Pew: Investment Performance Falls As Alternative Allocations Rise

Seeking to boost returns on their investments, many state pension funds turned to hedge and private equity funds for help. Alternative investments grew from 11% to over 26% of the average public pension plan.

A Pew study reports that as of fiscal year 2016 (latest available data), state pension funds now have a combined $1.4 trillion deficit, up $295 million from 2015. State pension plans now have total pension liabilities of $4 trillion while having only $2.6 trillion in assets.

John Schoen filed this report in CNBC:

To try to make up that deficit, state pension fund managers have shifted investments away from the traditional mix of stocks and bonds to a greater reliance on alternative investments like hedge and private equity funds. Between 2006 and 2016, the average plan has raised its share of alternative investments from about 11 percent of assets to 26 percent.

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Despite paying higher costs, pension plan performance has fallen. Among the funds Pew studied, none met its investment target. The shortfall has left many retirement systems owing more in liabilities than they can afford to pay out, in some cases much more.

Pension fund systems in New York, South Dakota, Tennessee and Wisconsin had enough to cover at least 90 percent of their liabilities in 2016, while pension funds in Colorado, Connecticut, Illinois, Kentucky and New Jersey were less than 50 percent funded, according to Pew.

Another 17 states had less than two-thirds of the assets needed to pay future retirement benefits. Kentucky and New Jersey had the lowest funded ratios among states at 31 percent and Wisconsin had the highest at 99 percent.