Category Archives: Pensions

Public Pension Plan Investment Return Assumptions

Source: National Association of State Retirement Administrators, NASRA Issue Brief, February 2017

From the introduction:
As of September 30, 2016, state and local government retirement systems held assets of $3.82 trillion. These assets are held in trust and invested to pre-fund the cost of pension benefits. The investment return on these assets matters, as investment earnings account for a majority of public pension financing. A shortfall in long-term expected investment earnings must be made up by higher contributions or reduced benefits.

Funding a pension benefit requires the use of projections, known as actuarial assumptions, about future events. Actuarial assumptions fall into one of two broad categories: demographic and economic. Demographic assumptions are those pertaining to a pension plan’s membership, such as changes in the number of working and retired plan participants; when participants will retire, and how long they’ll live after they retire. Economic assumptions pertain to such factors as the rate of wage growth and the future expected investment return on the fund’s assets.

As with other actuarial assumptions, projecting public pension fund investment returns requires a focus on the long-term. This brief discusses how investment return assumptions are established and evaluated, compares these assumptions with public funds’ actual investment experience, and the challenging investment environment public retirement systems currently face.

Public Pension Plan Investment Return Assumptions

Source: National Association of State Retirement Administrators, NASRA Issue Brief, February 2017

As of September 30, 2016, state and local government retirement systems held assets of $3.82 trillion. These assets are held in trust and invested to pre-fund the cost of pension benefits. The investment return on these assets matters, as investment earnings account for a majority of public pension financing. A shortfall in long-term expected investment earnings must be made up by higher contributions or reduced benefits.

Funding a pension benefit requires the use of projections, known as actuarial assumptions, about future events. Actuarial assumptions fall into one of two broad categories: demographic and economic. Demographic assumptions are those pertaining to a pension plan’s membership, such as changes in the number of working and retired plan participants; when participants will retire, and how long they’ll live after they retire. Economic assumptions pertain to such factors as the rate of wage growth and the future expected investment return on the fund’s assets.

As with other actuarial assumptions, projecting public pension fund investment returns requires a focus on the long-term. This brief discusses how investment return assumptions are established and evaluated, compares these assumptions with public funds’ actual investment experience, and the challenging investment environment public retirement systems currently face.

Softening Investment Expectations Signal Accelerating Budget Pressure from Pensions

Source: Thomas Aaron, Timothy Blake, Moody’s, Sector InDepth, State and Local Government – US, February 16, 2017
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State and local governments have held down annual pension contributions with high assumed discount rates, which in turn reflect high assumed returns on their pension assets. Generally, the higher the assumed discount rate, the lower the annual contribution requirement. Facing investment conditions that increasingly suggest lower future returns, however, the California Public Employees’ Retirement System (CalPERS, Aa2 stable) and many of its national peers are gradually lowering their assumed discount rates. Such moves will generally result in governments making higher pension contributions, incrementally improving their discipline in funding their pension promises earlier in time. But these higher contributions also mean that budgetary pressure from pensions, already on the rise in many cases, is accelerating. Meanwhile, pension investment volatility risk remains high.

Cost Sharing Among State Defined Benefit Pension Plans: Approaches to managing risk and cost uncertainty

Source: Greg Mennis, Pew Charitable Trusts, January 2017

From the overview:
A number of states with defined benefit, or traditional, pension plans have enacted policies that retain the core elements of the plans while sharing the risk of cost increases—as well as potential gains—between public employees and employers. These mechanisms for sharing costs can help reduce volatility and investment uncertainty while preserving the ability to pay promised pension benefits.

For most public sector defined benefit (DB) plans, the cost of providing these benefits fluctuates, depending on investment performance, inflation, salary growth, life spans, and workforce demographics. Cost volatility can strain state or local budgets or lead to underfunded pension plans if policymakers have not provided sufficient contributions.

In response to the budget strains and funding challenges, some states have looked to alternatives to traditional pensions, including defined contribution, cash balance, and hybrid plans. Still, most state and local governments continue to offer DB plans, though many now use cost-sharing mechanisms to reduce budget uncertainty. Employees continue to receive guaranteed lifetime benefits and in some cases see gains, such as higher cost of living adjustments (COLAs), from strong investment returns….

….This map and table highlight strategies used by large state pension plans to share cost increases with members. Looking at the benefits offered to new workers in 102 primary state retirement plans, Pew’s public sector retirement systems project identified 28 plans in 16 states that use formal cost-sharing mechanisms to manage risk….

NCPERS 2016 Public Retirement Systems Study

Source: National Conference on Public Employee Retirement Systems, December 2016

In September, October and November 2016, the National Conference on Public Employee Retirement Systems (NCPERS) undertook a comprehensive study exploring retirement practices of the public sector. In partnership with Cobalt Community Research, NCPERS has collected and analyzed the most current data available on member funds’ fiscal condition and steps they are taking to ensure fiscal and operational integrity. The 2016 NCPERS Public Employee Retirement Systems Study includes responses from 159 state, local and provincial government pension funds with more than 10 million active and retired memberships and assets exceeding $1.5 trillion. The majority –77 percent– were local pension funds, while 23 percent were state pension funds…..
Related:
NCPERS 2016 Public Retirement Systems Study Dashboard
Since 2011 NCPERS has conducted the annual Public Retirement Systems Study that surveys nearly 200 local and statewide public pensions. It is the most comprehensive survey of its kind and provides information on investment experiences and assumptions, plan administration and operations, and trends, innovations, and best practices.

With the issuance of the 2016 NCPERS Public Retirement Systems Study, in addition to the static pdf of the survey we have provided a dynamic interactive dashboard powered by Tableau to supplement the study. The dashboard will allow you to manipulate and search the survey results so that the data is refined to your specifications. Among the benefits is that you can compare survey results to plans similar to yours in size, participant composition, and plan type.

Public Pension Investment Risk-Taking May Result in Future Challenges

Source: Donald J. Boyd, Yimeng Yin, Nelson A. Rockefeller Institute of Government, Pension Simulation Project, January 2017

The latest report from the Rockefeller Institute’s Pension Simulation Project examines the difficult choices public pension funds faced as interest rates fell over the last 25 years. Public plans generally increased investment risk in an effort to avoid lowering expected investment returns, creating substantial potential for plans to become severely underfunded or to require sharp increases in government contributions in the future. This is the fourth report of the Pension Simulation Project, supported by the Laura and John Arnold Foundation and The Pew Charitable Trusts.
Related:
Policy Brief
News Release

State and Local Pension Reform Since the Financial Crisis

Source: Jean-Pierre Aubry and Caroline V. Crawford, Center for Retirement Research at Boston College, Issue in Brief, SLP#54, January 2017

The brief’s key findings are:
• Since the financial crisis, 74 percent of state plans and 57 percent of large local plans have cut benefits or raised employee contributions to curb rising costs.
• Plans with a larger pension cost burden and lower initial employee contributions were more likely to enact such changes.
• And, among plans that made changes, those in states with the strongest legal protections for current workers were more likely to limit the cuts to new hires.

OECD Pensions Outlook 2016

Source: Organisation for Economic Co-operation and Development (OECD), December 2016

From the abstract:
The OECD Pensions Outlook 2016 assesses policy issues regarding strengthening pension systems and, in particular, funded pension plans. It covers defined benefits and defined contribution pension plans; fiscal incentives to save for retirement; policy measures to improve the financial advice for retirement; annuity products and their guarantees; pension design and financial education; and the pension arrangements for public-sector workers, including a comparison with those for private sector workers.