U.S. state and local-government pensions ended the 2012 fiscal year with a median gain of 1.15 percent as the European debt crisis and a slowing global economy damped stock returns, Wilshire Associates said.
It was a reversal after two years of gains for the retirement funds, which have $2.8 trillion in assets, according to the U.S. Census Bureau. The performance, included in a report Wilshire is set to release today, may add to political pressure on public workers to accept benefit cuts and increase contributions to the plans.
In the last three weeks, the California Public Employees’ Retirement System, the biggest U.S. pension, reported returns of 1 percent for the fiscal year ended June 30. New York City’s $122 billion pension funds reported preliminary returns of 1.7 percent, and Maryland’s $37.1 billion plan earned 0.36 percent.
“The grave concern with Maryland is it assumes a very rosy and very optimistic return rate of 7.75 percent,” said Christopher Summers, president of the Maryland Public Policy Institute, which promotes policies based on free enterprise and limited government. “You have the 11th or 12th year in a row where the actual liabilities of the pension system are larger than its assets.”
State and local government pensions count on returns of 7 percent to 8.5 percent to pay retirement benefits for teachers, police officers and other civil employees. To make up for losses suffered during the 2008 financial crisis and the recession, municipal officials had to contribute more to the funds, straining budgets and leaving less money available for services.
Estimates of public-pension funding deficits vary from $757 billion to $4.6 trillion, depending on assumptions. To help close the gap, 29 states made changes to their pensions in the calendar year 2011, such as increasing employee contributions, raising the retirement age and revising automatic cost-of-living adjustments, according to the National Conference of State Legislatures.
Rhode Island enacted the most sweeping change, closing the defined-benefit pension that covers state employees, teachers and many municipal employees. Current members will be transferred to a hybrid plan that consists of a reduced defined- benefit plan and a 401(k)-type account.
The median annualized return for public pensions in the past 10 years was 6.32 percent, Wilshire said. Public funds returned 21.4 percent in fiscal 2011 and 12.6 percent in 2010, according to Santa Monica, California-based Wilshire. The median public pension lost 17.4 percent in 2009.
Bigger allocations to U.S. and international stocks dragged down performance compared with corporate pension funds, which invest more in bonds, said Robert Waid, a managing director at Wilshire.
Corporate pension plans had a median return for the year ending June 30 of 3.68 percent, the best among institutional funds, according to Wilshire. Foundations and endowments had the worst returns, at 0.37 percent.
“In general, allocation to bonds helped all plans,” Waid said. “It was a classic story of equity versus bond exposure.”
The MSCI EAFE Index (MXEA), which measures stock performance in developed markets outside the U.S. and Canada, lost 13.8 percent for the year ending June 30. The Standard & Poor’s 500 Index (SPX) gained 5.4 percent for the period.
The report, compiled by the company’s Wilshire Trust Universe Comparison Service, covers about 900 institutional investment trusts, including foundations and endowments, union retirement funds, corporate plans and public pensions.
The median public pension had 54.9 percent of its holdings in stocks, 26.3 percent in bonds, 3.98 percent in real estate and 3.12 percent in alternative investments such as leveraged- buyout or distressed-bond funds. About 2.73 percent was held in cash.
The weak performance of US public plans shouldn't surprise anyone, especially after CalPERS and CalSTRS reported paltry returns.
The major culprit explaining these results is that unlike corporate plans that are de-risking and investing more in bonds, US public plans are heavily exposed to public equities. The larger the exposure to stocks (like foundations and endowments), the weaker the performance.
However, if I'm right and stocks soar to new highs, this underperformance will reverse, favoring funds that are more exposed to risk assets. We shall see what lies ahead but one thing is for sure, whether or not stocks and other risk assets surge, Tom Stabile is right, US pension funds need to rethink their targets: