Unfunded pension liabilities pose a greater credit risk for investors in municipal bonds than investors who buy corporate debt, according to a just-released report from Moody’s Investors Service.
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The analysis says unfunded pension liabilities range between 49% to 73% for states and big cities. In the private sector, the unfunded liability runs around 24%.
Changes to the laws governing private sector pensions forced them to become less risky, says Moody’s. No such changes were ever required for state and municipal pensions, which is one reason they are a greater risk to investors. The report cites the migration of private sector employees to defined contribution or 401K plans and subsequent freezing of traditional defined benefit plans as reasons private sector pension obligations pose less risk to bond investors than public sector pension obligations.
Read the report here.