Investment returns below public pension plans’ benchmarks mean that future contributions from participating state and local governments will have to rise in order to recover lost ground, Fitch Ratings says.
On Monday, CalPERS reported its assets gained 2.4% in the fiscal year ended June 30, well below its investment return assumption of 7.5%. The slower investment return performance in fiscal 2015 follows several years of above-benchmark returns for CalPERS and other plans.
CalPERS’ returns in fiscal 2015 are likely to be similar to those of numerous large state and local pension plans, the majority of which have June 30 fiscal year-ends. Most plans assume their asset portfolios will grow between 7.5% and 8% annually.
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“The need to hit this target every year means that even in years with low-single digit positive returns, like 2015, plans fall behind in their effort to fully advance-fund their pension benefit obligations,” says Fitch.
Over time, investment returns are intended to cover the vast majority of pension benefits owed to retirees, with contributions from employers and employees covering the balance. Ultimately, employers must cover whatever benefits are not covered by investment returns and employee contributions.
Contribution pressures on governments have risen rapidly in recent years, the result of investment losses during the last recession, benefit increases in the decade before that, rising retirements and flat or declining public workforce levels. Another factor has been governments’ unwillingness to fully fund their actuarially-calculated annual required contributions, which over time leaves asset levels depleted and puts upward pressure on future contribution requirements.
Fitch found that, in fiscal 2014, only about 40% of plans received their full annual required contributions.
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