Posted by on October 4, 2017 3:50 pm
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Categories: Alberta Investment Management Corporation Bond Business Corporate bond Economy Equity Private Finance Financial markets fixed Investment Labor money Oklahoma Oklahoma Teachers' Retirement System Ontario Teachers' Pension Plan Pension Crisis Pensions Personal finance Private Equity Real estate Social Issues Social law South Dakota Investment Council

A new study of public pension returns by Cliffwater LLC has found that the median U.S. state pension plan returned just 5.9% annually over the 10 years ended June 30, 2016.  Meanwhile, as Pension and Investments notes, the top performing state pension, the $15.6 billion Oklahoma Teachers’ Retirement System, was the only fund that managed to eek out a return over 7% during the same period.

U.S. state pension plans returned a median annualized 5.9% for the 10 years ended June 30, 2016, vs. 6.8% for the 10 years ended June 30, 2015, said Cliffwater’s most recent annual state pension performance report.

The average 5.7% return for the 10 years ended June 30, 2016, fell within a wide range of individual pension plan returns (3.7% to 7.1%).

Once again, the two top-performing state pension plans for the period were the $15.6 billion Oklahoma Teachers’ Retirement System, returning 7.1%, and the South Dakota Investment Council returning 6.8% for the $10.5 billion South Dakota Retirement System. In third place was the $7 billion Missouri Local Government Employees Retirement System, returning 6.7%. All returns cited are annualized figures.

Of course, as we’ve noted on numerous occasions, the problem with those returns is that most public pensions in the U.S. have randomly decided to assume a long-term return of 7.5%, or 1.6% higher than what they’ve actually been able to achieve in practice. All of which only serves to mask the true scale of the pension crisis in the U.S. by discounting future liabilities at an artificially high rate.

As we noted in a post entitled “An Unsolvable Math Problem: Public Pensions Are Underfunded By As Much As $8 Trillion,” lowering discount rates from just 7.5% to 6.0% could result in a 65% increase in underfunded liabilities.

Pension Underfudning

But you don’t have to take our word for it, even Kentucky’s State Budget Director, John Chilton, admitted in a recent letter sent out to the Kentucky Employees’ Retirement System that if pensions were subjected to the same rules governing single-employer private plans that their underfunded level would double and federal law would have already required “that all benefits be frozen and the plans terminated.”  Per The State Journal:

“It is well known that all of the Commonwealth’s pension plans are in a crisis. Using the same investment rates of return that corporate plans are required to use – the Corporate Bond Index rate – the aggregate underfunding for all of Kentucky’s eight plans goes from $33 billion to $64 billion,” he wrote in the letter.

“Furthermore, if Kentucky plans were subject to federal standards for single-employer private plans, six of the plans would be designated as having severe funding shortfalls because their funded status is less than 60 percent. As such, federal law would require that all benefits be frozen and the plans terminated. This is true even using the old 2016 actuarial assumptions, rather than the more realistic discount rates and other assumptions required of private plans.

“The need for significant reform is evident to anyone looking at the health of the Commonwealth’s plans within that larger context.”

The letter said total employer contributions for Fiscal Year 2017, which ended June 30, were $857,311,370.  If there is no legislative action, that rises to an estimated $872,677,346 in FY 2018, the current fiscal year, and $1,483,863,927 in FY 2019, an increase of over $611 million, from this fiscal year.


Adding insult to injury, Cliffwater found that well over 50% of public pension funds (adjusted for hedge fund allocations) are invested in public equities…

The alternative investment consultant’s report also looked at pension funds’ asset allocations and performance by asset class.

As of June 30, 2016, the plans had an average asset allocation of 48% public equities (down two percentage points from 2015), 26% alternatives (up two percentage points), 24% fixed income (up one percentage point), and 2% cash (down one percentage point).

According to Cliffwater, most of the alternatives increase for the year was directed to private equity, private debt and opportunistic investments. Within alternatives, the average allocation as of June 30, 2016 was 36% private equity, 30% real estate, 18% hedge funds, 13% real asset and the remainder in other alternatives.

Looking at alternative performance, the median return for private equity was 9.9% for the 10 years ended June 30, and 5.8% for real estate. Individual pension funds’ real estate returns varied the most of any asset class for the 10-year period, Cliffwater noted.

…All of which raises two very important questions: (1) how is it possible that pension underfundings continue to surge when 50% of assets have participated in one of the biggest equity bubbles in history and (2) when the current equity bubble bursts, which in inevitably will, will it result in a cascading failure of retirement systems across the country and finally expose the public pension ponzi for great lie that it has always been?

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