Video: How Do Public Pensions Invest? A Primer

Here’s an informative, extended look at how public pension funds invest — from principles and preferences, to assumptions and returns. The presentation was given by the National Institute on Retirement Security.

The presentation is moderated by Diane Oakley, Executive Director of NIRS. Panelists include Ronnnie Jung, CPA, a former executive director of TRS Texas; and Nari Rhee, PhD, Manager of Research at NIRS.

The video is a recording of a webinar that took place in 2013 – but its still holds up as an interesting and informative primer on public pension investing.


Photo by c_ambler via Flickr CC License

Chart: Investment Preferences of Pension Funds – Public vs. Private

PE Fund preference

Do public pension funds prefer to invest in different types of funds than their private counterparts?

The above graph details the percentage of public and private pensions that are currently invested in — or have a preference toward — various types of funds.

The graph is based on a survey conducted by Preqin. Read the full results here.


Chart credit: Chief Investment Officer and Preqin.

Illinois Senate Passes Bill That Allows Felons To Be Stripped of Pensions

Illinois capitol

A bill that would allow the Illinois Attorney General to strip pension benefits from felons passed through the state Senate unanimously last week.

From the Chicago Sun-Times:

The House bill, co-sponsored in the Senate by Sen. Kwame Raoul, D-Chicago, Jacqueline Collins, D-Chicago, and Daniel Biss, D-Evanston, passed the Senate 51-0 without debate.

“What we did in this bill is to clarify the language to make sure that it authorizes the attorney general to petition the court to enjoin the payment of pension funds where somebody’s convicted of a felony in connection to their duty,” Raoul said.


The bill was debated in committee with some Republicans worried the attorney general could abuse the authority. But Raoul said the attorney general could file a petition to the court, then to the appellate court and ultimately to the Illinois Supreme Court.

“It’s unlikely that you would have an attorney general who could have a conspiracy with the Appellate Court and the Supreme Court,” Raoul said.

A Madigan spokeswoman said the bill will give the attorney general an important new role in pension board cases.

“A public employee convicted of a felony related to their service should not be allowed to receive a taxpayer-funded pension,” state attorney general’s office spokeswoman Maura Possley said. “This bill provides the attorney general with an important watchdog role to ensure taxpayers are not left to foot the bill for a convicted felon.”

The bill came about after former Chicago policeman Jon Burge was allowed to keep his pension even after being convicted of a serious felony. From the Sun-Times:

In July, the Illinois Supreme Court ruled a Cook County court was correct in not allowing Madigan to intervene in a police pension matter. The decision allowed disgraced former Chicago Police Cmdr. Jon Burge, who was convicted in 2010 for lying about the torture of police suspects, to keep his public pension of about $54,000 a year.

The police pension board deadlocked 4-4 on a motion to strip Burge of his pension. Some argued his conviction was not related to his police work, since he was convicted on perjury and obstruction of justice from a civil suit filed after he left the force.

The bill now goes to Gov. Quinn’s desk.


Photo credit: “Gfp-illinois-springfield-capitol-and-sky” by Yinan Chen – (gallery, image). Via Wikimedia Commons

Why Have Local Governments Been Slow to Adopt Automatic Enrollment Practices?

savings jar

As defined-benefit plans around the country become more costly, some local governments have begun switching new hires into defined-contribution (DC) plans.

But those same governments have been slow to adopt automatic enrollment practices, according to a report published in the November issue of Pension Benefits.

From the article:

The public sector has been much slower that the private sector to adopt automatic enrollment for its defined contribution (DC) plans: only 2% use automatic enrollment. Currently, five states have automatic enrollment for the DC plans available for their workers: Georgia (ERSG), Missouri (MOSERS), South Dakota (SDRS), Texas (TRS), and Virginia (VRS).


Workforce trends and the current state of public retirement benefits strongly suggest that DC features that encourage savings, such as automatic enrollment, can play an important role in the retirement income security of many public employees.

