Internet Explorer 11 is not supported

For optimal browsing, we recommend Chrome, Firefox or Safari browsers.

Amid Concerns of a Recession, Pension Plan Returns Fall Short

After two straight years of beating expectations, pension investment earnings have slightly dipped thanks in part to fears of a trade war.

Public pension plans are missing their investment earnings expectations for the first time in three years, a development that could strain future state and local budgets amid rising concerns that the national economy is slowing.

Plans with more than $1 billion in assets earned a median return of 6.79 percent for the fiscal year ending June 30, according to the firm Wilshire Trust Universe Comparison Service. That’s below those plans’ median long-term expected rate of return of 7.25 percent.

Pension plans rely heavily on investment earnings because annual payments from current employees and governments aren't enough to cover yearly payouts to retirees. As it stands, roughly 80 cents on every dollar paid out to retirees comes from investment income.


Market Volatility Played a Role

Some pension plans didn’t miss by much. The California Public Employees' Retirement System (CalPERS), the largest plan in the nation, has reported a 6.7 percent return for the year -- just a few tenths below the expected 7 percent. Its sister plan, the California State Teachers’ Retirement System (CalSTRS), did slightly better, earning 6.8 percent on the same expected rate of return.

Both systems painted the year as a positive given market volatility over the past year. Much of those swings have been in response to fears over tariffs wars between the U.S. and China. “It was a roller coaster year and a very challenging environment in which to generate returns,” CalSTRS Chief Investment Officer Christopher J. Ailman said in a statement. “Thanks to the in-house expertise of our investment team, we were able to come very close to our assumed rate of return despite the instability of the market.”

Other plans saw a bigger gap. The Employees Retirement System of Texas has reported a preliminary 5.29 percent annual investment return on long-term expectations of 7.5 percent. And New York State’s Common Retirement Fund, which ended its fiscal year on March 31, reported an estimated 5.23 percent return on long-term average expectations of 7 percent.


What It Means for Funding

The poorer earnings come after two straight years of beating expectations. Nationally, public pension plans have collectively exceeded their assumed rates of return six times since the financial crisis in 2008, according to data collected by the Boston College Center for Retirement Research.

Yet funding ratios have not markedly improved. After falling sharply for four straight years following the financial crisis, the average plan has hovered around having 72 percent of the money it needs to pay retirement benefits to current and future retirees.

Governments have collectively gotten better at making their full pension contributions in recent years thanks to a stabilizing economy. But because of the way pension accounting is done, every year a government skimps on a payment or investment returns fall short of expectations, a pension's funded ratio gets worse.

Most experts say that pension health is better graded on long-term trends, not annual return results. But given the market volatility over the past decade, the long-term picture is becoming harder to assess. For example, CalPERS’ average investment return over the past 10 years has been an admirable 9.1 percent. But over 20 years, the average has been 5.8 percent.

A recent Moody’s Investors Service report warned of market volatility, highlighting the fact that pensions are becoming more reliant on the stock market (as opposed to bonds) for investment returns. “While public pension systems take a long-term investment focus and there have been favorable returns the last two fiscal years," Moody's said, "equity market losses in late 2018 will translate into larger-than-expected pension cost hikes in 2021 for many governments."

Liz Farmer is a former GOVERNING fiscal policy writer.
Special Projects
Sponsored Stories
In recent years, local governments have been forced to adapt to a wildly changing world, especially as it pertains to sending bills and collecting payments.
Workplace safety is in the spotlight as government leaders adapt to a prolonged pandemic.
While government employees, students and the general public had to wait in line for hours in the beginning of the pandemic, at-home test kits make it easy to diagnose for the novel coronavirus in less than 30 minutes.
Governments around the nation are working to design the best vaccine policies that keep both their employees and their residents safe. Although the latest data shows a variety of polarizing perspectives, there are clear emerging best practices that leading governments are following to put trust first: creating policies that are flexible and provide a range of options, and being in tune with the needs and sentiments of their employees so that they are able to be dynamic and accommodate the rapidly changing situation.
Service delivery and the individual experience within health and human services (HHS) is often very siloed and fragmented.
In this episode, Marianne Steger explains why health care for Pre-Medicare retirees and active employees just got easier.
Government organizations around the world are experiencing the consequences of plagiarism firsthand. A simple mistake can lead to loss of reputation, loss of trust and even lawsuits. It’s important to avoid plagiarism at all costs, and government organizations are held to a particularly high standard. Fortunately, technological solutions such as iThenticate allow government organizations to avoid instances of text plagiarism in an efficient manner.
Creating meaningful citizen experiences in a post-COVID world requires embracing digital initiatives like secure and ethical data sharing, artificial intelligence and more.
GHD identified four themes critical for municipalities to address to reach net-zero by 2050. Will you be ready?