Long-term returns for U.S. public pensions reportedly are expected to drop to the lowest levels ever recorded as states and cities face even deeper financial pain as a $1 trillion funding gap widens.
Twenty-year annualized returns for public pensions in the U.S. are poised to decline to 7.47% once fiscal 2016 results are released in coming weeks, according to an estimate from Wilshire Trust Universe Comparison Service, which tracks pension investment returns, The Wall Street Journal
The Journal reported that would be the lowest-ever annual mark recorded by Wilshire, which began tracking the statistic 16 years ago.
“Many states and local governments may be facing difficult choices if investment returns remain low,” Keith Brainard, research director at the National Association of State Retirement Administrators, told the Journal. “The money has to come from somewhere.”
The drop in 20-year annualized returns is significant because officials who oversee retirements for police officers, firefighters, teachers and government workers have long said one bad year or two isn’t as important as the long-term average, and they would earn enough money over decades to pay for retiree obligations, the Journal reported.
To be sure, Moody’s Investors Service officials estimated in an annual analysis released recently that U.S. multiemployer pension plans were collectively underfunded by $337 billion at the end of 2014, an increase of 5.6% from 2013.
A 5% increase in liabilities, outweighed a 4.5% increase in assets in 2014, resulting in a funding ratio of 47%, down from 48% at the end of 2013, Pensions & Investments Online reported.
Since the 2008 financial crisis through 2014, liabilities have grown 69.5%, while assets have grown 42.5%, resulting in a 9-percentage-point drop in funded status, Moody’s estimated, according to P&I.
Wesley Smyth, vice president and senior accounting analyst at Moody’s, told P&I that he expects funding levels will be even lower for 2015, given the year’s “anemic” stock market and fixed-income returns and falling discount rates. From 2008 through 2014, the discount rate has dropped about 145 basis points, according to Moody’s.
To drive the point home, the largest U.S. public pension fund recently posted dismal results.
The California Public Employees’ Retirement System earned a return of 0.6 percent on its investments last fiscal year, trailing its long-term target as holdings in stocks and forestland lost money, Bloomberg
The pension’s public equity portfolio lost 3.4 percent in the year through June 30 and forestland assets declined 9.6 percent, Chief Investment Officer Ted Eliopoulos said.
The system must average at least 7.5 percent a year to match its assumed rate of return or turn to taxpayers to make up the difference. Calpers’s annualized returns were 6.9 percent for the last three years, 5.1 percent for the last 10 years and 7 percent over 20 years, according to a presentation to the board. It is among U.S. pensions under pressure to boost investment returns as funding shortfalls increase amid an aging population and low interest rates, Bloomberg reported.
(Newsmax wire services contributed to this report).
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