Pension Plans Should Not Be Happy About Investment Returns Greater Than 0% if They Still Missed Their Assumed Rate of Return

Commentary

Pension Plans Should Not Be Happy About Investment Returns Greater Than 0% if They Still Missed Their Assumed Rate of Return

Most pension plans with fiscal years ending June 30, 2016 have released their fiscal year investment return figures, and the results have not been pretty. Most returns have hovered around zero, with some posting modest returns of a few percentage points, and a few others trending into negative territory. The same kind of results are likely be true for plans with fiscal years ending this upcoming September 30, 2016. Since pension plans typically have long-term investment return assumptions of between 7% and 8%, these figures are marks of a second straight bad year and will mean increases in the recognized value of unfunded liabilities for most plans.

And yet, there has been been more than once instance of real positivity from plan administrators who have managed to get returns north of 0%. As I write in a recent commentary:

In July, CalPERS’s chief investment officer said he was “proud” of the pension funds investment returns because 0.61% was “positive performance.” And last month, Florida’s top pension plan investment manager was singing the praises of his fund that managed to wring out its own 0.61% return on investments this fiscal year: “The positive net returns show the value of diversification, our success in controlling costs, and the prudence and patience of sticking to the fund’s long-term investment plan in a challenging year,” said Ash Williams, executive director of the State Board of Administration, which manages investments for the Florida Retirement System (FRS).

It’s nice that they want to be so cheerful, but there is a problem with the positivity: it’s based on an idea that the goal is to simply get returns greater than 0% each year. But pension systems need to do more than just avoid losing money. For the Florida Retirement System, the goal is to get returns greater than 7.65%. For CalPERS, the goal is to beat 7.5%.

There is nothing particularly special about a pension plan’s return being above a threshold of 0%, or avoiding a negative sign getting attached the annual rate of return figure.

For more on why just getting positive returns is a meaningless benchmark, and a detailed discussion of the Florida Retirement System return historic figures, check out the full commentary.

Anthony Randazzo

Anthony Randazzo is a senior fellow at Reason Foundation, a nonprofit think tank advancing free minds and free markets.