U.S. Public Pensions Post Worst Returns Since Market Crash

  • Government-worker retirement plans had 0.36% return last year
  • Underperformance may lead to higher bills for states, cities

U.S. state and city pensions posted the lowest investment returns since the credit crisis, falling far short of targets the funds count on and raising the specter of growing taxpayer contributions to keep them afloat.

The government workers’ retirement systems effectively had no gains last year, eking out a median increase of 0.36 percent, the smallest advance since 2008, according to the Wilshire Trust Universe Comparison Service. The returns were depressed by slowing global growth, falling oil and commodities prices and a strengthening U.S. dollar.

“It was a difficult environment,” said Robert Waid, a managing director at Wilshire Associates in Santa Monica, California.

State and local pensions count on annual gains of 7 percent to 8 percent to pay retirement benefits for teachers, police officers and other civil employees. When pensions don’t meet their targets, governments have to put more taxpayer money into the funds to make up the difference. The need to do so has led to credit-rating cuts for New Jersey, Chicago and Illinois, which are being squeezed by rising retirement bills.

New York City is increasing its required pension contributions by $730 million in fiscal years 2017 through 2020 to make up for investment returns of 3.15 percent for the 12-month period that ended in June, according to the city. Since then, the Standard & Poor’s 500 Index lost 6.6 percent, while international equities declined 14.8 percent. U.S. and foreign stocks make up about half the assets of New York City’s $160.6 billion pension funds.

Public Pensions

Nationwide, state and local pensions had a median allocation of 44.2 percent in U.S. stocks and 13.1 percent in foreign stocks, according to the Wilshire TUCS. 

Public pensions with more than $5 billion of assets invest less in U.S. stocks and more in alternatives like private-equity and hedge funds, with a median allocation of 16.1 percent to “alternative investments.” Those retirement systems had a median return of 0.54 percent in 2015, little more than the others.

“This is another year where it’s been difficult to sing the praises of diversification -- when one of the top asset classes is the one you’re diversifying out of, which is U.S. equities,” said Waid.

“When you start to look at the other asset classes that you diversify into, you didn’t do well,” he said, referring to international and emerging-market stocks and commodities.

Skipped Contributions

In 2015 public pensions generated better returns than corporate plans and foundations, according to Wilshire. Corporate funds had a median loss of 0.37 percent while foundations and endowments lost 0.45 percent.

Some governments are already under increased pressure to pump money into their pension funds after years of skipping contributions, while others are being affected because employees are living longer. The increased lifespans of retirees are expected to cost New York City an additional $3 billion in fiscal years 2016 through 2020.

Moody’s Investors Service last month estimated unfunded pension liabilities of U.S. states at about $1.3 trillion as of fiscal year 2014, using an assumed investment return of 4.3 percent to discount the value of benefits that are paid years from now. Thirteen states have pension-funding gaps of more than 100 percent of their annual revenue. For Illinois, it’s almost 300 percent more.

“We do have some states that aren’t funding even in accordance with their actuarially determined contribution guidelines, which just ensures that they get further behind,” said Marcia Van Wagner, a senior analyst with Moody’s in New York. “It’s not, from our perspective, a sector-wide crisis.”

States and cities are slowly lowering their investment-return assumptions. New York Comptroller Thomas DiNapoli lowered the state pension fund’s assumed rate to 7 percent in September. California’s Public Employees’ Retirement System, the largest U.S. pension, is also slowly cutting its investment target, now 7.5 percent.

Public pensions returned a median 7.93 percent for the three years ending in December, 7.37 percent over five years and 5.99 percent over 10 years, according to Wilshire TUCS.

“You’ll have light years, like this year, and hopefully you’ll have years that will round out so that you have a nice 10-year average,” Waid said.

Before it's here, it's on the Bloomberg Terminal.