Public pension systems underpin the retirement security of millions of Americans and Britons. With trillions in liabilities and demographic forces reshaping funding needs, understanding the current landscape is crucial for ensuring long-term stability and resilience. This article explores key data, risk factors, and actionable strategies to guide policymakers, plan sponsors, and stakeholders toward a secure pension future.

Backdrop: The Current Pension Funding Landscape

The aggregate funded ratio for U.S. state and local pensions reached an estimated 80.6% in 2024, propelled by robust market returns. Mid-year, plans hit a five-year high of 83.1%, yet Q1 2025 declines in equity markets drove the ratio down to 78.6%. Such volatility highlights the sensitivity of funding levels to market cycles.

Historical context reveals peaks and troughs that inform future risk management. The funded ratio soared to 94.3% in 2001 before plummeting to 62.3% in 2009 amid the financial crisis. By 2021, recovery efforts pushed it back to 83.9%. As of May 31, 2025, financial health varies widely: 30 public plans exceed 90% funding, while 11 remain under 60%. Total U.S. liabilities stand at $6.569 trillion.

Investment Returns and Revenue Composition

Investment earnings constitute the backbone of pension revenue, accounting for roughly 63%–68% of total inflows. Fiscal 2024 delivered a net return of 9.47%, bolstering asset growth. Over the past two decades, plans achieved annualized returns of 6.88%, underscoring the power of compounding and strategic asset allocation.

Yet reliance on markets introduces downside risk. The FT Wilshire 5000 Index’s 4.8% fall in Q1 2025 illustrates how quickly funded status can erode. Discount rate assumptions have dipped to an average 6.67% in early 2024, down from 7.31% in 2021, amplifying required contributions and exposing plans to potential mismatches between assumed and actual returns.

Contributions, Amortization, and Expense Efficiency

A balanced funding approach involves employer and member contributions alongside investment gains. Currently, employers supply about 24% of revenue, while members contribute roughly 9%. Encouragingly, 63% of pension funds received their full actuarial contribution in the latest survey, up from 57% just a year prior.

Improved amortization practices have reduced the average period to repay unfunded liabilities to 18.5 years, the shortest in recent memory. Meanwhile, investment management expenses fell to a four-year low of 0.39% (39 basis points), reflecting continued operational efficiency post-pandemic.

Global and Demographic Pressures

In the United Kingdom, state pension spending is projected to climb from 5.6% to 9.6% of national income over the next half-century, equivalent to an added £100 billion annually in today’s terms. Aging populations in both the U.S. and UK—where the share of adults over state pension age may rise from 24% to 30% by 2070—create sustained pressure on pay-as-you-go and funded schemes alike.

Longevity gains, while commendable, risk retirees outliving assets. The trend toward defined contribution plans further shifts decumulation risk onto individuals, many of whom lack adequate financial literacy or planning resources.

• Population over pension age growth
• Rising life expectancy pressures
• Transition from DB to DC frameworks

Governance and Best Practices

Strong governance correlates with improved funded status and crisis resilience. Post-2008 and during the COVID-19 pandemic, plans with consistent full funding and diversified investment strategies weathered shocks more effectively.

• Full funding of actuarially-determined contributions
• Periodic review of risk assumptions
• Transparent financial reporting

Strategies for Long-Term Stability

Achieving lasting pension stability requires a multifaceted approach. Plans should blend disciplined funding policies with robust risk management frameworks. Below are key strategic pillars:

• Actuarial Discipline: Maintain realistic discount rate assumptions and shorten amortization schedules to mitigate unfunded liability growth.
• Investment Risk Management: Diversify across asset classes, integrate liability-driven investments (LDI), and utilize dynamic hedging to cushion market shocks.
• Governance Excellence: Embed independent oversight, regular stress testing, and clear accountability for funding decisions.

Illustrating the Funding Journey

Practical Recommendations for Stakeholders

For policymakers and plan sponsors, embracing both proactive and reactive measures can fortify pension systems. Key actions include:

• Legislate mandatory full actuarial contributions and set enforceable targets for funded ratios.
• Encourage hybrid plan designs with automatic adjustments to contributions and benefits.
• Invest in participant education to enhance retirement readiness in DC frameworks.

Conclusion

Public pension funding is at a critical juncture. While market-driven returns have buoyed asset bases in recent years, demographic shifts and volatile investment climates pose ongoing challenges. By adhering to robust governance and risk management principles, calibrating actuarial assumptions thoughtfully, and fostering transparent practices, stakeholders can secure long-term pension stability for generations to come.

The road ahead demands vigilance, adaptability, and collaboration. Drawing upon historical lessons, international comparisons, and emerging innovations, pension systems can evolve to meet growing retiree needs without compromising fiscal sustainability.