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Administration January 18, 2017
Public Pensions Working to Improve Plans
Lowering costs, reducing return assumptions and experiencing healthy returns is putting a positive spin on public retirement plans’ future.
Reported by PLANSPONSOR staff
Public retirement systems are improving cost-efficiency, increasing funding ratios, and fine-tuning benefits to strengthen their capacity to serve retired public servants for years to come, according to an annual study by the National Conference on Public Employee Retirement Systems.
During 2016, pension funds squeezed down the cost of administering funds and paying investment managers to 56 basis points, or 56 cents per $100 invested, versus 60 basis points in 2015. This is well below the average fee of 68 basis points for stock mutual funds and 77 basis points average for hybrid mutual funds, which include stocks and bonds. “By controlling fees, pension funds continue to demonstrate that they can provide a higher level of benefits to members than most mutual funds do,” says Hank H. Kim, executive director and chief counsel of NCPERS.
Average funding levels—the value of the assets in the pension plan divided by an actuarial measure of the pension obligation—climbed for the third year in a row. Funding levels reached 76.2% in 2016, up from 74.1% in 2015 and 71.5% in 2014. Even as interest rates began to climb, funds continued to tighten assumptions. Nearly 40% of responding funds said they have reduced their actuarial assumed rate of return, and nearly 30% more said they are considering doing so in the future.
Funds also continued to put pressure on benefits. More than 30% of respondents said they have increased employee contributions and raised benefit age or service requirements.
Funds experienced healthy three-year, five-year and 20-year returns during 2016, close to or exceeding 8%. Aggregated 10-year returns came in at 6.2%, while one-year returns averaged 1.7%. (The one-year figure ticked up to 2.4% for plans with fiscal years ending in December.) “All signs point toward continued improvement in increasing public retirement systems’ funded status,” Kim says.
The 2016 NCPERS Public Retirement Systems Study draws on responses from 159 state, local and provincial government pension funds with more than 10 million active and retired memberships and assets exceeding $1.5 trillion. The majority (77%) were local pension funds, while 23% were state pension funds.