Tag: Reason

Testimony: Status of the Florida Retirement System

Mary Pat Campbell
Testimony: Status of the Florida Retirement System

Excerpt:

Using publicly available data and annual financial reports published by FRS, our quantitative team has built an actuarial model of the FRS system that has allowed our analysts to spotlight areas of systemic risk and inefficiencies that have resulted in not only the FRS defined benefit plan going from 118 percent funded and a surplus of $13.5 billion to 82 percent funded and holding over $36 billion in earned, yet unfunded, pension obligations that are implicitly protected by law, but also how the defined contribution Investment Plan, as currently built today, falls well short in providing adequate retirement security to public sector employees.

Regarding the current state of the FRS pension plan, underperforming investment returns have been the largest contributor to the unfunded liability, adding $17 billion in debt since 2008. Milliman Inc.—the actuaries hired by the system—warned for three straight years (2016, 2017, and 2018) that the system’s assumed rate of return was not reasonable, leading to its eventual reduction to 7.0 percent. Even with the reduced assumption, however, our analysis indicates that FRS still has a less than 40 percent probability of achieving or exceeding that rate over the next ten years. Market outcomes below FRS expectations will still likely be an issue generating unexpected costs for taxpayers, and the unfunded liabilities that exist today will continue to inhibit plan assets from compounding over decades, making paying down the $36 billion debt and honoring the state’s long-term obligations more di­fficult.

Author(s): Vittorio Nastasi

Publication Date: 4 February 2021

Publication Site: Reason

Examining Private Equity in Public Pension Investments

Mary Pat Campbell
Examining Private Equity in Public Pension Investments

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Excerpt:

However, there are reasons to be skeptical of public pension investment in private equity. While it is true that most private equity benchmarks outperformed the S&P 500 during the 2010s, it appears that public pension system investors did not benefit from this outperformance: their returns on public and private equity holdings were similar. Furthermore, it appears that private equity underperformed in 2020 and may not recover its edge in the decade ahead.

Over a long time period, annual returns on leveraged buyout funds are highly correlated with those of the S&P 500, raising questions as to whether private equity meaningfully adds to the diversification of pension system portfolios.

Pension systems should thoroughly evaluate the downsides of private equity investing before increasing their allocations to this asset class. These disadvantages include illiquidity, challenges in obtaining timely and accurate valuations, high investment costs, and lack of transparency.

Author(s): Marc Joffe

Publication Date: 27 January 2021

Publication Site: Reason

Public Pension Plans’ Funded Ratios Have Been Declining for Years

Mary Pat Campbell
Public Pension Plans’ Funded Ratios Have Been Declining for Years

Excerpt:

Over time, changes in a pension plan’s funded ratio, also referred to as a pension’s funded status, can show the rate at which the plan’s debt is growing.

In 2001, West Virginia was the only state where public pension plans had an aggregate funded ratio of less than 60 percent. However, 18 years later, in 2019, nine states faced aggregate funded ratios below 60 percent.

In that same time period, the number of states with funded ratios below 70 percent (but above 60 percent) grew from three to 14. Together, these numbers show that, as of 2019, 23 states had less than 70 percent of the assets on hand that they need to be able to pay for promised future retirement benefits.

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Author: Jordan Campbell

Publication Date: 29 January 2021

Publication Site: Reason

With Interest Rates Low, US Pension Funds Make Risky Investments In Emerging Market Debt

Mary Pat Campbell
With Interest Rates Low, US Pension Funds Make Risky Investments In Emerging Market Debt

Excerpt:

In the United States, public pension funds, which have an average investment return target of 7.25 percent, will likely struggle to meet those investment targets and could be severely impacted by plummeting interest rates. Without changes to pension plans’ assumed rates of return, many public pension systems will see an increase in debt.

Unfortunately, many public pension plan managers are not interested in adjusting their investment return targets to realistic levels at this time. Instead, they are seeking riskier, potentially higher-yielding investments in an effort to make up for depressed interest rates and hit their targets.

Author: Swaroop Bhagavatula

Publication Date: 25 January 2021

Publication Site: Reason