State and local pension plans have taken on additional risk, since the market crashed in 2007-2008, in an attempt to return their assets to pre-crash levels. According to a report by the Pension Research Council, these funds lost nearly $1 trillion in assets and have yet to recover their former value. Average pension funding levels fell from 85 percent in 2007 to 77 percent in 2009, the report said.
"Since public pension plans generally assume an 8 percent return on assets, this implies that, even today, plan assets are more than 25 percent below levels projected as of 2007. Indeed, even if public plans returned to 11.5 percent annually going forward, it would take them until 2020 to catch up to asset levels projected prior to the financial crisis," the report stated.
To make up some of this deficit more quickly, many plans have increased contributions for employers and participants, helping assets catch up more quickly with projected liabilities. Some states have attempted to reduce the generosity of benefits, particularly for new hires but, in some cases, for current employees and retirees through reductions in post-retirement cost of living adjustments. Most have increased their risk within the plans.
Recommended For You
From 2007 to 2009, the percentage of public pension assets held in equities declined from 60 to 52 percent; bonds grew from 24 percent to 26 percent; real estate remained constant at a median value of 6 percent of assets; Cash stayed at 1 percent; alternative investments increased from 0 to 2 percent and the "other" asset class grew from 1 percent to 6 percent, the report found.
"Target asset allocations changed rather markedly since the financial crisis, with pension fund managers indicating a rising interest in alternative investments. Given the poor returns on equities in recent years and pressures to maintain expected returns going forward, the shift into alternate investments may be understandable," the report said.
"Though equity price declines reduced the share of plan investments held in stocks, plan target allocations have tended to increase risk, often via a broader acceptance of alternative investments in public plan portfolios. The typical pension plan in 2010 targeted a level of risk that exceeded the rate of two thirds of pensions in 2007. While the increased risk taken by the median public sector pension was modest, a small number of plans did significantly increase their target portfolio allocations, making more plausible the view that some plans may boost risk as a means to recover from market declines over the past several years," the report said.
© 2025 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
