Large public defined benefit pension plans in the U.S. saw only small investment gains during the year ended June 30, snapping a two-year streak of double-digit returns.
The Wilshire Trust Universe Comparison Service calculated the median return of public plans with more than $5 billion in assets at 3.4%.
Consultant Callan Associates Inc. calculated an average investment return of 3.2% for 265 public plans with assets of more than $1 billion.
The culprit: lower stock market returns, said Keith Brainard, research director of the National Association of State Retirement Administrators, based in Austin, Texas. “Equities make up roughly half of public pension portfolios, that's always going to be a driver of returns,” Mr. Brainard said.
By comparison, plans surveyed by Wilshire had a median return of 17.3% for the year ended June 30, 2014, and 12.5% for the previous year.
Plan sponsors say one bad year isn't going to be a problem when it comes to meeting their obligations. But some acknowledge capital market assumptions that call for muted returns in the next decade or so might make it difficult for plans to meet their return assumptions, and are exploring or implementing lower rates.
The average plan's return assumption was 7.69% at year-end 2014, according to NASRA, from 8% as of June 30, 2008. But critics have said an assumption of 5% or lower is more realistic, a number that plan executives have rejected as being too low.
The Russell 3000 index returned 7.3% for the year ended June 30, while the FTSE All-World index returned 1.5%. A year earlier, however, the indexes had returned 25.3% and 33.6%, respectively.
Mr. Brainard said continuing low interest rates did not help the situation. “Fixed-income interest rates went mostly sideways; they ended the year where they began,” he said.
The Barclays U.S. Aggregate index showed returns of 1.9% for the year ended June 30.