The Public Fund Survey finds that nearly every state has made changes to its pension plan. The most common change was to increase what percentage of wages employees must contribute to accrue pension benefits. Data from the survey shows that, during 2012, the long-standing median employee contribution rate increased from 5% to 5.7%.
The survey, which is maintained on a fiscal year basis, is sponsored by the National Association of State Retirement Administrators, as well as the National Council on Teacher Retirement. More than 85% of all state and local government pension assets and members in the United States are represented in the survey.
In addition to examining employee contribution rates, the survey also looks at topics such as pension funding levels, liability growth, the impact of employees that are actively working versus employees that are retired, plan investment returns and the average allocation of plan assets.
Funding and Liability Growth
In terms of pension funding levels, data from the survey shows a decrease in fiscal year 2012 to 73.5%, down from 75.8% in fiscal year 2011. The aggregate actuarial value of assets increased to $2.67 trillion, an increase of 0.9%. This increase was outpaced by growth in the actuarial value of liabilities, from $3.49 trillion to $3.63 trillion, or 4.1%.
The survey indicates liability growth has declined noticeably since the onset of the recession in 2007. This is likely due to several factors, including low salary growth in recent years. The survey authors note that declines in the rate of liability growth can be offset by the effects of changes in actuarial assumptions, with many plans that have reduced their investment return assumption propping up what would otherwise be an even lower median rate of liability growth.
Actives vs. Annuitants
The survey measures two types of retirement system members—actives and annuitants. Actives are those who are currently working and earning retirement service credits. Annuitants are those who receive a regular benefit from a public retirement system.
For the second consecutive year, the number of annuitants increased by 4.2%, according to the survey. However, for the fourth consecutive year, the number of active members decreased. Survey authors find this decline to be consistent with U.S. Census Bureau reports showing a reduction in the number of persons employed by state and local government, a trend that began in August 2008.
The difference between the continued increase in annuitants and a declining number of active members is driving a sustained reduction in the overall ratio of actives to annuitants, finds the survey. In 2012, this ratio dropped to 1.65.
The survey authors point out that a low or declining ratio of actives to annuitants is not necessarily problematic for a public pension plan. This is because the typical public pension funding model ensures the accumulation, during a plan participant's working years, of assets needed to fund retirement benefits. However, when combined with an unfunded liability, a low or declining ratio of actives to annuitants can cause fiscal distress for pension plan sponsors.
An unfunded liability represents a shortfall in accumulated assets, and increases the required cost of the plan. A lower ratio of actives to annuitants results in a plan’s unfunded liability being spread over a smaller payroll base, which increases the cost of the plan as a percentage of employee payroll.
Investment Returns and Asset Allocation
The survey also shows that the median investment return for plans with a fiscal year-end date of June 30, 2012 (approximately three-fourths of the funds in the survey), barely exceeded 1%. By contrast, the median one-year return for funds with a fiscal year-end date of December 31, 2012, was 13.1%. Returns for five-year periods that ended in fiscal year 2012 remain depressed and continue to reflect the sharp decline from 2008 and 2009.
The survey results show that for longer periods, particularly 10 years and longer, median public pension fund returns are closer to the investment return assumptions used by most plans.
As for the average asset allocation, the survey shows three main trends. First, there has been a slow but steady decline in the average allocation to public equities. Second, there has been a consistent increase in allocations to real estate and alternatives, composed primarily of private equity and hedge funds. And third, reversing a long-term trend, the allocation to fixed income rose to 25.4% in 2012.
The survey serves as an online compendium of key characteristics of 100 public retirement systems that administer pensions and other benefits. While the survey is done by fiscal year, it is updated as new information becomes available. In addition to annual financial reports, survey data is also taken from actuarial valuations, benefit guides, systems and input from system staff. Every system in the survey has a least one plan, with some systems having more than one.
A summary of the survey findings can be found here.