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Battered Public Pensions Doing Better?
Jeanette Neumann of the WSJ reports, Battered Public Pensions Do Better:
A
rebounding stock market helped buoy state pension plans' assets in
2010. But the plans still have a long way to go to bridge a funding gap
caused in large part by losses suffered during the financial crisis,
according to a report expected to be released Monday.
Any
upswing is good news for state pension plans, typically funded by
contributions from public employers and workers and investment returns
on assets held in the plans.
State pension systems had an
estimated funding ratio of 69% for fiscal year 2010, ending June 30, up
from 65% for fiscal year 2009, according to Wilshire Associates, a
Santa Monica, Calif.-based investment-consulting firm. But pension
plans remain well below the 95% estimated average funding ratio for
2007.
The ratio means that 126 state
pension systems surveyed by Wilshire on average have 69% of the assets
on hand compared to projections of what they will owe in pension
payments to government workers over the long term. That figure is based
on the market value of the assets.
"The trajectory is up,
albeit it's up off a pretty low base," says Steven Foresti, managing
director at Wilshire and an author of the report.
The so-called
actuarial estimate, which most plans use and which spreads out
investment gains and losses over longer periods, leads to a projection
of 77% for 2010. That's down from 79% a year earlier and 87% in 2007.
For
most of the pension plans, figures reflect funding through June. Since
then, robust market returns have likely bolstered pension plans'
assets, Mr. Foresti said.
Over the next decade, Wilshire projects
public pension plans will have a median annual return on their assets
of 6.5%. The pension plans included in the study have projected a
median actuarial return of 8% over several decades, Wilshire says.
Public pension plans' asset allocation has shifted over the past decade, according to Wilshire.
In
2010, funds had 31.1% of their assets in U.S. stocks, down from 45% in
2000, while foreign equities have increased to 17.5% from 13% over the
same time frame. Investments in so-called "alternative" assets
classes, such as real estate, private equity, commodities and hedge
funds have also increased.
Public pension funds'
health has received heightened attention in recent months amid
increased stress on states' finances and questions by some over the
size of retiree pensions. Representatives of government workers have
said gaps are due at least in part to employers' failures to make
required contributions.
The Wilshire report comes as other data also point to signs of improvement in state and local finances.
State
tax collections, for instance, increased 6.9% across 41 states that
have reported their fourth-quarter revenue, the fastest rate in nearly
five years, according to a February report by the Nelson A. Rockefeller
Institute of Government at the State University of New York.
Federal
Reserve Chairman Ben Bernanke in a speech in New York last week said
that if the economy continues to strengthen "states and localities may
start to get a little breathing space," as tax collections rise with
income and spending and the demand for support programs such as
Medicaid, a federal-state partnership to provide health coverage for
the poorest Americans, diminishes. But Mr. Bernanke and others also say
that state and local governments face a tough slog ahead.
Wishire recently reported that the Master Trusts rose nearly 6% in the fourth quarter, resulting in a median return of over 12% for calendar year 2010:
For
the second year in a row, master trusts had a stellar year returning
12.72 percent in 2010 following an 18.29 percent return in 2009, as
measured by the median Wilshire Trust Universe Comparison Service®
(Wilshire TUCS ®), a cooperative effort between Wilshire Analytics,
the investment technology unit of Wilshire Associates, and custodial
organizations. Wilshire TUCS, the most widely accepted benchmark for
the performance of institutional assets, includes approximately 900
plans representing $2.8 trillion in assets.
The
Public, Taft-Hartley Defined Benefit and Endowment and Foundation
plans were all top performers posting median returns in a tight range
of 6.0, 5.98, and 5.95 percent, respectively, in the fourth quarter. For
the year, it was the corporate Defined Benefit plans that came out on
top with a median return of 13.19 percent while Public (12.94%),
Taft-Hartley Defined Benefit (12.61%), and Endowments and Foundations
(12.50%) all trailed behind.
The
large plans are once again outperforming the smaller plans as
demonstrated by the median Master Trust over One Billion return of 5.86
percent for the quarter and 13.11 percent for the year, while the
Master Trusts less than One Billion returned 5.78 and 12.39 percent,
respectively. Within the large plans, it was the Taft Hartley Defined
Benefit plans that outperformed all others with 5.68 percent for the
quarter and 13.71 percent for the year. This can be somewhat explained
by their large exposure to equities at 63 percent, as represented by
the median allocation to US and International Equity combined.
