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Pension Funds

Cliffwater: U.S. state pension fund returns ‘badly trail’ aggregate assumed rate of return

U.S. state pension funds collectively earned an annualized asset-weighted average return of 5.87% between fiscal year-ends June 30, 2000, and June 30, 2018, "badly trailing" the 7.75% aggregate annualized asset-weighted assumed actuarial rate of return, showed research released Friday by alternative investment consultant Cliffwater.

Cliffwater researchers collected and analyzed data from the comprehensive annual financial reports of the 66 U.S. state pension fund systems with fiscal year-ends of June 30 between 2000 and 2018.

"The almost 2-percentage-point shortfall contributed greatly to a decline in pension funding ratios … from close to unity (100%) in 2000 to 73%" as of June 30, 2018, according to the Cliffwater report.

Cliffwater researchers said, "While other events undoubtedly have impacted pension funding, among them the failure of some states to make required contributions, outdated mortality tables, and unfunded benefit improvements, the failure of actuaries to properly assess long-term asset return(s) is clearly the primary factor in pension underfunding today."

Further analysis showed a "meaningful dispersion in individual state pension returns" over the 18-year study period, the report said, ranging from an annualized average return of 7.34% to 3.6%, with the 25th percentile at 6.24%; the median, 5.88%; and the 75th percentile, 5.65%.