Public pension investments post losses in second quarter

Reuters News
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Posted: Aug 06, 2012 12:22 PM
Public pension investments post losses in second quarter

(Reuters) - Public retirement systems, already hobbled by the financial crisis and recession, saw their investments dip in the second quarter, with a median loss of 1.73 percent, largely because of their reliance on equities, according to a report released on Monday.

Public pension investments only eked out a median return of 1.15 percent over the year ended on June 30, according to Wilshire Associates, which analyzes institutional assets.

Wilshire found public pensions had put 25 percent of their investments into fixed income during the quarter, compared with more than a third at corporate plans. Corporate pension plans had a median loss of 0.88 percent over the quarter and a gain of 3.68 percent over the year.

"The asset class that somewhat saved returns for the quarter and year was fixed income," Robert Waid, managing director of Santa Monica, California-based Wilshire Associates, said in the report.

Investments provide the lion's share of public pension revenue, accounting for $6 out of every $10 in the funds, according to Pew Center on the States. Employer contributions, essentially the taxpayers' bill, follow at about 20 percent. When investment returns dip, state and local governments must pitch in more money.

The financial crisis and recession ravaged public pensions' investments, just as state and local governments pulled back contributions in the face of budget crises.

Now, according to Pew, public pensions are short a total of $757 billion to pay for future retiree benefits.

Wilshire found that public funds with assets greater than $1 billion had median quarterly losses of 1.58 percent and annual returns of 1.12 percent. Those with assets greater than $5 billion fared slightly better, with median losses of 1.48 percent over the quarter and returns of 1.15 percent over the year.

Because many states have constitutional requirements to provide pension benefits, taxpayers are worried that they will pull money from other areas to make good on retirement promises. Recently, cities and some states have considered requiring employees to pay more or take less in benefits.

The accounting organization for public finance - the Governmental Accounting Standards Board - has begun requiring states and cities with large pension funding gaps to lower the projected rates of return on their retirement investments.

The Wilshire data shows how volatile those investments have been. Their median return for three years ended June 30 was 11.66 percent, but for five years, it was a mere 1.82 percent. For 10 years, the return was 6.32 percent.

Wilshire reported in May that during the first quarter, public pension funds had median returns of 7.5 percent, their best rate since 2010.

The U.S. Census reported in June that public pensions' total holdings and investments had reached $2.8 trillion in the first quarter, with earnings hitting a record $179.2 billion. But few expected those gains to continue into the second quarter.

A recent study from the National Conference of Public Employee Retirement Systems found that public pension funds had exposure of 36 percent in domestic equities and 17 percent for international stocks.

In the next two years, the systems plan to reduce domestic equity and increase allocations to private equity, commodities and other investments, according to the study.

(Reporting by Lisa Lambert; Editing by Lisa Von Ahn)