Public Pension Investment Returns and Market Volatility
For fiscal year ending June 30, 2011, state and local government retirement systems had a median investment return of 21.6 percent.
That statement is often followed by “but…” as in “but look what’s happened to the markets since then!”
With a slow economic recovery and ongoing global market volatility, the fact remains that taking a long-term focus is an overarching factor in public pension investment strategies and projections.A primary objective for using a long-term approach is to promote stability and predictability of cost. Public plans’ use of a stable, long-term rate enables these plans to weather volatility in investment markets, thereby reducing fluctuations in required contribution rates. If an investment return assumption is set too low, it would result in overstating liabilities, which would overcharge current taxpayers, undercharge future taxpayers, and result in a poor allocation of resources.
For perspective on what it means to be a long-term investor in a volatile market, watch this clip from the PBS NewsHour: “Major Investor CalPERS Rides out Big Waves in Markets With Calm Approach” (Aug 18, 2011) featuring CIO Joe Dear.
– The NewsHour transcript, and MP3 recording, can be found here.
– NASRA Issue Brief: Public Pension Plans Investment Returns
– The Wall Street Journal (Oct 10, 2011), “Pensions Wrestle with Return Rates“