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Pension Funds

Cliffwater: U.S. state pension plans returned a median annualized 5.9% over 10 years

U.S. state pension plans returned a median annualized 5.9% for the 10 years ended June 30, 2016, vs. 6.8% for the 10 years ended June 30, 2015, said Cliffwater's most recent annual state pension performance report.

Large endowments with assets greater than $1 billion returned an average 5.7% over the 10 years ended June 30, making it Cliffwater's first report in which endowments did not outperform state pension plans. The average return for state plans was also 5.7%.

Once again, the two top-performing state pension plans for the period were the $15.6 billion Oklahoma Teachers' Retirement System, returning 7.1%, and the South Dakota Investment Council returning 6.8% for the $10.5 billion South Dakota Retirement System. In third place was the $7 billion Missouri Local Government Employees Retirement System, returning 6.7%. All returns cited are annualized figures.

The alternative investment consultant's report also looked at pension funds' asset allocations and performance by asset class.

As of June 30, 2016, the plans had an average asset allocation of 48% public equities (down two percentage points from 2015), 26% alternatives (up two percentage points), 24% fixed income (up one percentage point), and 2% cash (down one percentage point).

According to Cliffwater, most of the alternatives increase for the year was directed to private equity, private debt and opportunistic investments. Within alternatives, the average allocation as of June 30, 2016 was 36% private equity, 30% real estate, 18% hedge funds, 13% real asset and the remainder in other alternatives.

Looking at alternative performance, the median return for private equity was 9.9% for the 10 years ended June 30, and 5.8% for real estate. Individual pension funds' real estate returns varied the most of any asset class for the 10-year period, Cliffwater noted.

Once again, the plans with the highest real estate returns over the 10-year period were the $73.3 billion Ohio State Teachers Retirement System, returning 9.6%; $15.6 billion Hawaii Employees' Retirement System, 8.8%; and $109.2 billion New York State Teachers' Retirement System, 7.6%.

The plan with the highest private equity return over the period remained the $67 billion Massachusetts Pension Reserves Investment Management Board, with a return of 14.4%, followed by the $13.4 billion Ohio School Employees Retirement System, 13.5%; and the $28.5 billion Iowa Public Employees' Retirement System, 12.4%.

Cliffwater's report also found that more than three-quarters of the pension funds exceeded the 4.9% average​ 10-year return for a passive portfolio of 65% stock index funds and 35% bond index funds. However, in aggregate, the plans underperformed the 8% assumed rate of return for the 10-year period.

The average 5.7% return for the 10 years ended June 30, 2016, fell within a wide range of individual pension plan returns (3.7% to 7.1%).