Ten-year total investment returns for the 44 funds in our study that report performance net of fees as of June 30, 2016, ranged from 3.8 percent to 6.8 percent, with an average yield of 5.5 percent. ", "Even when establishing controls, comparing plans that look the same, have the same size, the same maturity, you'd expect they'd have the same allocation," he said. In other words, plans’ equity premium has grown by over 3 percentage points—more than fourfold over the period. The asset class weights above, as of June 31, 2019, are based on the aggregated asset allocations on 12/31/2015 of the largest 100 US defined benefit pension plans of publicly traded US corporations. New York, NY 10017-4036, Chicago Office Based on the latest information from the Public Fund Survey, the average public pension fund asset allocation is as follows: 685 Third Avenue The U.S. Federal Reserve Financial Accounts of the United States data, which include aggregate economic and investment data on public pensions from 1954 to 2016. The report, "Impact of Public Sector Assumed Returns on Investment Choices," reveals that public pension plans have a riskier portfolio relative to private plans, which don't calculate the assumed return in the same way. It must be completed for all DB pension plans with 1,000 or more participants at the beginning of the plan year. The Wilshire Trust Universe Comparison Service (TUCS) performance comparison data, reported quarterly from 1991 to 2016. Issue Brief: Investment Return Assumptions, Latest investment return assumptions, October 2020, Roll Call investment activities and asset allocations (members-only), Best Practice: Investment Policies for Defined Benefit Plans, Government Finance Officers Association, October 2017, Callan Periodic Table of Investment Returns, 2019, Risky Business: How Much Risk a Fund Requires to Reach a 7.5% Return, Callan, September 2016, Risky Business Update: Challenges Remain for Today's Investors, Julia Moriarty, February 2019, Investment Returns: Defined Benefit vs. Furthermore, as our population ages and the number of retirees grows, cash outflows increase, adding more pressure to pension fund balance sheets. State and local public retirement systems held $3.8 trillion in assets in 2016, the most recent year for which comprehensive data are available. Similarly, while yields for investment-grade bonds averaged about 6.5 percent between 1988 and 2007, they are not projected to reach those levels again. National Association of State Retirement Administrators. Since 2009, Schedule R Line 19a collects information about the plan’s asset allocation. Because earnings on these investments are expected to pay for about 50 to 60 percent of promised retirement benefits for public workers and retirees, careful attention to reporting and transparency has become increasingly important. Assets reported for Line 19a are required to: • Reflect market value at the beginning of the year and exclude the value of any receivables; And over the past decade, funds have increasingly turned to alternative investments to achieve investment return targets. In the past year, 20 states (California, Colorado, Connecticut, Florida, Hawaii, Iowa, Kansas, Kentucky, Maryland, Minnesota, New Hampshire, New Jersey, North Carolina, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, South Dakota, and Vermont) have adjusted their assumed rates for at least one plan to better account for lower investment returns. When determining the number of … While the proportion of risky assets and safe assets has stayed consistent between 2006 and 2016, there have been significant changes in asset composition within the risky class. As Figure 3 shows, between 1992 and 2016, the expected equity risk premium for public funds—the difference between U.S. bond yields and the average plan’s assumed return—increased from less than 1 percent to more than 4 percent, as bond yields declined and the assumed rates of return remained relatively stable. But from 2009 to 2015, those allocations diverged, with public plans allocating significantly more to risky assets than private plans. Such a policy improves the quality of decisions and demonstrates a commitment to the fiduciary care of public funds, with emphasis on balancing safety of principal and liquidity with yield. Defined Contribution Plans, Center for Retirement Research, December 2015, Bringing Home the Investment: Building the Case for Internal Investment Management, Funston Advisory Services, June 2015, Bringing Home the Investment: What Does it Take to Make Internal Management Work?, Funston Advisory Services, June 2015, Best Practice: Investment Fee Policies for Retirement Systems, Government Finance Officers Association, September 2014, How Sensitive Is Public Pension Funding to Investment Returns, Center for Retirement Research, September 2013, Best Practice: Asset Allocation for Defined Benefit Plans, Government Finance Officers Association, Global Investment Performance Standards, CFA Institute, March 2010, Best Practices in the Hedge Fund Industry, Report of the Asset Managers' Committee to the President's Working Group on Financial Markets, January 2009, Principles and Best Practices for Hedge Fund Investors, Report of the Investors' Committee to the President's Working Group on Financial Markets, January 2009, CalPERS Investment Beliefs, California Public Employees' Retirement System, Private Equity Principles, International Limited Partner Association, Most public funds maintain an investment policy to guide the investment of assets. A GFOA Best Practice. Although the increase may seem small, it equates to more than $2 billion in total annual investment fees for the 73 plans examined. One common measure—the equity risk premium—illustrates a dramatic increase in U.S. public pension plans’ exposure to financial market uncertainty over the past 25 years. Broadly, half of these assets are invested in stocks; a quarter in bonds and cash; and another quarter in what are known as alternative investments, such as private equity, hedge funds, real estate, and commodities.
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