US State Pension Funds: Default Risk 30% Higher Than US States


Traditional pension funds have had a difficult decade: although low or even negative interest rates have been good for asset prices, this benefit has been outweighed by the cost of growing liabilities. According to the Pew Charitable Trusts, the total pension gap across the 50 US Federal States is estimated to be around $1trn.

As the chart below shows, this is partly reflected in the credit risk assessments; the typical State or Municipal pension fund has a default risk that is at least 30% higher than that of the typical Federal State.

The interquartile range of credit risk estimates for pension funds is, understandably, larger than that of the actual states. There are multiple pension funds in each state and some will have significantly stronger funding than others.

According to the National Association of State Retirement Administrators, the average funding level is 73% of liabilities, but there are major differences between states. Delaware, Idaho, North Carolina, South Dakota and Wisconsin are close to 100% funded. Alaska, Connecticut, Illinois, and Kentucky are all around 50%.

According to the chart below, the typical state pension fund has an average annual default probability of more than 5 Bp, giving a CBC* of a+. The equivalent for the average state is around 4 Bp, on the boundary between a+ and aa-. Both distributions are clearly positively skewed, with the average default risk significantly higher than the median for both sets of obligors.

The $1trn funding gap is unlikely to close unless there is a sustained rise in long term interest rates. Short term interest rates are expected to continue to rise in 2017, and long term bond markets have retreated from their highs of 2016; but the recent long bond rally means that the credit risk gap between States and their Pension Funds is likely to persist.

*CBC = Credit Benchmark Consensus; a 21-category scale which is explicitly linked to probability of default estimates sourced from major banks. A CBC of bbb+ is broadly comparable with BBB+ from S&P and Fitch or Baa1 from Moody’s.

Sovereign Bond Risk Management

In the current low yield environment, many Sovereign bonds issued by different countries are priced at similar levels. However, this Read more

Introduction For Credit Portfolio Managers

Credit Benchmark is a market-led response to three of the most critical issues facing credit risk professionals: 1) The need to Read more

Sovereign Default Risk In Developing Economies

This paper examines the use cases for Credit Benchmark’s Consensus Probabilities of Default (Consensus PDs), in the context of more Read more

Impact Of BCBS Proposals On IRB Banks

The Basel Committee on Banking Supervision recently published wide-reaching proposals for reducing variation in Credit Risk Weighted Assets, with a Read more


Follow us on:

Credit Benchmark brings together internal credit risk views from over 40 leading global financial institutions. The contributions are anonymized, aggregated, and published in the form of consensus ratings and aggregate analytics to provide an independent, real-world perspective of credit risk. Risk and investment professionals at banks, insurance companies, asset managers and other financial firms use the data for insights into the unrated, monitoring and alerting within their portfolios, benchmarking, assessing and analyzing trends, and fulfilling regulatory requirements and capital.