Two new reports put the investment performance of U.S. state and local government pension plans in a positive light.
A National Institute on Retirement Security report shows that those public plans returned an average 16% in 2009, outperforming the returns of corporate DB plan returns by three percentage points, largely because public plans maintained equity positions while corporate plans shifted toward bonds.
A separate report issued by the National Association of State Retirement Administrators says public pension fund investment returns have exceeded their median assumed rates of return by 1.25 percentage points over 25 years.
“Public pension plans have avoided making drastic moves, largely staying the course through the recent market turmoil, and reaping the rewards of a patient, long-term approach to investing,” said the NIRS report, “New Fed Data Sheds Light on Pension Investments.”
The report, based on Federal Reserve Flow of Funds data, said that by the end of 2009, public plans had an average of 57% in equities while corporate plans had an average 38%. Through 2006, corporate and public pension plans each had about 60% of their assets invested in stocks.
The report said the corporate plans’ retreat from equities appeared to be spurred in part by the Pension Protection Act of 2006 and “threatened” changes in private-sector accounting standards putting more emphasis on mark-to-market, which both put a heavier burden on companies that offer defined benefit plans.
Other corporate plan sponsors have frozen plans, which require greater liquidity of assets over time. The need for greater liquidity favors a shift away from long-term investments like stocks in favor of cash and bonds, the report said.
The NASRA report, “Public Pension Plan Investment Return Assumptions,” said the median public plan’s actual investment return over the 25-year period ended Dec. 31 was 9.25%, while the median assumed return rate was 8% percent over the same period.
Public plans use the assumed rate of return to estimate the cost of a public plan.
“Although public pension funds, along with most other investors, have experienced subpar returns over the past decade, median public pension fund returns over longer periods exceed the assumed rates used by most plans,” the NASRA report said.