New Research Finds State and Local Pension Fund Investments in Alternatives Tripled Since 2005, Representing Larger Share Than Fixed Income Investments
A new analysis finds that through the first quarter of 2021, state and local retirement plans have accumulated assets of $5 trillion in defined benefit (DB) pension plans and $531 billion in defined contribution (DC) plans. Despite the early economic disruption of the COVID-19 pandemic, the average funded ratio among state and local pension plans has held steady at 72% for plans included in the Public Plans Database (PPD).
These findings are contained in new research from MissionSquare Research Institute (formerly the Center for State and Local Government Excellence at ICMA-RC), “Public Plans Database – Snapshot as of September 2021.”
The research also finds that the share of plans contributing at or near their full actuarially determined employer contribution (ADEC) remained high, although decreasing from 85% of all plans in 2019 to 83% in 2020. From 2001 to 2020, the actuarially determined contribution expressed as a percentage of payroll has more than doubled for all payroll sizes, and it is highest among the plans with the lowest covered payroll.
Regarding investment allocations, the analysis indicates that public pension fund investments in alternatives such as private equity, real estate, hedge funds, and commodities are more than three times what they were in 2005. As of August 2021, the public pension plans in PPD held 28% of assets in alternative investments.
The PPD is a comprehensive database of public sector retirement plans developed and maintained through the collaborative efforts of MissionSquare Research Institute, the Center for Retirement Research at Boston College (CRR), the Government Finance Officers Association (GFOA), and the National Association of State Retirement Administrators (NASRA). It contains detailed information on the 210 largest state and local DB pension plans in the U.S., representing 95% of all state and local pension assets and participants. The PPD was expanded in 2020 to include data from public sector DC retirement plans. For this report, 2020 data were available for most but not all of the 210 total plans, depending on when a plan’s fiscal year closed.
“The Public Plans Database continues to be an excellent resource for understanding the public sector retirement plan landscape,” said Joshua Franzel, Ph.D., MissionSquare Research Institute Managing Director. “As we continue to expand the PPD to include more defined contribution plans, it will provide stakeholders with an even more comprehensive view of public retirement plans.”
Additional report findings are as follows:
- DB pensions are the most common form of state and local retirement plan, offered to 86% of state and local government employees. DC plans are offered to 37% of the state and local workforce.
- The share of plans contributing at or near their full actuarially determined employer contribution (ADEC) remained high, although decreasing from 85% of all plans in 2019 to 83% in 2020. The share that was paying less than 70% of the ADEC decreased from 9% of all plans in 2019 to 6% in 2020.
- Most pension plans continued making all or most of their annual contributions in 2020. Among those with a funded ratio below 50%, 13 of the 16 contributed at least 70% of their ADEC, and the other three contributed between 60-70% of this amount.
- Among the 207 plans for which 2020 investment data are available, the average assumed return was slightly lower than the previous year, at 7.1%, but the average actual returns for 2020 were lower as well, at 3.6%.
- In 2001, high ratios of active participants to beneficiaries were common, particularly among smaller or medium-sized plans. By 2019, all sizes of plans were averaging 1 to 1.5 active participants for each beneficiary, which may relate to the aging of the workforce and maturing of some newer plans.
MissionSquare Research Institute (formerly the Center for State and Local Government Excellence at ICMA-RC) promotes excellence in state and local government and other public service organizations so they can attract and retain talented employees. The organization identifies leading practices and conducts research on retirement plans, health and wellness benefits, workforce demographics and skill set needs, labor force development and topics facing the not-for-profit industry and education sector. MissionSquare Research Institute brings together leaders and respected researchers. More information and access to research and publications is available here.
MissionSquare Research Institute | Kelly Kenneally | 202.256.1445 | [email protected]