The gap between well-funded and struggling public pension plans grew wider in fiscal 2017, despite higher investment returns and more contributions.
The average funding ratio of the 100 largest U.S. public pension systems slipped to 71.6% in fiscal year 2017, the lowest since 2005, the first year Pensions & Investments tracked such data. That compares with 73.99% in fiscal year 2016 and 75.19% the prior year. The drop came despite noticeably better returns among plans that disclosed investment performance, with a median 13.15% return for fiscal 2017, compared to 1.25% in fiscal 2016. Five-year annualized returns were also up in 2017, at 9%, compared to 7.29% the previous year, while 10-year returns of 5.51% came close to the 5.7% notched in fiscal 2016.
Some of the funded status decline was due to a downward trend for investment return assumptions. According to P&I's data, the aggregate return assumption was 7.29%, ranging from 5.25% for the $12 billion Kentucky Retirement Systems, Frankfort, to 8.5% for the $21.1 billion Teachers Retirement Association of Minnesota, St. Paul. The previous year, the aggregate assumed rate of return was 7.53%. For fiscal year 2010, it was 7.9%.
(All asset sizes in this story are based on the most recent actuarial valuation figure.)
"You are definitely seeing more downward pressure on the expected rate of return. Some of that comes from the reality of what expected returns are. It becomes a much easier pill to swallow," said Timothy F. McCusker, partner and chief investment officer of NEPC LLC, Boston. Kevin Leonard, partner and team leader for NEPC's public fund consulting practice, does not expect that trend to reverse, given public funds' long-term liabilities. "I think what we've seen in the public fund world is an acknowledgment of what the professionals are telling them. We are all telling the same thing," Mr. Leonard said.