The average funding ratio for U.S. public pension plans declined to 75.4 per cent in 2023, compared to 77.8 per cent in the previous year, according to a new survey by the National Conference on Public Employee Retirement Systems.
The report, which was based on responses from nearly 160 public pension funds with roughly US$2.3 trillion in combined assets under management, found the average return for plans was negative 1.9 per cent.
The diminished investment returns were attributed to sharp declines from global fixed income (negative 7.1 per cent) and domestic fixed income (negative seven per cent). U.S. equities offered a negative 2.1 return in 2023, while global equity netted a 0.4 per cent return. Real estate (eight per cent) and private equity (6.7 per cent) assets saw the largest investment returns for the year.
Read: Study finds U.S. public pension plans’ average funding ratio reached 77.8% in 2022
According to the report, investment returns (63 per cent) were the largest contributor to pension fund revenue. Employer contributions (28 per cent) rose by four per cent compared to 2022, while member
contributions (nine per cent) remained flat.
Despite the decline in investment returns, investment management expenses declined to 39 basis points in 2023, compared to 49 basis points the year before. Similarly, administrative costs dropped from 64 basis points in 2022 to 56 basis points.
Nearly two-thirds (63 per cent) of respondents said they received their full actuarially determined contribution in 2023, up from 57 per cent. Notably, these respondents held a 79 per cent average funded level compared to 59 per cent for those that didn’t receive the full contribution. The average investment assumed rate of return for responding funds increased from 6.85 per cent to 6.91 per cent, while the average investment-smoothing period for respondents rose from 5.2 years to 5.7 years.
In addition, the percentage of respondents that said environmental, social and corporate governance factors played a “somewhat or very important” role in their investment decisions dropped from 54 per cent in 2022 to fewer than half (46 per cent) in 2023. And, on a 10-point scale, respondents were largely (8.2 points) convinced in their readiness to address retirement trends and issues over the next two years.
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