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NEW YORK | Thu Mar 31, 2011 4:48pm EDT  - After suffering steep losses during the financial crisis and recession, U.S. public pension funds' investments are making gains, according to government data released on Thursday, but the gains may not be enough to cover looming shortfalls.

Total investments in the 100 largest public employee retirement systems rose 5 percent in the final quarter of 2010, marking the second straight quarter of gains, the U.S. Census said. Their holdings are now at $2.6 trillion.

Standard & Poor's, in a separate report on Thursday, said that despite improved returns, the funded ratios for pension funds in U.S. states continue to decline -- signaling potential credit pressure for states.

"Without exception, reduced pension asset values relative to estimated liabilities is placing upward pressure on the annual required contributions of state governments, compounding what is already a difficult budget cycle for most states," S&P credit analyst Gabriel Petek said in a statement.

Wall Street rating agencies and investors in the $2.9 trillion U.S. municipal bond market are increasingly focused on unfunded pension liabilities as they weigh the fiscal health of state and local governments.

A study from Northwestern University forecasts states' future liabilities at $3 trillion, although other estimates put them closer $1 trillion.

According to the Census, the value of the funds' corporate stocks, which make up nearly one-third of the investments, were up $50 billion to $855 billion in the last quarter of 2010 from the previous quarter. Corporate bonds edged up to $431 billion from $429 billion.

International securities, about one-fifth of the investments, were up about $30 billion to $483 billion.

U.S. government securities, state and local securities and mortgages, all of which make up 6.5 percent of investments, were down slightly to $171 billion.

S&P said in its annual survey of state pension funds that the improved performance in global equity markets since around March 2009 still has not helped weak funded ratios -- the value of assets divided by the accrued liabilities.

The problem has been compounded by some states choosing not to make the full contribution to their pension funds, S&P said. Budget crises forced many states to put money that would have gone into the funds toward more pressing needs and kicked off a firestorm of debate on how best to run public pensions.

Chris Mier, a managing director at Loop Capital Markets, said that while pension reform is needed, pension funds would be able to sustain rates of return on investment portfolios that occurred in previous decades.

"For two years in a row, a pension fund with a routine apportionment of stocks and bonds would have been able to able to return an investment return in each year above the 8 percent assumed rate," Mier said in an interview.

He added that only a few states, such as California, Illinois and New Jersey, cut their pension payments.

"It's a problem that's confined to a relatively small number of bigger, more manufacturing generally, more unionized generally, states," said Mier.

(Reporting by Edith Honan; Editing by Leslie Adler)

© 2010 Thomson Reuters. Click for Restrictions.


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