Of course, 2008-09 were tough times for stock and bond market investors and the historic downward spirals offered the opponents of public employees’ defined benefit plans plenty of opportunity to knock them. Unfunded liabilities would break the backs of cities and states, they said (and continue to say in many cases).
The truth of the matter is that public employee pensions are long term investors and focusing on returns – and the subsequent consequences to a pensions unfunded liabilities – for a year or two or five or ten -- doesn’t make much sense to those in the industry. The time frames for most pension investments are 15-20 years and as long as the longer-term, multi-year trends for both returns and unfunded liabilities are positive, public officials should not be too concerned except in a relatively small number of cases.
Such is the situation we’re seeing with a national report by Wilshire Associates on the state of U.S. retirement systems. A few points from the survey of 111 pension plans that reported their returns to Wilshire, as reported in Asset International’s Chief Investment Officer:
- The aggregate funding rose three percent to 75% in 2013, from 72% in 2012.
- For 111 pension plans, assets grew 8% from $1.96 trillion to $2.12 trillion in 2013.
- The 111 plans’ aggregate funding shortfall decreased from $863.3 billion to $779.8 billion.
- The average assets-to-liabilities ratio was 70%.
- Only 8 had assets worth less than 50% of their liabilities.
All said, only 7 percent of the reporting pensions were in a truly concerning situation, with their assets less than 50% of liabilities. These might warrant some review and action by the people involved to ensure their future solvency, but they are certainly salvageable. All the other findings were very positive.
The best news from our perspective was the aggregate funding trend, up 3% in one year. In investing terms, the trend is your friend, and as long as the large majority of pension funds continue in this positive direction the din and cry for ‘pension reform at all costs’ will slowly fade – until the next historic market downturn. – Max Patterson