Municipal pension plan sponsors in the United States expect their investment portfolios to outperform the market by 146 basis points annually over the next five years, finds a Greenwich Associates study.
The firm says these expectations might be a little unrealistic. “Few individual investment managers have ever generated 100 bps of annual alpha on a consistent basis,” says Greenwich Associates consultant Rodger Smith.
Without shifting a big chunk of assets to alternative investments that are largely uncorrelated with other holdings and have the potential to generate significant levels of alpha, he adds, it’s unlikely that many municipal funds will approach that 146 basis point mark.
The firm recommends that municipalities relying on this type of performance to fund pension plan liabilities should look closely at historic investment results and consider if other, non-investment actions will be required to meet future obligations.
On an overall basis, the average solvency ratio of public pension funds in the U.S. increased slightly to 87% last year from 86% in 2006. However, those gains are due to gains made by state funds, which saw average solvency ratios increase to 85% from 79% year-over-year.
Municipal fund solvency ratios actually fell to 87% from 89% over the same period. In addition, more than 30% of municipal pensions have solvency ratios of 79% or less.
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