Public pension returns could be worst in 15 years

Amy Scott Jul 27, 2016
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Long-term returns for pensions are forecast to drop to about 7.5 percent. John Moore/Getty Images

Public pension returns could be worst in 15 years

Amy Scott Jul 27, 2016
Long-term returns for pensions are forecast to drop to about 7.5 percent. John Moore/Getty Images
HTML EMBED:
COPY

Public pensions are having a rough time of it. Retirement plans for public employees, like teachers and police officers, are facing a $1 trillion funding gap. Meanwhile, large U.S. pensions are expected to report their worst long-term results in 15 years.

The median annual return for public pensions, over 20 years, is expected to hit about 7.5 percent for the 2016 fiscal year, according to an estimate from Wilshire Trust Universe Comparison Service. That’s down from more than 12 percent in 2001.

The two recent recessions have taken a toll on long-term results, said Jean-Pierre Aubry, with the Center for Retirement Research at Boston College.  

“Even though you have a bull market in the last three or four years, the last 15, the performance has been pretty low, really due to the 2008-9 crisis, and the 2002 dot-com burst,” he said.

Persistently low interest rates haven’t helped. About a quarter of pension fund holdings are in bonds, Aubry said.

To close funding shortfalls, pension systems have three main options, said Keith Brainard, research director at the National Association of State Retirement Administrators.

“Contributions will have to go up for some, benefits will be lowered, and we are seeing – and we have continued to see over the last number of years – changes in the way the assets are invested,” he said.

While new employees typically bear the brunt of increased contributions and reduced benefits, Brainard said, more and more existing workers and retirees are being asked to share the pain.

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