From a median average of 8% in 2010, the return assumptions of public pension plans have fallen to record low of 7.45% as of November this year, according to a report from the National Association of State Retirement Administrators (NASRA). The trend has placed even more pressure on the finances of state governments.
Here is an excerpt from a report filed in Chief Investment Officer:
Since 1987, public pension funds have accrued approximately $7 trillion in revenue, said NASRA, of which $4.3 trillion, or 61%, is from investment earnings, with 27%, or $1.9 trillion, coming from employer contributions, and the remaining 12%, or $844 billion, coming from employee contributions. Because public pensions rely on investment returns for a majority of their revenue, the lower the investment returns are, the more governments will have to spend to cover the shortfall.
Of the 128 public pension plans tracked by NASRA, only six still have investment return assumptions at the 2010 median of 8.0%, which is the highest assumed rate of return among the plans, and only 22 have assumed rates of returns of 7.5% or higher. A majority of the plans (69) have assumed rates of return that range between 7.0% and 7.5%, and 37 plans have assumed rates that are 7.0% or lower. Kentucky’s Non-Hazardous Employee Retirement System pension registered the lowest assumed rate of return at 5.25%, and was the only plan among the 128 with an investment return assumption below 6.25%.
A relatively healthy US economy has helped keep state pension funds afloat over the past several years but a recent study from The Pew Charitable Trusts suggested that even a modest downturn in economic fortunes could push off the cliff some of the more troubled state pension funds like those in New Jersey and Kentucky.
Here is an excerpt from a report on pension funds from CBS:
“Even after eight years of economic recovery — eight straight years of stock market gains — the public pension plans are more vulnerable than they’ve ever been to the next recession,” researcher Greg Mennis said in an interview.
Governments have been ramping up contributions to the funds to help cover the promises they’ve made to retirees, but that leaves less money to spend on schools, police, parks and other core government services.
Another option is reducing pension benefits. A plan to do that in Kentucky led to teacher walkouts earlier this year.
ABSTRACT: The public pension pigeons are coming home to roost. The high profile bankruptcy filing by the City of Detroit, Michigan, has brought to the fore the relationship between pension underfunding and the financial difficulties faced by an increasing number of municipalities and states in the United States.
ABSTRACT: This research adds to an existing body of research that suggests that the adoption of investment return assumptions associated with public sector defined benefit (DB) pension plans may partly be explained by political opportunism.