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In This List

Pension Brief: Liquidity Is A Rising Concern For U.S. Public Pensions In Down Markets


S&P Global Ratings Definitions


This Time Is Different: An Anemic And Uncertain Passenger Recovery Will Challenge U.S. Airports' Credit Quality


U.S. Airport Ratings Placed On CreditWatch Negative On Severe Passenger Declines And Weakening Credit Metrics


State Brief: North Dakota

Pension Brief: Liquidity Is A Rising Concern For U.S. Public Pensions In Down Markets

Given the current market downturn, U.S. public pension plans may experience liquidity stress to cover benefit payments. Through periods of continued volatility, assets in plans with weak liquidity are likely to be sold at a loss and may contribute to decreasing funded ratios. In our opinion, poorly funded plans and high discount rates may be indicators of excessive liquidity risk.

In the U.S., plans have an average of 1% of their target portfolios held in cash and short-term investments to pay ongoing expenses, such as benefit payments and administrative costs. A liquidity-to-assets ratio can be useful in determining the liquidity risk, if any, of a pension plan.


A negative liquidity-to-assets ratio indicates the pension plan requires additional money to maintain operations and make all benefit payments. The further the ratio is below zero, the higher the percentage of assets that may have to be converted to cash. In a typical year, cash flows may be supplemented by realizing positive investment returns. However, the selling of non-cash assets, as during the current severe market downturn, may lead to large losses.

Weak funded ratios and high discount rates increase liquidity risk

There is a direct correlation between the discount rate, which is generally the assumed return in the public sector, and the underlying target portfolio. A high assumed return indicates a high level of risk accepted in investments, which sometimes indicates a low percentage of cash.

Plans with already weak funded ratios and limited cash might need to liquidate longer-term investments to meet annual benefit payouts, thereby eroding earning power and sinking into even weaker funded status. As an illustration, a target allocation may be set at plan inception so that cash makes up 1% of the portfolio, but if the plan is poorly funded at 40%, then there would only be 40% of the necessary cash on hand. However, a poor funded ratio does not guarantee liquidity pressure, since the target portfolio allocation can always be rebalanced.

Liquidity-to-assets ratio of severely underfunded large pension plans

We previously published on concerns about whether some public plans might completely run out of money to fund pension benefits (see "Pension Brief: Credit Effects Of Municipal Pension Plans Approaching Asset Depletion," published Sept. 5, 2019, on RatingsDirect). To illustrate what happens at asset depletion, we provided select examples from around the U.S. of severely underfunded pension plans, which we define as under 40% funded.

The table shows the liquidity-to-assets ratios of our selections, included in that brief, of severely weak funded pension plans. Five of these plans have ratios below zero, indicating possible negative available cash that would require additional financing or a drawdown of assets for short-term support, which could expedite their path to insolvency. The remaining plans are likely to experience significant deterioration during a prolonged and severe market downturn.

Liquidity Risk Heightened For Large Plans Under 40% Funded
Pension plan Liquidity-to-assets ratio (%)
New Jersey Teachers (7.46)
Chicago Police (2.77)
KERS Non-Hazardous (2.77)
Chicago Municipal (1.39)
Illinois SERS (0.68)
Connecticut SERS 0.34
Providence ERS 3.19
Pittsburgh 5.51
Escalating retiree medical costs may hinder pension sponsor liquidity

Other postemployment benefits (OPEB) costs are expected to increase in the near-to-medium term as a result of the COVID-19 emergency. OPEBs are typically pay-as-you-go, which means that, unless benefits are reduced, there is no room to reduce or delay contributions. Legal and practical flexibility of benefit reductions may dictate how much OPEB costs affect funds that may be needed for pensions or other budgetary concerns.

Even after the market turns upward, further pension deterioration is likely

Employer and plan sponsor budgets are going through a concurrent period of stress, so as sponsor and pension plans adjust budgets, they may look to defer contributions for budgetary relief. Measures that may be taken at the expense of funding the pension plan may include extended amortization payments, temporary changes to asset smoothing, or other means of contribution deferral. State and local governments with limited fiscal flexibility and weak economic metrics are more likely to consider these options. Similar to the years following the last recession, many U.S. public finance entities are likely to emerge seeking plan design and benefit changes in an effort to gain budgetary relief.

Related Research

  • Pension Brief: Credit Effects Of Municipal Pension Plans Approaching Asset Depletion, Sept. 5, 2019
  • Fifteen Largest U.S. City Pensions See Modest Gains In 2018, But Recession Risk And Rising OPEB Cost Challenges Persist, Sept. 23, 2019
  • U.S. State Pension Reforms Partly Mitigate The Effects Of The Next Recession, Sept. 26, 2019

This report does not constitute a rating action.

Primary Credit Analyst:Todd D Kanaster, ASA, FCA, MAAA, Centennial + 1 (303) 721 4490;
Secondary Contacts:Timothy W Little, New York + 1 (212) 438 7999;
Sussan S Corson, New York (1) 212-438-2014;
David G Hitchcock, New York (1) 212-438-2022;
Geoffrey E Buswick, Boston (1) 617-530-8311;

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