State Pension Funds Face “New Normal”

A report from Pew Charitable Trusts shows that state retirement systems are adjusting their return expectations to lower levels over the next 20 years. This according to a recent article in Chief Investment Officer.

The Pew report shows that from late 2007 to mid-2009, public pension plans lowered return targets due to changes in the long-term outlook for financial markets, adding that while the US experienced annual GDP growth of more than 5.5% from 1988 through 2007, the Congressional Budget Office (CBO) now projects only 4% annual growth over the next decade. The article notes that the Pew database includes the 73 largest state-sponsored pension funds, which account for 95% of all investments for state retirement systems.

The report states, “These changes reflect a new normal in which forward-looking projections of expected economic growth and yields on bonds are lower than those that state pension funds have historically enjoyed.” The research found, however, that pension plan allocations have remained largely unchanged despite the lower return expectations, with stocks and alternative investments remaining stable at around 50% and 25% of assets, respectively.

According to Pew, this stability in allocations indicates that “most fund managers and policymakers are adjusting assumed rates of return in response to external economic and market forecasts, not on shifts in internal investment policies.”