Public Pensions Report Strong 2018 Returns

According to the “2018 NCPERS Public Retirement Systems Study” one-year investment returns averaged 13.4% for all plans reporting last year, well above the 7.8% return reported in 2017.

Fueled by strong investment returns, public retirement systems continued to strengthen their funding levels and fine-tune their assumptions, according to an annual study by the National Conference on Public Employee Retirement Systems (NCPERS).

According to the “2018 NCPERS Public Retirement Systems Study,” one-year investment returns averaged 13.4% for all plans reporting last year, well above the 7.8% return reported in 2017. The five- and 10-year returns were also higher, and the 20-year returned averaged 7.2%. The average funded level for all funds studied rose to 72.6%, from 71.4% in 2017.

The average annual investment return assumption fell to 7.34% last year, versus 7.49% in 2017. In all, 65% of funds that responded to the 2018 study had reduced their assumptions, and 18% were considering doing so.

In addition to reducing their investment return assumptions, pension funds used more conservative amortization periods—a calculation of the period of time over which pension liabilities must be funded. Pension funds participating in the study shortened their amortization periods to an average of 22.4 years last year, down from 23.8 years in 2017.

Contribution rates to pension funds remain stable. Among study respondents that participated two years in a row, employer contribution rates edged down to 20% of payroll in 2018, from 21% in 2017. Employee contribution rates were unchanged.

Public pension funds remained cost-effective. The control group of funds that took part in the study two years in a row reported average expenses of 0.6% of assets, or 60 basis points (bps). Average expenses also clocked in at 60 basis points for all study participants, up from 55 basis points a year earlier. For comparison, the average expenses for mutual funds are 59 basis points for an equity fund and 70 basis points for a hybrid—i.e., mixed equity/bond—fund, according to the Investment Company Institute (ICI).

The 2018 study draws on responses from 167 state and local government pension funds with more than 18.7 million active and retired members, actuarial assets exceeding $2.5 trillion and market assets exceeding $2.6 trillion. The majority—62%—were local pension funds, while 38% were statewide pension funds. NCPERS conducted the eighth annual study this past September through December in partnership with Cobalt Community Research.

Fifty-nine percent of the 2018 study participants, or 98 pension systems, also completed the study in 2017.