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Pensions Beat Expectations for 2nd Straight Year

It's been another good year for public pension investment returns. But the gains won't make a big difference in their overall fiscal health.

Pension plans are reporting another better-than-expected year for investment returns. But experts caution that most pensions still face long-term challenges when it comes to improving their overall fiscal health.

Looking at roughly half a dozen major plans that have released their preliminary annual return, Governing found that most pensions bested their annual projections, reporting a nearly 9 percent return on their investments in fiscal 2018. For most plans, that's more than one percentage point above projections.North Carolina Retirement Systems reported the lowest return rate of only 7.3 percent. At the other end of the spectrum, New York state reported a nearly 13 percent annual return.

This better-than-expected year comes after an even better one: In fiscal 2017, many plans reported double-digit returns. A booming stock market is a big reason for the positive growth these last two years as pension plans typically have anywhere from about 40 to 50 percent of assets invested in equities.

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.



Pension Plan Preliminary 2018 Return 2018 Ending Balance 2017 Ending Balance 2017 Percentage Funded
New York City's five pension funds 8.7% $194 billion $178 billion 56-69%
New York State Common Retirement Fund (FY Ends March 31) 12.95% $206.9 billion $192 billion 94%
Oklahoma Teachers 9.7% $16.5 billion $15.6 billion 70%
North Carolina Retirement Systems 7.3% $98.2 billion $94 billion 92%
California State Teachers’ Retirement System 8.96% $224 billion $210 billion 64%
California Public Employees’ Retirement System 8.6% $351 billion $328 billion 68.3% (FY 2016)
Florida Retirement System Pension Plan 8.99% $160.4 billion $154 billion 84%
Wisconsin Retirement System Core Fund 8.6% Data Not Available $93 billion 100%
Sources: Pension plan websites, pension fund CAFRs and the Public Plans Database
Two years of investment returns exceeding expectations undoubtedly helps, says Fitch Ratings Senior Director Douglas Offerman. "It's great to have a string of positive years," he says. "It does make an incremental difference."

After two years of stellar returns, for example, California's Public Employees Retirement System expects to bump up its funded status by three points to 71 percent. But, Offerman adds, this year's positive news has to be viewed "against a larger backdrop of unrelenting pressure on pensions."

Nationally, public pension plans have collectively exceeded their assumed rates of return at least five times since the financial crisis in 2008, according to data collected by the Boston College Center for Retirement Research. (This year would mark the sixth.) Yet funding ratios have steadily declined for five straight years. Since 2012, the average plan has hovered around having 72 percent of the money it needs to eventually pay retirement benefits to current and future retirees.

Meanwhile, governments' contributions to pension plans have ballooned, growing by 74 percent between 2010 and 2017, according to an analysis by Fitch.

In other words, it's a lot harder to make up ground than it is to lose it. This is primarily due to the fact that there are more retirees than ever, which means that in some years plans will have more money going out in payouts than coming in via worker and government contributions and investment earnings. 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.

Pension plans have previously resisted lowering their investment return assumptions because it means higher bills from contributing governments to make up the difference. But in recent years, that resistance has fallen away as dozens of plans have begun shifting their assumptions downward. For the first time, dozens of plans are assuming a lower than 7 percent annual rate of return on investments, while the national median has gone from 8 percent in 2001 to 7.5 percent this year. In doing so, many believe pension plans are setting themselves up for more stability down the road -- assuming governments can keep up their pension payments.

"The fact that [plans] are getting more realistic about return assumptions is a positive," says Offerman. "It at least forces a recognition of what the real cost of benefits are."

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Liz Farmer, a former Governing staff writer covering fiscal policy, helps lead the Pew Charitable Trusts’ state fiscal health project’s Fiscal 50 online resource.
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