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1 February 2013 CFA Institute Journal Review

Public Pension Funding Ratios Still Tumbling (Digest Summary)

  1. Claire Emory

Funding ratios for the 100 largest public pension plans in the United States declined slightly in fiscal year 2011, continuing their downward trend. Analysts disagree, however, on the severity of the prognosis for these public pension funds.

What’s Inside?

The average funding ratio for the 100 largest public pension funds that are tracked by Pensions & Investments (P&I) declined from 74.29% in fiscal year 2010 to 73.64% in FY2011; the median funding ratio declined as well. Over the past 10 years, these public pension funds have struggled to meet their assumed rates of return. They have only achieved a median 10-year annualized return of 5.6%, which is 224 bps below the average assumed rate of return.

How Is This Article Useful to Practitioners?

The author reports that total assets in the top 100 public pension plans tracked by P&I were estimated to be about $2.81 trillion at the end of the third quarter in 2012. These funds are an important component of the U.S. economy and have a critical impact on state and local governments. Many plans reduced their average assumed rates of return, with the largest public pension funds adjusting their return assumptions from 7.92% in FY2010 to 7.84% in FY2011, down from 7.96% in 2007. The median annualized 10-year return of 5.6% falls 224 bps below the average assumed rate of return for FY2011.

The author also reports that plans are being reminded to maintain a long-term view. He notes that the Wilshire Trust Universe Comparison Service found that public pension funds with more than $5 billion in assets returned 10.29% over the 30-year period ending 30 June 2012.

Abstractor’s Viewpoint

Public pension funds will most likely continue to increase allocations toward hedge funds, real estate, commodities, and emerging markets as they strive to exploit market inefficiencies and increase returns. Some analysts are concerned that plan sponsors may focus on meeting their goals through higher-risk assets, whereas others see increased state and local tax revenues during the second quarter of 2012 as an encouraging sign toward improving funding ratios.

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