U.S. public pensions continue to experience subdued growth as demonstrated in this week’s chart. The U.S. Census Bureau’s recent release for the 100 largest-public employee pension systems shows the market value essentially flat quarter-over-quarter and down about 4% year-over-year at $3.25 trillion. The California Public Employees’ Retirement System, the largest U.S. public pension fund, earned a return of 0.6% for the recently-ended fiscal year after being up only 2.4% the prior year.
At the same time, pension contributions have increased substantially. Since the Great Recession (which ended in June 2009), government contributions have increased a significant 58.9% while employee contributions are up 5.3%. Currently, employer contributions are near record levels at 2.6 times that of employees. This trend of increasing contributions is likely to remain as investment performance is challenging and benefit payments are expected to rise as more Americans retire and lifespans increase.
Meanwhile, return assumptions for many public pensions are currently in the 7% context, an overly optimistic level in today’s extraordinarily low interest rate, low return environment. Lowering the return assumption will require additional pension contributions to meet future obligations. The weight of increasing government contributions will lead to further crowding out of other spending priorities in government budgets absent of any meaningful revenue growth.
Key Takeaway:
As Penn Mutual Asset Management CEO David O’Malley discussed at our panel on the State of State Pensions this week, the current low interest rate/low return environment is creating meaningful challenges for public pension plan performance and resultant funding levels. With central banks around the globe largely maintaining accommodative policies in an effort to spur growth, including the European Central Bank (ECB) purchasing investment-grade corporate bonds, achieving return targets is incredibly difficult for pension fund managers. Scant support for additional pension contributions and pension reforms further amplifies the challenge being faced.
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
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