Public Pensions Produced Solid Returns in 2017

Yet they also adopted more conservative investment assumptions, according to the National Conference on Public Employee Retirement Systems.

In 2017, public pensions managed to raise the market value of fund assets above the actuarial value of assets, the National Conference on Public Employee Retirement Systems (NCPERS) found in a survey of 164 state and local government pension funds, conducted in partnership with Cobalt Community Research.

Furthermore, the one-year, five-year and 20-year investment returns are near or above investment assumptions. In spite of these improvements, 85% of public pension funds tamped down their investment return assumptions or plan to do so (64% have and 21% plan to do so). They also reduced the smoothing period for investment returns from 5.7 years to 5.0 years.

The pension funds said that they pay their investment managers an average of 55 basis points, up slightly from the 54 basis point average fee in 2016. NCPERS said that funds have been able to reduce fees over time by negotiating with investment managers, automating processes and achieving workflow efficiency.

However, NCPERS points to the fact that the Investment Company Institute (ICI) said that in 2017, the average fee for equity funds was 63 basis points, and for hybrid funds, that was 74 basis points. “This means public funds with lower expenses provide a higher level of benefit to members for each dollar invested, and produce a higher economic impact for the communities those members live in,” NCPERS says.

The average investment return assumption is 7.5%, on par with 2016. In inflation assumption is 2.9%, down 0.1 percentage point form 2016. With the smoothing period also being reduced to 5.0 years, all of these changes have impacted funding levels, which decreased slightly to 71.3%

Due to these more conservative assumptions, NCPERS says, employer contribution rates rose from 18% of fund income in 2016 to 22% in 2017. Furthermore, the percentage of funds receiving full contributions from their plan sponsors rose from 70% in 2016 to 74% in 2017. “The nation’s pension systems are deeply committed to their mission of providing a secure retirement for millions of firefighters, police officers, teachers and other public sector workers,” says Hank Kim, executive officer and chief counsel at NCPERS. “Over the seven years we have conducted this annual study, pension systems have grown increasingly confident in their ability to adapt to pressure and deliver on their promise to retired public servants.”

The trade group also learned that 68% of the funds that responded to the survey have members who are eligible for Social Security. The 32% of funds that have members who are not eligible for Social Security tend to offer higher levels of benefits to make up for this shortfall, according to NCPERS. Forty-five percent of funds include overtime in benefit calculations, and 37% provide some level of health care coverage for retirees.

The pension managers, trustees and administrators responding to the survey conveyed a high level of optimism about their ability to address retirement trends and issues over the next two years; on a scale of one to 10, they gave themselves an average rating of 8.1, up from 7.4 in 2011.

Respondents said that they expect their funds will need to fund liabilities for 23.8 years, a slight increase from 23.3 in 2016.

Asked what other benefits they offer their workers, 93% said they offer a disability benefit, either by the plan, Social Security or the employer. Eighty-nine percent offer an in-service death benefit, and 57% an automatic post-retirement cost of living adjustment (COLA). Forty-nine percent offer a defined contribution (DC) plan.

In terms of fund oversight, 96% conduct an actuarial valuation at least every two years, 93% say that their board adheres to investment policies, and 90% have an auditor assess the fund’s financial statements.

The 2017 NCPERS Public Retirement Systems Study can be downloaded here.