Public pension returns barely broke even in fiscal 2016

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(Bloomberg) – Public pension fund investments returned only 0.6% on average in fiscal 2016, according to a report by the Center for Retirement Research at Boston College, far lower than their 7.6% average target rate.

Lower than expected returns did little to improve the nation’s growing unfunded pension liabilities. Of the 170 plans studied, the average funding ratio was 72% for the fiscal year, about the same level as the year before, according to the report. Under new accounting standards introduced in 2014, however, the plans were only 68% funded.

Lower than anticipated investment returns have plagued pension funds since the financial crisis as many public retirement systems have failed to earn enough to close their chronic shortfalls. Growing unfunded pension liabilities-- the difference between what governments’ owe public workers versus what has been set aside-- has weighed on the finances of states and cities across the country, threatening the credit ratings of Illinois, New Jersey, Kentucky, and others.

Some plans have responded to adverse market conditions by lowering the assumed rate their investments would gain during an average year. However, lower assumed rates of return mean that governments must contribute more to public pension systems to make up the difference, a move that lawmakers in some states and cities have been hesitant to do in the past.

The authors of the report noted that even though returns for fiscal 2017 are better, the recovery will likely do little to improve funding ratios. They estimate that even if pension systems achieve their estimated rates of return over the next few years, they will only be 72.9% funded by 2021.

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