Public pension plans: Returns up, expenses down, more death audits, fewer staff
But that's not all. A recent NCPERS survey of pension professionals offers insights into pensions' favored asset classes, funding levels, COLAs, and more.
Strong investment returns, increased oversight and digital communication efforts, and new concerns about staffing were among the key findings of a report on the fiscal condition of local and state government retirement funds and the latest trends in their operations.
The survey from the National Conference on Public Employee Retirement Systems – completed in partnership with Cobalt Community Research – includes responses from 156 local and state government pension funds with more than 17.7 million active and retired members and assets exceeding $2.6 trillion. Local and state pension funds were both represented in the responses (53% and 47%, respectively). NCPERS represents approximately 500 funds throughout the United States and Canada. The survey was held between September and December 2021.
Returns up
Overall, reporting funds saw average one-year returns of approximately 14.0%, up from 9.8% in 2020. Funds also enjoyed five-year (8.7%) and 10-year (8.4%) averages above the assumed rate of return, though 20-year returns (6.7%) landed slightly below the assumed rate of return. Funds with members who are not Social Security eligible enjoyed higher one-year returns in 2021 than those with members who are Social Security eligible – 14.8% to 13.1%.
Responding funds’ most favored asset classes for allocations were domestic equity (29.8% average current asset allocation), global equity (24.1%), domestic fixed income (18.8%) and international equity (18.0%).
Funding levels
Overall, funds reported a funding level of 74.7% for 2021. Funds that include members who are not Social Security eligible tend to have higher benefit levels to offset the lack of that source of retirement income, according to the report, and consequently showed lower average funded levels (68.8%) when compared to funds with only members who are Social Security eligible (77.2%).
Investment earnings contributed the bulk of the sources of revenue for funds (68%). Other prominent sources of revenue reported in the survey included employer contributions (23%) and member contributions (8%). While member contributions as a percentage of payroll dipped from 9% to 8% among respondents, employer contributions rose from 20% to 23% and overall contributions rose from 29% to 32%.
Expenses and COLAs
Average expenses to administer the funds dropped from 60 basis points (100 basis points equals 1 percentage point) to 54 basis points. In comparison, the average expense of hybrid funds is 59 basis points, according to the report.
The average cost-of-living adjustment offered to fund members was 1.7%, the same as in 2020, though the report found that “many responding funds did not offer a cost-of-living adjustment in the most recent fiscal year.” The number of funds that exclude overtime from the calculation of a retirement benefit rose from 51% to 54%, continuing an upward trend.
Increase in audits, participant communications
According to the report, funds showed a marked increase in oversight practices in 2021. They reported a growing use of death audits (74% vs. 62% in 2020), actuarial audits (65% vs. 52%), information systems security audits (59% vs. 52%), and asset allocation studies (65% vs. 57%).
Plans reported a growing focus on enhanced online and mobile member account access. Similarly, funds showed a sharp increase in digital communication efforts with their members, including more of them offering videoconferencing to members (78% in 2021 to 54% in 2020), sending mass emails to members (51% to 32%) and providing a social media presence (51% to 29%).
In several areas, funds adapted their plan design and assumptions in response to ongoing trends. Overall, they increased their efforts toward lowering the actuarial assumed rate of return (70% implemented vs. 52% in 2020), raising benefit age/service requirements (40% implemented vs. 32% in 2020) and increasing employee contributions (37% vs. 31% in 2020).
Little interest in additional benefits offerings
In terms of retirement benefits, funds showed little interest in offering additional benefits to their members, though certain benefits remained prevalent, according to the report. In 2021, 95% of reporting funds offered a defined-benefit plan, 88% offered a disability benefit and 84% offered an in-service death benefit. Health plan coverage declined among funds with 60% not sponsoring a health plan in 2021 compared to 57% in 2020.
In the face of a nationwide labor shortage affecting many industries, pension funds are also showing strain in their workforces. Approximately 56% report that they are starting to experience or expect to face a problem attracting and retaining skilled staff, a sharp rise from 28% in 2020.
Despite those staffing concerns, fund representatives expressed a high level of confidence in their capacity to navigate the challenges and opportunities ahead. On a 10-point scale, respondents had an overall confidence rating of 8.0 in response to the question, “How satisfied are you with your readiness to address retirement trends and issues over the next two years?” That compares to an average of 7.4 in 2011.
READ MORE: