Big Returns for Pension Systems…Now What?

Governing magazine has reviewed the latest round of investment returns for public pension systems, and speculated on the next steps for jurisdictions offering these traditional defined benefit plans, that are dependent on long-term investments to pay for future benefit payments. The State of Maryland hosts such a plan for employees and public school teachers, and roughly half of the Maryland counties participate in that “pool.”

From Governing, citing analysis by Tom Aaron, vice president and senior analyst at Moody’s Investors Service:

Pension plans rely heavily on investment earnings because annual payments from current employees and governments aren’t enough to cover yearly payouts to retirees. As it stands, roughly 80 cents on every dollar paid out to retirees comes from investment income.

The average annual investment earnings target for pension plans is 7.4 percent. By Aaron’s calculations, pension plans would need investment returns of nearly 11 percent to prevent unfunded liabilities from growing.

Many plans are actually on track to beat that lofty figure this year, reporting returns between 10 and 14 percent, according to a Governing analysis. But it’s becoming much harder for pension plans to gain ground than to lose it.

The data collected by Governing (shown above) shows the Maryland plans’ consolidated returns at 10% for the year – well above the system’s assumed rate of return, but also incrementally below each of the other public systems reporting as part of the analysis. See previous Conduit Street coverage on the Maryland system returns.