Plans that move to more complex investments also need to be prepared to adopt greater transparency requirements. CalPERS, like most It should also indicate the type of instruments eligible for purchase by a government entity, the investment process, and the management of a portfolio. In an interview, Jean-Pierre Aubry, associate director of state and local research at the Center for Retirement Research at Boston College and co-author of the report said that the difference between how public and private plans allocate their assets "can't really be explained. The report shows that from 2001 to 2008, the average allocation to fixed income, equities and alternative asset classes was roughly the same for public and private plans. The Wilshire Trust Universe Comparison Service (TUCS) performance comparison data, reported quarterly from 1991 to 2016. A decade later, allocations to alternative investments had more than doubled to 26 percent of the average plan portfolio. The model's implications are examined using annual data on the portfolio allocations and plan characteristics of 125 state pension funds over the 2000–2009 period. Growth in gross domestic product (GDP) and bond yields form the building blocks of investment returns, and most economists, wealth managers, and other specialists expect both to lag historical averages over the next 20 years. Copyright © 1996-2020 The Pew Charitable Trusts. And over the past decade, funds have increasingly turned to alternative investments to achieve investment return targets. Exclusive state-policy research, infographics, and stats every two weeks. For example, a 1 percentage point difference in annual returns on $3.8 trillion equates to a $38 billion impact on pension assets. Conserving Marine Life in the United States, Ending Overfishing in Northwestern Europe, International Boreal Conservation Campaign, Protecting Coastal Wetlands and Coral Reefs, U.S. Public Lands and Rivers Conservation, State Public Pension Funds’ Investment Practices and Performance: 2016 Data Update (PDF), State Public Pension Funds Increase Use of Complex Investments, Most States Suffer Declines in Education Jobs, Federal Assistance Boosts States' Personal Income. With the retirement security of 19 million current and former state and local employees at stake, sound and transparent investment strategies are essential. While the proportion of risky assets and safe assets has stayed consistent between 2006 and 2016, there have been significant changes in asset composition within the risky class. When determining the number of … U.S. public pension plans invest more in riskier assets than private plans, a report issued by the Center for Retirement Research at Boston College said. For example, the U.S. experienced GDP growth of more than 5.5 percent in the 20 years leading up to the Great Recession, more than 1.5 percent higher than projections for the next two decades. recently raised the bar on investment fee transparency by disclosing the full amount it pays to invest in private Despite the greater risk incurred, public sector plans continue to see real returns underperform against actuarial assumptions. Investment earnings take the form chiefly of income from fixed income securities (bonds), and capital appreciation of equities. Public pension fund assets are invested in diversified portfolios that include public equities; bonds issued by the U.S. and foreign governments and corporations; real estate; alternatives, such as private equities, hedge funds, and infrastructure; and other asset classes. Best Practice: Investment Fee Policies for Retirement Systems, How Sensitive Is Public Pension Funding to Investment Returns, Best Practice: Asset Allocation for Defined Benefit Plans, Best Practices in the Hedge Fund Industry, Principles and Best Practices for Hedge Fund Investors. Bringing Home the Investment: What Does it Take to Make Internal Management Work? But from 2009 to 2015, those allocations diverged, with public plans allocating significantly more to risky assets than private plans. Optimal portfolio allocations are derived when pension fund management maximize the utility of wealth of a representative taxpayer or when pension fund management maximize their own utility of compensation. Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors. During the 1980s and 1990s, plans significantly increased their reliance on stocks, also known as equities. The Government Finance Officers Association (GFOA) recommends that all governing bodies adopt a comprehensive written investment policy and review and update its policies, if necessary on an annual basis. Assets reported for Line 19a are required to: • Reflect market value at the beginning of the year and exclude the value of any receivables; Investment performance over the last five to six years has, for the most part, tracked plan target rates, with average returns of about 7 percent. 685 Third Avenue Don't miss our latest facts, findings, and survey results in The Rundown, State Public Pension Funds’ Investment Practices and Performance: 2016 Data Update, Exploring the Science of the Maternal-Fetal Bond, Nonprofits Lead Park Trips to Heal Veterans and Inspire, Health Impact Assessments Can Help Improve Decision-Making. Recommendation. Finally, plans should offer greater disclosure of investment management fees. Many state retirement systems are on an unsustainable course, coming up short on their investment targets and having failed to set aside enough money to fund the pension promises made to public employees.