Public Pension Return Assumptions Fall in 2022, NCPERS Says

The average assumed rate of return for public pension funds dropped in 2022 to 6.86% from 7.07% a year earlier, according to a report from the National Conference on Public Employee Retirement Systems.

The drop came as capital markets overall struggled last year, while public pension funds managed to increase their funded status, the study found.

The funded ratio at public pension funds increased to 77.8% last year, compared with 74.7% in 2021, per a survey of almost 200 funds conducted by NCPERS, the largest trade association for public funds in the U.S. and Canada, in partnership with Cobalt Community Research.

The vast majority of survey respondents, 92%, represent defined benefit plans, 8% defined contribution plans, 10% combination plans and 5% cash balance plans. The total exceeds 100% because of multiple responses, according to NCPERS.

Public pension programs scored an average one-year return of around 11.4%. By contrast, the S&P 500 was down around 19% and the Bloomberg US Agg, which tracks bonds, was off 13% in 2022. Heavy concentration in real estate and private equity were the key to the funds’ outperformance, the report says.

The study’s findings highlight public pensions’ “resiliency in the face of volatile markets, rising interest rates, and disruption in the workforce during the COVID-19 pandemic,” said Hank Kim, NCPERS executive director and general counsel, in a statement. “It’s clear that public pensions remain dedicated to maximizing returns while managing risks in order to efficiently deliver retirement benefits to public servants all over the country.”

Higher contribution income helped. Investment returns were the largest component of the gains, accounting for slightly more than two-thirds of them, but the stronger average member and employer contributions also played a role. Each rose by one percentage point, to 9% and 24%, respectively.

Benefit payouts were larger than 2021, but not enormously so. The aggregated average cost-of-living adjustments to members last year was 2.0%, which was slightly above the 1.7% COLA offered the year before.

The funds’ confidence in the future remains healthy. Respondents were asked, “How satisfied are you with your readiness to address retirement trends and issues over the next two years?” The average rating was 7.8 on a 10-point scale, down only a small amount from the prior survey.

One other takeaway is that environment, social and governance factors matter to those managing public pension funds: Some 54% indicated that ESG is somewhat or very important in their investment decisions.

A total of 195 public retirement funds participated in NCPERS 2023 Public Retirement Systems Study. Of these survey respondents, 108 also participated in the previous year’s study. The responding funds represent more than 19.6 million active and retired members and assets exceeding $3 trillion. About 56% are local funds while 44% are statewide funds, NCPERS reported.