CHESTNUT HILL, Mass. Contrary to common perception, public pension fund investments are producing just as good rates of return as private-sector pension funds, according to a new analysis of U.S. Census Bureau data by the Center for Retirement Research at Boston College.
Its general lore that public plans dont do quite as well as private plans, said Alicia H. Munnell, director of the Chestnut Hill-based center and an author of the brief, in an interview. Whats interesting about these results is that theyre doing just about the same when you adjust for the size of the plan and the asset mix.
The researchers analyzed data from the Census Bureaus annual State and Local Government Employee Retirement System Survey between 1994 and 2004. By using that data and data from Department of Labor Form 5500 filings, researchers calculated and compared public and private plan returns.
They found that the geometric mean real rate of return for all public plans between 1994 and 2004 was 10.7%, while the mean return for private plans was 9.5%. Public plans with less than $500 million in assets had median real returns of 9% while public plans with $1.5 billion or more produced 10.2%. Private plans with less than $500 million in assets had median real returns of 8.5% while private plans with $1.5 billion or more produced 10.6%.
Also, state and local pension plans had 68.5% of total plan assets invested in equities in 2004, while private plans only had 58.2%. Thats an increase since 1994, when state and local plans had 54.2% of assets in equities, while private plans had 42.1% of assets in equities.
Private plans have cut back on their equity investments in recent years because they wanted to reduce the amount of risk they were taking on, said Mark Ruloff, director of asset allocation at Watson Wyatt Worldwide, Arlington, Va. That is particularly true since the 2006 passage of the Pension Protection Act.
The PPA shortened the horizon for private plans, Mr. Ruloff said. Under 1987 accounting rule changes, private plans needed to be 90% funded. Under the PPA, the target is 100% of liabilities.
Furthermore, public funds and private funds calculate their estimated contributions differently, Mr. Ruloff said. As a result, public funds need a stronger rate of return and can take on more risk than private plans.
The brief What Do We Know About the Universe of State and Local Plans? also found that state plans account for only 8% of total plans, but 88% of active members and 82% of assets.
The brief is part of a project the center is doing on state and local pension plans. The center is working on the project with the Center for State and Local Government Excellence in Washington.
The goal of the brief the fourth in the project was to shed light on all public plans, not just the largest. The census data identified 2,670 government-sponsored retirement system in 2004.
This gives us a sense of the universe with the total number of plans, Ms. Munnell said.