Public pension systems saw a year of positive returns, adopting more conservative investment assumptions as well as budgeting their spending, an annual National Conference on Public Employee Retirement Systems (NCPERS) report shows.
Pulling responses from 164 state and local government pension funds (62% local government pension funds and 38% state pension funds) with a total of $1.8 trillion in assets, the 2017 NCPERS Public Retirement Systems Study found aggregate one-year returns rose to 7.8%, way up from 2016’s 1.5%, with longer-range returns near the assumed rate of return.
Funds that received their full statutory contributions from governments rose to 74% in 2017, up 4% from the previous year. Employer contributions also rose 4% to reach 22%, a figure NCPERS Executive Director and Chief Counsel Hank H. Kim called “encouraging,” noting that governments honoring pension commitments is what helps drive employer contributions up.
Public pensions also curbed their expenses at an average ratio of 55 basis points per dollar of investment—a lower cost than most mutual funds. According to the 2017 Investment Company Fact Book, equity mutual funds experience an average of 63 basis points per dollar while hybrid mutual funds round out to about 74 basis points.
Across all pension funds, expense ratios hardly changed, as a subgroup that participated in both 2016 and 2017 studies saw expenses shrink to 52% from 54% .
64% of all participants in the study, have either reduced their return-on-investment assumptions or plan to do so. While the average investment assumption rate remained at 7.5%, the average inflation assumption dropped slightly to 2.9% from 2016’s 3%.
In addition, the trend of shrinking asset smoothing periods for investment return calculations continued, trickling down from 5.7 years to five years.
For the first time in four years, average funding levels dropped slightly as investment and inflation assumptions tipped them down to 71.4% from 74.7% in 2016.
“The nation’s pension systems are deeply committed to their mission of providing a secure retirement for millions of firefighters, police officers, teachers, and other public-sector workers,” Kim said in a statement. “Over the seven years we have conducted this annual study, pension systems have grown increasingly confident in their ability to adapt to pressure and deliver on their promise to retired public servants.”