Changes made to Connecticut’s $13 billion State Employees’ Retirement Fund, Hartford, has protected the fund from risk even during bear markets, while the state’s $18.7 billion Teachers’ Retirement Fund could face insolvency during a recession if reforms aren’t made, said the results of a pension stress test conducted by The Pew Charitable Trust on behalf of the state.
While the state’s current level of contributions helps to diminish the likelihood of fiscal distress, low funded levels might result in persistently high costs for decades if investments underperform, the report stated.
Results of Pew’s stress test showed recent reforms to SERS led to positive results in managing financial market volatility and mitigating investment risk. In contrast to TRS, the new funding policy for SERS translates into a relatively stable level of required contributions under a range of scenarios.
In addition, placing new state employees into a hybrid plan, as has been proposed, could significantly mitigate risk of higher employer costs, according to test results. Pew estimates this could lead to savings of $1 billion to $2.5 billion over 30 years, depending on how investments perform.
“This analysis demonstrates that actions we took to restructure and reform the State Employees Retirement System have been incredibly effective and provide the path for what we need to do with the Teachers Retirement System to greatly improve the state’s financial future,” said Connecticut Gov. Dannel P. Malloy in a news release announcing the stress test.
Another finding from Pew’s analysis is that Connecticut’s state budget is exposed to potentially unaffordable spikes in required pension contributions in scenarios where investment returns fall short of expectations. Pew’s analysis estimates that in a 5% investment return scenario, total employer contributions required under state policy would increase to more than 19% of revenue by 2028 from its current level of 13%.
In addition, although SERS has minimal exposure to solvency risk or fiscal distress under an adverse recession scenario that includes an initial 25% decline in pension fund assets followed by low returns after an initial recovery, TRS could face a significant risk of insolvency if the required contributions are not met.
Mr. Malloy added: “Our pension problems have haunted our state and impeded growth for decades, but by fully funding our obligations, reforming the amortization methods to stabilize annual payments, mitigating additional growth in the unfunded share and creating a hybrid system … we have solidified our state employees’ system.”