Investment returns improve for US public pensions in Q2

The performance of U.S. public pensions' investments improved greatly in the second quarter, returning a median 3.71 percent, compared to median returns of 1.87 percent in the first quarter, according to a Wilshire Associates report released on Monday.

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Pensions also continued to outperform their peers. The median return for all institutional assets tracked by the Wilshire Trust Universe Comparison Service was 3.43 percent during the second quarter.

For the last year, public pensions have had a median return of 16.86 percent. Those with assets greater than $1 billion have seen even greater returns over one year, 17.44 percent, according to Wilshire.

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Investment earnings provide nearly two-thirds of all public pension revenues, which left the retirement systems particularly vulnerable during the financial crisis, when their holdings plummeted to record lows. From coast to coast, battles have erupted over whether states have enough money to pay promised benefits, especially now that the first wave of the Baby Boom generation is retiring.

The fights are especially heated over the annual assumed rates of return the funds use, with many conservatives saying the current expected rates are too high to attain and will leave retirement plans underfunded.

For most plans, the assumed annual rate of return is around 8 percent. Since the 2007-09 recession many funds have cut their assumptions to closer to 7 percent and the accounting board overseeing public pensions now requires systems deemed underfunded use a "riskless" rate of return of around 5 percent.

McKinsey Report: Alternative Investments growing fast
McKinsey Report: Alternative Investments growing fast

The stock market rally of 2013 gave public pensions a hefty boost. They had a record $4.89 trillion in assets in the first quarter of 2014, according to Federal Reserve data, but also the largest liabilities on records going back to 1945, $5.03 trillion.

Taking a longer view, Wilshire found the median return for public pensions' assets over five years was 12.69 percent and over 10 years was 7.27 percent.

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For funds with assets greater than $1 billion, the five-year median was 12.83 percent and the 10-year median was 7.43 percent. For the largest funds—those with assets of more than $5 billion—the performance was even stronger. Their five-year median return was 12.9 percent and their 10-year median 7.52 percent.

Some critics say those public pensions with higher assumed rates of return have to take greater risk to achieve their investment projections, which pushes them into shakier assets.

According to Wilshire, public pensions allocated a median of 45.95 percent of their investments to U.S. equities and only 1.34 percent in "alternative investments." But those with $5 billion or more in assets only allocated a median 39.19 percent to U.S. stocks and a median 10.49 percent to alternatives.

—By Reuters.