Regions

Returns on US Public Pensions drop to worst since 2012

August 10
10:58 AM 2015

The US State and Local government pension funds registered worst performance since 2012 following the bleak performance in global stock markets and bonds. 

The US pension funds grew 3.5% for the past 12 months ending June 2015, as revealed by Santa Monica, a California-based consulting firm. Generally, public funds offer seven percent or more per annum.

However, they recorded a bleak 1.5% growth in 2012 fiscal and the latest increase for the year ended June 2015 was only 3.5%. The average return on retirement system (pension funds) was 17% in 2014 fiscal and 12.5% in 2013. The major reason for this attractive returns was Fed decision to keep interest rates at almost zero level resulting to better asset prices. 

The biggest pension fund in the US is the California Public Employees' Retirement System and this major fund also reported thin returns of 2.4% for the fiscal year much lower than the average 7.5% returns.

The returns on assets over $5billion were comparatively better as their average growth was hovering at 3.6%, according to data from Wilshire Trust Universe Comparison Service.

Market analysts attribute the reasons for poor performance of funds and bonds to unfavorable market conditions that put pressure on the returns.

MSCI index of international equities dropped 5.3% during the period while the Barclays US Aggregate Bond index added about two percent.

According to a rough calculation, a portfolio of 60% stocks and 40% bonds resulted in five percent earnings. This shows how the bleak performance of global stock markets impacted the returns on the US pension funds and bonds.

Federal Reserve's decision helped retirement systems earn more in the present market conditions. The US Federal Reserve kept the short-term interest rates at almost zero level and this boosted the returns on retirement systems in the wake of strengthening the economy. 

The US state and local governments count on pension funds estimating the returns in the range of 7-8.5 percent so that they can pay retirement benefits to different professionals including civil staff, policemen, teachers, etc.

The drop in pension funds returns would force the states and local governments to bridge the gap by parking their own funds. Pressure on governments would increase the burden of investment losses more particularly the losses occurred during the recession in 2009. 

The unfavorable conditions forced the local governments to cut down their annual funding contributions. This also impacted the assets. It was estimated that only 40% of public pensions got full annual contributions during 2014, according to a report made by Fitch Ratings.

Different estimates about the pension-fund deficit vary subject to the several calculations methods to determine the costs. However, the states and local government all together have $1.4 trillion less than what's needed to cover promised benefits under the pension funds.

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