Study: Decline in DB Plans Widens Income Inequality Gap

Research done by the National Conference on Public Employee Retirement Systems found that public policies aimed at cutting public costs by reducing pension benefits or switching to defined contribution plans may actually increase the need for public spending due to “the dynamic interrelationship between pension reforms, income inequality, the economy, and market return.”

The continuing decline of the number of defined benefit pension participants in the U.S. is widening America’s income equality gap, which in turn is stunting economic growth, according to the recent study from NCPERS.

NCPERS noted in its report that, “for many years,” there has been a shift to defined contribution plans from defined benefit plans, particularly in the private sector, while changes to state and local public pensions include raising employee contributions, cutting benefits and closing pensions to new hires. According to NCPERS, the changes, which it refers to as negative pension changes, “exacerbate income inequality.” The report added that despite the slowdown in economic growth caused by the widening income inequality gap, the impact of pension changes on income inequality and economic growth are often overlooked by policymakers.

“Our analysis shows that, at the national level, income inequality is inversely correlated with the shift from DB plans to DC plans,” the report’s authors wrote. “This means that the lower the percentage of the workforce in DB plans, the higher the rate of income inequality, and vice versa.” The report added that policymakers “should think twice before they make changes that undermine public sector pensions or support policies that encourage elimination of pensions in the private sector.”

The report also stated there is a misconception that the only beneficiaries of public pension plans are its participants and that taxpayers are forced to burden the associated costs.

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“This is an incomplete picture, however, as it completely ignores how pensions contribute to broader income equality—and not just among retirees,” the report stated. “It also overlooks how retired pension members contribute to local and state economic activity by spending their pension income and how the investment of trillions of dollars of pension fund assets grows local economies and generates billions in tax revenues.”

According to NCPERS’ analysis, in addition to the “negative” pension changes, the “key variables” widening the income inequality gap include a lack of investment in public education, regressive taxation and a decline in union membership. NCPERS reported that income inequality decreases when access to defined benefit plans, investment in public education and union membership increase.

“The present study finds that pension reforms generally exacerbate income inequality and dampen economic growth,” the report’s authors wrote. “An awareness of the impact of changes to pensions on income equality and economic growth is often, however, missing in pension policy debates.”

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Tags: Defined benefit (db) pension plans, Defined Contribution, Economic Growth, income inequality, National Conference on Public Employee Retirement Systems, NCPERS, Pension Plans, Pension Reform, study

Japan’s Government Pension Investment Fund reported a 3.65% return in its fiscal year’s first quarter, which ended June 30, fueled by foreign equities and bonds, that raised the pension giant’s asset value to $1.73 trillion. The gains were down from 9.52% the previous quarter and 9.49% during the year-ago period.

With the performance, which added approximately $60.8 billion to the GPIF’s asset value, the pension giant reclaimed its title as the world’s largest pension fund, edging out Norway’s Government Pension Fund Global, which has an asset value of approximately 18,331 Norwegian kroner ($1.72 trillion).

The GPIF’s top-performing asset class for the quarter was foreign equities, which returned approximately 10%, or $41.1 billion, followed by foreign bonds, which rose 5.5% and contributed $22.4 billion to the fund. Japanese equities returned 1.75%, or $7.4 billion, while the worst-performing asset class was Japanese bonds, which lost 2.39% during the quarter, or approximately $7.4 billion.

The quarterly results for the asset classes narrowly beat their corresponding benchmarks, which rose 9.94% and 5.44%, respectively, for foreign equities and foreign bonds, while the domestic equities benchmark earned 1.69% and the domestic bonds benchmark was down 2.45%.

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As of the end of June, the GPIF’s asset allocation was 25.85% in domestic bonds, 25.34% in foreign equities, 24.45% in foreign bonds and 24.37% in domestic equities.

The pension fund also released its annual survey evaluating the stewardship activities of its external asset managers. The survey received responses from 717 companies, down from 735 the previous year, which equates to a 33.3% response rate, down slightly from 34% a year earlier, according to a report summarizing the survey results.

The GPIF reported that approximately 90% of the companies surveyed said they voluntarily disclosed nonfinancial information, including environmental, social and governance disclosure. It also said that only 96 companies have endorsed the Taskforce on Nature-Related Financial Disclosures and 35 companies responded that they have disclosed information in line with the TNFD recommendations. Meanwhile, 376 companies said they plan to disclose the information in the future, and 160 intend to disclose by 2025.

According to the GPIF, the main themes of ESG activities at surveyed companies were climate change, corporate governance and diversity. The most frequently cited theme was climate change, the same as in the previous year. The fund reported topics including capital efficiency, risk management and supply chain had a significant increase in the share of responses from the previous survey.

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Tags: Asset Managers, ESG, First Quarter, foreign equities, Government Pension Fund Global, Government Pension Investment Fund, GPIF, Japan, Norway, Q1, stewardship, Task Force on Nature-related Financial Disclosures, TNFD, World's Largest Pensions