Public pension plans are spending more than $2 billion a year in fees on high-cost, risky investments to boost returns. But those bets haven't been paying off, according a report Wednesday from the Pew Charitable Trusts.
The higher cost comes as public pension fund managers try to make up for a steep shortfall brought by years of underfunding and lackluster investment returns.
As of fiscal 2016, the latest data available, state pension funds tracked by Pew had a combined $1.4 trillion deficit – up $295 billion from 2015 and the 15th annual increase in pension debt since 2000. State public pension plans have assets of just $2.6 trillion to cover total pension liabilities of $4 trillion.
To try to make up that deficit, state pension fund managers have shifted investments away from the traditional mix of stocks and bonds to a greater reliance on alternative investments like hedge and private equity funds. Between 2006 and 2016, the average plan has raised its share of alternative investments from about 11 percent of assets to 26 percent.
That shift has also raised the cost of managing pension fund assets. In addition to the $2 billion, some funds are paying undisclosed performance fees, according to the Pew study, which makes the total cost impossible to measure. It's also difficult to compare the full cost of managing these investments, Pew noted, because some funds report their returns without factoring in management fees, while other report after subtracting those fees.
Despite paying higher costs, pension plan performance has fallen. Among the funds Pew studied, none met its investment target. The shortfall has left many retirement systems owing more in liabilities than they can afford to pay out, in some cases much more.
Pension fund systems in New York, South Dakota, Tennessee and Wisconsin had enough to cover at least 90 percent of their liabilities in 2016, while pension funds in Colorado, Connecticut, Illinois, Kentucky and New Jersey were less than 50 percent funded, according to Pew.
Another 17 states had less than two-thirds of the assets needed to pay future retirement benefits. Kentucky and New Jersey had the lowest funded ratios among states at 31 percent and Wisconsin had the highest at 99 percent.
Here's how the 73 funds tracked by the Pew study stack up. Hover over a state for details.