Drilling
down to the asset class level, equity portfolios showed a large
spread in median returns for both the fourth quarter and the year
ending December 2010 with a strong size effect resulting in small cap
significantly outperforming the mid and large cap styles. There
was also a large style effect, according to the Wilshire TUCS
medians, with growth managers dominating value managers in all
capitalization ranges for both the quarter and the year.
“Looking at the Small Cap Growth median returns of 16.78 and 28.42
percent for the quarter and the year, as compared with Large Cap Value
portfolios which returned 10.28 and 14.69 percent for the same
period, really illustrates these points”, said Hilarie C. Green, CFA,
Managing Director, Wilshire Analytics.
Turning
to the fixed income managers, the High Yield managers (3.09%) easily
beat the other strategies with the Long Duration managers delivering
the weakest performance (-4.39%) as the yield curve adjusted upwards
during the quarter. On the other
hand, for calendar year 2010, the Long Term duration managers
outperformed all others (11.76%), except the High Yield managers which
returned a median of 14.47 percent.
Strong
returns in stocks and bonds bode well for public pension assets. The
problem is that interest rates remain near historic low levels, so even
if the funding gap is shrinking a little, it's still high and won't get
better anytime soon. You would need a sharp rise in rates and continued
strength in the stock market to see those funding deficits shrink
substantially.
In her article, Lisa Lambert of Reuters notes the following: Public Stock The All this to say that US
pensions have recently sparked heated debates, from the halls of the
U.S. Congress, where lawmakers have suggested allowing states to go
bankrupt to undo pension promises, to the streets of Wisconsin's
capital, where thousands of demonstrators are pitched in a battle over
public employees' rights.
market declines drove down the value of many retirement systems' funds
recently, and many states pulled back on putting money into the funds as
they faced their worst budget crises in decades.
retirement systems have been caught short in paying for future
retirees. Estimates of the shortfalls range from $800 billion to $3
trillion, depending on how much the systems' investments are expected to
appreciate.
public pension funds are doing better but are by no means out of the
woods. If you want to know what the future might have in store for many
public sector workers, have a look at what is going on in the UK where a
review by former Labour Cabinet minister Lord Hutton is expected to recommend an end to "gold-plated" final salary schemes. He is set to say that workers should instead receive payouts linked to average salary over their careers.
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Nothing but an illusion funded by Bernanke.
Leo, an honest accounting of asset rise due solely to QE versus the deficiency of future income due to inflation caused solely by QE would lead the impartial viewer to conclude that the pension system is imploding.
Have a nice day. ;)
Why do you end all your headlines with a question mark, is it a punctuation error or are you asking me? Seriously what the fuck, make a statement once in a while.
Question mark shows humility, even though I know it all! ;)
... even though I know it all!
Then you know you're kicking the can down the road toward the approaching cliff, those public pension funds are going to crash or be looted.
"Recovery", you say?
Ben Bernanke, naughty boy, is that you?
This is like telling a mortal wounded person with a head wound your getting better it didnt hit your heart. Your still going to die. Pensions funds are still doomed.
Yes 'fatal' just about sums up this friggin public sector mess. But all credit to Leo Kockupalotis and the entire public pension industry (ponzi scheme) for stringing out this mortal head wound for as long as possible, jawboning "All is Well" and trying to shift (shifty being the operative word) the goalposts simply because the promises made to date were ponzi lies from the very beginning.
So what should happen Leo?
What strategy other than your drowning man grasping at straws desperation?
First shutter the industry. Pay out what its got left, while it's still got something left, to the people and let them sort their own private pensions out.
Namely reverse the centralised diseased dinosaurs into small flexible mammals. Are we crystal clear son? Go forth, spread the words of wisdom, stop pretending and extending (ie. lying and losing) and do something right just once in your life
I agree to shutter the industry, but not pay out what's left. I'd rather have every dime rolled over to social security. Those on pension would be shifted to social security, just like everyone else.
so you'd throw what good money there was left in a bankrupt public pension (ponzi) system into another bankrupt social security (ponzi) system? Personally i'd like to see those who contributed to public pensions see at least some of their money back rather than the usual failed socialist model of rewarding wasters who contribute nothing getting SS pay-outs of other peoples money
I agree to shutter the industry, but not pay out what's left. I'd rather have every dime rolled over to social security. Those on pension would be shifted to social security, just like everyone else.
sure they are !