Despite a better record of making their annual contributions, locally administered pension plans are less funded than their state counterparts, largely due to more conservative investments, according to new research from the Center for State and Local Government Excellence.
Research conducted for the CSLGE by Alicia H. Munnell, Jean-Pierre Aubry and Joshua Hurwitz of the Center for Retirement Research at Boston College found 72% funding for local pension plans, vs. 76% for state plans.
The local pension plans typically made higher shares of the annual required contribution, but state plans have historically earned higher returns because they invest more in risky assets, the authors found. Risky assets were defined as anything except cash and government bonds. Mature plans with substantial assets saw higher returns that more than offset their lower contributions. A difference of 30 basis points was enough to offset the impact of paying even 10% less of the annual required contribution.
During the financial crisis, the more conservative portfolios of local pension plans fared better, which narrowed the funding gap between state and local plans to just four percentage points in the last four years.
The survey data were a mix of 2010 and 2011, with the state sample covering 97% of assets, and the local plan sample representing 67% of assets. Local pension plan assets ranged from less than $10 million to more than $30 billion.
The Center for State and Local Government Excellence helps inform state and local governments on pension trends and best practices, among other workforce topics.