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Confidence, Performance Rises at Public Pension Funds

In a year of positive — but modest — change, a new survey suggests that public pension funds are feeling better about their ability to deal with trends and issues, at least in the near term.

According to the 2014 National Conference on Public Employee Retirement Systems (NCPERS) Public Retirement Systems Study, public funds’ confidence in their readiness to address retirement trends and issues over the next two years increased slightly compared with a year ago; their overall confidence rating increased to 7.9 on a 10-point scale (very satisfied =10) compared with the 2013 score of 7.8 and a 2011 score of 7.4.

Responding funds report an average funded level of 71.5%, compared with 70.5% a year ago. Two factors contributed to the change, according to the report:

1. on average, funds saw 1-year investment returns of 15%; and
2. funds continue to lower amortization periods.

The average administrative expense for respondents to administer their fund is 14 basis points, down from 16 basis points in 2013, though investment manager expenses increased from 42 to 47 basis points, and the total cost of administering the fund and paying investment managers increased from 57.3 basis points to 61.1.

Assumptions

According to the 2014 study respondents, 46% include overtime in the benefit calculation, compared with 39% in 2012. About 37% provide some level of health coverage for retirees, down from 43% two years ago.

The average investment assumption for responding funds was 7.7%, up 0.1% from 2013. The inflation assumption fell to 3.2% from 3.3% a year ago.

The average investment smoothing period for respondents was 5.2 years, down from 5.7 years in 2013. For Social Security-eligible funds, the smoothing period averages 5.3 years, down from 5.5 years last year. Non Social Security-eligible plans have an average smoothing period of 4.9 years.

A plurality (35%) of responding funds offer a COLA of 3% or higher. However, nearly a quarter (24%) do not offer any COLA.

Increased Activities

Looking ahead, the areas that saw a significant increase in occurrence compared with the 2013 study include offering:

  • deferred retirement option plan (6% increase);
  • an employer pick up of employee contributions (4% increase); and
  • an Ad hoc COLA (3% increase).
Staffing

The average participant-to-staff ratio was 1,024 to 1 in this year’s survey, down from 1,042 to 1 in 2013, a shift that the report said can be attributed to a slight increase in the number of staff members who administer the fund.

The ratio for Social Security-eligible plans is 1,206 to 1; non Social Security-eligible plans have a participant to staff ratio of 718 to 1. The average staff-to-management ratio is 5 to 1, down from 6 to 1 in 2013. Both Social Security and non Social Security-eligible plans have ratios of 5 to 1.

The 2014 NCPERS Public Employee Retirement Systems Study includes responses from 187 state, local and provincial government pension funds with a total number of active and retired memberships surpassing 11.8 million and assets exceeding $1.8 trillion. The majority – 81% – were local pension funds, while 19% were state pension funds. NCPERS is the largest trade association for public sector pension funds, representing more than 550 funds throughout the United States and Canada.