By Deborah Brewster in New York
Sunday Jul 20 2008 17:15
SourceUS public pension funds have had their worst returns in six years, losing an average of more than 4 per cent in the year to June 30, that puts them under even greater pressure to meet their growing liabilities.
The average plan's funded status has declined by close to 5 per cent during the year, taking it well below 100 per cent to be only 96 per cent funded, according to BNY Mellon.
Until now funding had been improving, after five years of positive returns.
The 40 largest public pension plans had a median loss of 4.3 per cent during the fiscal year, according to data from Northern Trust, which will be released this week.
That compares with a return of more than 17 per cent last year. This year's loss is close to the loss of 4.8 per cent in 2001, which was the worst for pension funds in the 11 years from 1997.
Smaller pension funds usually post lower returns than large ones, so the total national average is probably lower.
The typical public pension fund has 60 per cent of its money in equities and almost every stock market index in the world fell during the 12 months to June.
Some, such as Japan's Nikkei 225 and Europe's Stoxx 50, fell by more than 20 per cent, and the Standard & Poor's 500 fell by 13 per cent.
Fixed income, which typically accounts for a quarter of a pension fund, remained largely flat.
Those funds that had big investments in commodities did slightly better, as their commodities paid off. However, federal lawmakers are holding hearings into whether pension funds should be restricted in their commodities investments, in case this adds to speculative fever in the asset class.
Calpers, the biggest state fund, invested more than $1bn into oil and commodities last year - its first such investment - and has seen returns of close to 70 per cent on the portfolio.
However, that represents only a sliver of the fund's $240bn in assets. Calpers estimated it lost 2.4 per cent during the year to June 30, it said on Friday.
The poor returns come as the US Governmental Accounting Standards board met two weeks ago to begin changing accounting rules to make the pensions more accurately report returns and liabilities.
Under the current system, the funds paint an overly optimistic picture of their finances, say critics of the system.
Even as pension fund returns shrink and liabilities widen, some state governments are giving their state employees higher pension benefits, further increasing the pressure on the funds and ensuring even greater liabilities. Most public pension funds have a fiscal year that ends in June.