Investment returns earned by “mega” public pensions, with assets of more than $5 billion, topped those of the smaller plans by almost 1 percentage point last year, according to Wilshire Associates Inc.
Big government-employee pensions reported median returns of 13.43 percent for the year. Funds with less than $1 billion in assets, which don’t invest as much in so-called alternatives like private equity, hedge funds and real estate, had median returns of 12.47 percent, according to Wilshire.
“Large and mega plans outperformed small plans because of greater exposure to other classes, such as international stocks and alternatives, versus the traditional U.S. equity and U.S. bonds,” said Robert Waid, a managing director at the Santa Monica, California-based consulting firm.
The disparity underscores one rationale for consolidating smaller funds, which has been proposed in Pennsylvania. Before he left office, Jack Wagner, the state’s former auditor general, said that merging 2,600 municipal plans into a single statewide system could help them achieve higher investment returns. Two- thirds of the local funds he audited have 10 or fewer members.
Consolidation would also lower administrative expenses and help reduce the need for taxpayers to cover obligations to retirees, Wagner said in September. Eugene DePasquale replaced Wagner as auditor general on Jan. 15.
“Pennsylvania has too many smaller and underfunded municipal pension plans that could cost taxpayers millions of dollars to maintain,” Wagner said in his September statement.
The Keystone State has more than 3,200 local government pensions for police officers, firefighters and nonuniformed workers, about a fourth of all municipal pensions in the U.S. DePasquale’s office audits 2,600 of the plans, with combined assets of $10.2 billion. It doesn’t review about 600 county and municipal funds.
Among the pensions audited last year, Wagner said 52 had assets to cover less than 50 percent of their liabilities, making them “severely distressed.” Another 234 plans were “moderately distressed,” with an aggregate funding ratio of 53 percent, Wagner said in a report.
Nationwide, state and local pensions with less than $1 billion of assets had a median allocation of 10.6 percent of their holdings in international stocks and zero in alternative investments last year, according to Wilshire.
Public pensions with assets of more than $5 billion had a median allocation of 22.3 percent in international stocks and 9.6 percent in alternatives, according to Wilshire.
The MSCI EAFE Index (MXEA), which measures stock performance in developed markets outside the U.S. and Canada, returned 6.63 percent in the fourth quarter, while the Standard & Poor’s 500 Index (SPX) lost 0.38 percent, data compiled by Bloomberg show. For the year, the MSCI index returned almost 18 percent, trailed by the S&P at 16 percent.
“Larger plans are better able to diversify and thus reduce overall plan risk,” said Waid at Wilshire, which advises investors and pensions.
For the quarter ending Dec. 31, public pensions with assets of more than $5 billion had a median return of 2.45 percent, beating corporate pensions, foundations and endowments, and union retirement funds of all sizes, according to Wilshire.
Many state and local government pensions count on annual investment returns of 7.5 percent to 8 percent to pay benefits for teachers, police and other employees.
In the 10-year period through Dec. 31, public pensions with more than $5 billion in assets had a median return of 7.96 percent, compared with a 7.36 percent median for all public funds, according to the consulting firm.
Foundations and endowments with more than $500 million in assets had the best 10-year median return, at 8.22 percent, Wilshire said.
Wilshire’s report, compiled by its Trust Universe Comparison Service, covers more than 1,500 institutional investment trusts, including corporate plans, foundations and endowments, union retirement funds and public pensions. They have combined assets of more than $2.75 trillion, according to the company.
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