Funding levels for public retirement funds are improving despite problems still facing some states, says the National Conference on Public Employee Retirement Systems, a nonprofit trade association representing state and local pension funds in the United States and Canada.
“The funds are improving cost-efficiency, increasing funding ratios and fine-tuning benefits to strengthen their capacity to serve retired public servants for years to come,” says the association in its annual report for 2016.
During 2016, pension funds lowered administration costs to 56 basis points from 60 basis points in 2015. This is well below the average fee of 68 basis points for stock mutual funds and the 77 basis point average for hybrid mutual funds, says the report.
Although states like Illinois, Alaska, Kentucky and New Jersey continue to face problems in trying to adequately fund their pension plans, average funding levels climbed for the third year in a row. Funding levels reached 76.2 percent in 2016, up from 74.1 percent in 2015 and 71.5 percent in 2014.
Even as interest rates are beginning to climb, funds continued to tighten the actuarial assumptions for what their returns would be. Almost 40 percent said they have reduced their actuarial assumed rate of return, and nearly 30 percent said they are considering doing so in the future, making real returns more closely match the assumed returns.
Funds experienced healthy three-year, five-year and 20-year returns during 2016 at close to or exceeding 8 percent, although returns were lower in recent years than they were in the 10- and 20-year range.
Although pension funds are improving their numbers, more than 30 percent said they have increased their employee contributions and raised the benefit age or service requirements to help balance the money they are taking in with benefit payments.
“All signs point toward continued improvement in increasing public retirement systems’ funded status,” said Hank H. Kim, executive director and chief counsel for the association.
The study included 159 state, local and provincial government pension funds with more than 10 million active and retired memberships and assets exceeding $1.5 trillion.