Report: Public Pension Plans Making Riskier Investment Choices

Are public pension plans trading off long-term stability for a less hair-raising sticker price for state governments today? A new report from the Rockefeller Institute of Government answers that question and takes a closer look at the difficult choices those running public pension funds have had to make over the last three decades, and what those choices mean for the future fiscal stability of states. 

The report explains that, as risk-free interest rates have declined since the 1980s and 1990s, public pension plans have faced a tough scenario: reduce investment-return assumptions and request more money from state and local governments OR keep those return assumptions the same and pursue riskier investments. For the most part, pension plans have decided to take the second – riskier – route.

Keeping return assumptions the same means plans can avoid significant increases in government contributions – particularly attractive when state budgets are already strained. But, that also means going after riskier investments which in turn means more volatile returns with larger future swings in plan funding and government contributions. The Rockefeller Institute estimates that “at today’s level of risk, with $3.7 trillion in public pension fund assets, there is about a one-in-six chance of a single year shortfall of more than $425 billion for the United States as a whole”.

In the past, public plans invested more conservatively than their private defined benefit counterparts. Now, however, public plans have a bigger share of their assets invested in equity-like investments than private plans do. For reference, about two-thirds of public pension funds are currently invested stocks, real estate, hedge funds, and other assets subject to investment risk.

Read the whole report here: How Public Pension Plan Investment Risk Affects Funding and Contribution Risk