Public pension funds were not spared the carnage of the Great Financial Crisis, as assets and funding status eroded between December 2007 and June 2009. From 2009 to 2013 there was a significant decline the overall percentage of required contributions paid. When the economy recovered, states and other plan sponsors normalized their contribution levels.
A recent webinar hosted by the National Retirement Security Institute, in conjunction with consulting firm Segal and Lazard Asset Management, reviewed the report “Examining the Experience of Public Pension Plans Since the Great Recession,” which examines how public pension plans resisted the market of the period and made subsequent changes to public pension funds to ensure their long-term viability.
Most plans recouped their losses between 2011 and 2014, three to six years after the market bottomed. Despite the recession and the resulting loss in value, the plans continued to pay more than $1 trillion in benefits to subscribers during the period.
Todd Tauzer, vice president at Segal, says that since 2008, public plan risk assessment models and strategies have evolved significantly. According to Tauzer, “funding status alone does not indicate the health of a public pension, after all, one cannot see the underlying assumptions being used. A plan’s funded status can be measured in many different ways, and the ways we measure can change over time.
“Today’s plans rely on a much stronger measure of accountability than 15 years ago,” Tauzer said. Adjustments to the mortality models assumption, assumed rate of return, general population figures and assumed rate of inflation are some of the changed assumptions that give greater clarity to the health of pensions after the GFC.
Adjusted model assumptions made over the past 15 years show that public pension funds are more conservative in their actuarial accounting than they were before the Great Recession. “For many plans, we find that changes in assumptions make up a large portion of unfunded liabilities,” he says. Typically, assumptions have a much bigger impact than investment gains and losses on the overall state of funding, Tauzer says.
In addition to adjusting the assumptions in the models, since 2009 the plans have evolved towards shorter amortization periods. Prior to 2009, more than 70% of plans used a 30-year amortization schedule. These changes help reduce unfunded liabilities, helping plans achieve or approach full funding.
In 2008, before the GFC, the assumed median ROI was just over 8%, whereas today the median ROI is 7%. According to Tauzer, “the plans have used the past 10 years of stock recovery and growth to introduce more conservative assumptions into their models.”
During the same period, innovations in the actuarial accounting of schemes were adopted, schemes showed positive performance in the post-GFC era, capturing alpha while weighting overall portfolio risk. Ron Temple, managing director of Lazard Asset Management, said “pension plans have done very well for their stakeholders over the past decade, and that is grossly underrated.”
Temple pointed out that the plans’ recent performance, along with the assumed rate of return and benefit payout, is due to excellent professional management in the industry.
Dating back to the 1970s and 1980s, the investment environment was very different; Yields on US Treasuries were above 10%. Back then, getting an 8% annual return didn’t require much thought outside of fixed income and public stocks. Temple explains: “Until the bursting of the TMT (technology, media, telecommunications) bubble in 2000, there was no reason for public pensions to allocate money to private equity or hedge funds. . It was around this time that public plans began to change the way they allocate their assets.
Since the GFC, plan allocations have fallen from 80% of assets invested in public equities and fixed income securities to only around 70%. Stating that since the GFC, public funds have moved into alternatives such as private equity, real estate, hedge funds, cash and commodities.
“Private equity is a leveraged game of stock markets, with a trade-off between higher risk and higher potential return, but with less liquidity,” Temple explained. “Over the past 30 years, there has been a bigger change [to allocate] private equity, which is generally not accounted for on a mark-to-market basis like public stocks. Plans like private equity investments due to the holding value of private equity, while the value of private equity fluctuates.
Charts presented during the webinar showed that total US local and state pension plan assets have doubled since 2009. 2009 low. From 2009 to 2015, the plans allocated public stocks to other asset classes, shifting their gains, selling high and buying low, [and by doing so] serve their stakeholders very well.
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Tags: GFC, Great Financial Crisis, Great Recession, Lazard Asset Management, National Institute for Retirement Security, NIRS, Ron Temple, Segal, Todd Tauzer