Industry News

On May 6, 2019, Fitch Ratings released its special report, U.S. State and Local Pension Investments: Concerns Grow with Riskier Allocations, Lower Returns. The research report reviews the portfolio allocations and asset performance trends of public defined benefit pensions from 2001 to 2017. Fitch’s analysis is based on asset data provided by the Center for Retirement Research at Boston College (CRR), which surveyed asset allocations and performance for 180 state and local pension systems in 50 states.

Over the last two economic cycles, state and local pension asset allocations have become riskier. As a result, potential volatility increases and participating governments become exposed to higher funding risks and possibly higher contributions. From 2001 to 2017, average asset allocations to higher-risk equities and alternatives rose to 77% from 67% while cash and lower-risk fixed income decreased to 23% from 33%.

According to Fitch, “Given the importance of investment returns to meeting long-term funding goals, the adequacy and volatility of actual returns are a key risk to the long-term health of state and local pensions. Investment gains for pension plans were fairly volatile between 2001 and 2017, averaging approximately 6.5%, a figure that incorporates 10 years of above-average positive returns, three years of below-average positive returns and four years of negative returns… This underscores the need to evaluate the investment risks inherent in these plans and the potential impact of volatility on the budgets and liability burdens of participating governments.”

The report is available here.