So why haven’t local governments adopted auto enrollment practices? The article’s author, Paula Sanford, offers some reasons:

– Legal constraints. Only 11 states permit automatic enrollment for public DC plans. In a few places, an exemption to anti-garnishment laws has been written into statute for a particular retirement system or plan.

– Perception. Government leaders worry that automatic enrollment in a supplemental savings plan might overburden their employees, especially those who earn modest wages.

– Labor questions. There is debate in the labor community about whether automatic enrollment should be supported.

– Administrative challenges, such as multiple record keepers.

Cobb Country, Georgia, offers an example of how auto enrollment can increase participation:

The county started automatic enrollment for new employees in January 2013, and the feature has been very successful at increasing participation in the 457(b) plan. Prior to automatic enrollment, countywide participation in the 457(b) plan was only at about 33%; yet in just a little over a year, it has increased to 57.5%. This increase is striking considering that approximately two-thirds of the employees still participate in the original DB plan. The initial employee contribution under automatic enrollment is 1% of salary, and the county has kept its matching formula for all hybrid plan participants.

Read the full report, containing further analysis and other examples, in the latest issue of Pension Benefits or here.


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Chart: Asset Allocation Over Time and the Rise of Alternatives

CREDIT: Pew Charitable Trusts report

Check out the fascinating graphic [above] detailing the different between alternatives allocations between 2006 and 2012. In six short years, alternative investments as a percentage of pension assets have doubled.

Now, compare that to the allocation of a public pension fund in 1980 [below].

Today, no pension system in its right mind would adhere to the allocations we saw in 1980, and for good reason. Still, it’s an interesting exercise to look back at how things have changed.

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Video: Funding Shortfalls and the Politics of Pensions


Here’s a short segment that dives into public pensions with Adrian Moore, vice president of policy at the Reason Foundation.

The video touches on assumed rates of return, New Jersey’s funding shortfall and the politics of pension payments.

The Reason Foundation is a libertarian-leaning think tank based in California.

Video: Discussing Investment Fees, Assumed Rates of Return and the Outlook of Public Pensions


The above video is a panel discussion from the Bloomberg Markets Most Influential Summit, which was held in New York on September 22.

The discussion is moderated by Bloomberg editor-at-large Tom Keene, and features Clifford Asness, managing and founding principal of AQR Capital Management, and John C. Bogle, founder of Vanguard Group Inc.

The pension discussions begin at around the 2:35 mark of the video.

Topics include investment fees, assumed rates of return, and the panelists “gloomy” outlook for public pensions.

Can Insurance Companies Save Public Pensions?

Scrabble letters spell out INSURANCE

Last week, Pension360 covered a question asked by the Washington Post’s Wonkblog:

Does it make sense for local governments to turn over the assets of their employee pension plans to insurance companies, who would in turn make monthly payments to retirees?

This week, Mary Pat Campbell (who runs the STUMP blog) has given an in-depth answer to the above question:

Here is the problem: for all of my posts about alternative assets in public pensions (though those are troubling when they are a huge portion of the portfolio), it’s not the financial risks per se, or even the longevity risk, that has been killing public pensions, though those do contribute.

It’s that governments are great at promising, but not so great at putting money by to pay for those promises.


Insurers are willing to write group annuities to back pension promises — they did this with GM and Verizon pensions — but you have to give them all the assets they require to back that business. A “fair price” would be less than what is statutorily required, probably, because statutory requirements tend to be very conservative in valuing the liabilities, in order to protect policyholders/annuitants. This is called surplus strain.

But the thing is, even with the “fair price”, governments would have to pay amounts way beyond what they’re paying now, just to meet the pension promises made for past service, forget about any future service accruals.

The main problem is that not enough money has been put by. The risk is not so much that public pensions across the country have been investing too riskily or anything like that (but overly risky investing can make the bad situation worse.)

Now, not all pensions are underfunded as grossly as New Jersey or Illinois. But you don’t get to a 72% overall funded ratio just from those two states.

While insurers might be able to reduce the worry about longevity risk and financial risk for fully-funded plans, they cannot help politicians trying to lowball pension costs.

Her answer, in other words: “No”.


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