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Public Pension Funds Solidly Funded, Actively Changing to Adapt to Economic, Political Conditions

June 9, 2011 (SmartPros) The most comprehensive and up-to-date study addressing retirement issues for public pension plans finds state and local pension funds are solidly funded and are adopting substantial organizational and operational changes to ensure their long-term sustainability.

The 2011 NCPERS Public Fund Study, conducted by the National Conference on Public Employee Retirement Systems (NCPERS) and Cobalt Community Research, surveyed no less than 215 public pension funds in March and April. The vast majority – 83 percent – were local pension funds, while the remaining 17 percent were state pension funds. Those funds cover nearly 7.6 million active and retired public employees and have assets exceeding $900 billion.
“The data we collected – the most current data available – tells a strongly positive story,” said Hank Kim Esq., NCPERS Executive Director and Counsel. “Public pensions are experiencing a robust recovery from the Great Recession and are reporting strong investment returns, growing assets and funding levels on track to meet their obligations. And they are actively making structural changes to respond to the current economic, political and social landscape.”
Among the study’s key findings:
  • Funds have been active in making organizational and operational changes. The most significant activity has been in three areas: lowering the actuarial assumed rate of return; raising benefit age and service requirements, and increasing employee contributions.
  • Despite weak short-term investment experience in 2008 and 2009, the long-term investment discipline of fund managers has produced an average one-year return of 13.5 percent, based on the most recently reported data. Fund participating in the study reported a 20-year average return of 8.2 percent. The average return that respondents use to calculate assets is 7.7 percent, with an assumed inflation rate of 3.5 percent.
  • Investment returns are the single most significant source of plan funding, comprising approximately 66 percent – two thirds – of fund revenue. Members are a significant source of plan funding, contributing 10 percent of plan revenue. Employer contributions comprise only 24 percent of plan revenue.
  • Although media coverage has focused on a handful of troubled funds, most funds are managed responsibly and maintain strong funding levels. On average, funds are 76.1 percent funded and continue to work toward full funding. According to its February 2011 report Enhancing the Analysis of U.S. State and Local Government Pension Obligations, Fitch Ratings considers a funded ratio of 70 percent or above to be adequate. As with a home mortgage, funding levels are designed to be funded slowly over many years. The average amortization period for study respondents is 25.8 years.
The findings announced today represent the final results of the NCPERS study. Partial, preliminary findings were released publicly in late April.

2011 SmartPros Ltd. All rights reserved.

Source: NCPERS

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