Professor Sébastien Betermier from McGill University examined how unfunded public pension liabilities can drive up bond yields and create risks for bond investors. Citing his GRI-supported research comparing U.S. public pension shortfalls and municipal bond yields during financial crises, Betermier spoke about a non-linear “hockey stick” effect whereby borrowing costs rise sharply only once pension gaps exceed roughly 100% of annual state revenue.

Key takeaways regarding pension shortfalls and bond yields:

• Market stress can activate the latent fiscal risk of underfunded pensions.
• Pension solvency is critical for mitigating unexpected borrowing cost spikes.
• Persistently underfunded plans often increase their vulnerability by taking on greater investment risk.
• Even for jurisdictions with well-capitalized pension systems, demographic pressures and uncovered liabilities still pose challenges, and require careful risk management.