Virginia Pension in Worse Shape to Weather Crash than in 2008

Virginia’s pension fund is less prepared today for a market crash than it was before the Great Recession when its funding status tumbled nearly 25% in a single year, according to a recent stress test report analyzing the Virginia Retirement System (VRS).

“If a repeat of the five-year returns observed by the pension plan from fiscal year 2008 to 2012 were to occur beginning in fiscal year 2020, the state plan would be in a worse position to absorb the impacts of the investment losses than it was in 2009,” said the report.

The analysis said the state’s pension plan would see an increase in unfunded liability of approximately $6.9 billion, peaking at $12.5 billion in 2026. And because actuarial losses are amortized over 20-year periods, the plan could see increased contribution rates through 2047.

The report also said that employer rates could increase to over 22% of covered payroll within a few years of a market crash. And because the statewide plans have not paid down the legacy unfunded liabilities, an additional investment loss of the extent seen in fiscal years 2008 and 2009 would potentially put the state plan’s funded status below 55%.

Although that’s under a worst-case scenario, the outlook for the system is still rather subdued with less dire, but still undesirable, market returns.

If the VRS fund only returns 5% annually each of the next five years, the state plan would see an increase in unfunded liability of approximately $2.2 billion, peaking at $7.8 billion in 2027, according to the stress test. As a result, employer rates could increase to approximately 15.5% over the next 10 years.

Additionally, under this scenario of lower-than-expected returns, the plan’s funded status would lose approximately 10% of its value. The estimated additional funding that would be required to pay down five consecutive years of lower-than-expected returns would start at $5.5 million in fiscal year 2023, and gradually increase to approximately $280 million in fiscal year 2041.

The report also said that if lower-than-expected returns of 5% continued for 10 years, the impact would be even greater. It said the state’s pension plan would see an increase in unfunded liability of approximately $4.2 billion, peaking at $9.5 billion in 2032. And employer rates could increase to over 18% over the next 10 years.

In a sustained period of 5% in each of the next 10 years, the funded status would lose approximately 15% of its value, and the additional funding needed would start at $5.5 million in fiscal year 2023 and gradually rise to approximately $550 million in fiscal year 2041.

“In 2008-2009, financial markets crashed around the world resulting in the worst annual investment performance on record for VRS,” said the report. “Since that time, even with the pension reforms and more diligent funding of the state-wide plans by the governor and general assembly, the system remains at risk if another investment return shock were to occur.”

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