Report: Public Pensions Boost Government Revenues

According to a new study from the National Conference on Public Employee Retirement Systems (NCSPERS), public pension funds contributed $137.3 billion to state and local governments in 2016.

“Our findings are a powerful rebuke to the popular argument that taxpayers cannot afford public pensions,” Michael Kahn, NCPERS’s research director said in a release. “The evidence shows that if public pensions did not exist, taxpayers not only wouldn’t save money; they would have to cover a severe annual revenue shortfall.”

The study found that pensions are net contributors to revenue in 38 states. In the other 12 states, the report said pensions were either revenue neutral, or taxpayer contributions were greatly subsidized by state and local revenues generated by public pensions.

“Due to lack of research focusing on the economic impact of public pension assets, we have developed a new model and methodology,” said the report.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

NCPERS said the purpose of the model is to estimate the economic impact, as measured by personal income, of pension assets, controlling for other variables such as investment in education, infrastructure spending, multifactor productivity, and income inequality. The analysis used historical data from public sources, including the US Census Bureau, Bureau of Economic Analysis, and Bureau of Labor Statistics.

“Critics of public pensions often hang their arguments on distorted assumptions and apples-to-oranges comparisons,” Hank Kim, executive director and counsel of NCPERS, said in a release.

Kim said the most common misconception is that pensions may fall short if benefits aren’t funded in full up front. He points out that pension funds work by accumulating assets over a worker’s lifetime, and that employer and employee contributions, plus investment returns contribute steadily to the funds’ growth.

“Pensions are a long-term investment, and it’s a mistake to evaluate them through the lens of short-term political expediency,” Kim said. “Even worse than a mistake, it is a great disservice to the hardworking public servants who have faithfully paid into their pension plans even when the governments that employ them opted to take break from fulfilling their own obligations.”

According to the report, the US economy grows by $1,088 for each $1,000 of pension fund assets, and the economic and revenue impact of pension assets in high-population states like California, Florida, New York, and Texas are particularly significant. It also found that the impact of the investment of assets, plus spending of pension checks by retirees in 2016 translated to a $1.3 trillion contribution to the economy, and $277.6 billion to state and local revenues. At the same time, taxpayer contributions to state and local pension plans in 2016 totaled $140.3 billion, indicating that pension funds generated $137.3 billion more in revenues than what was contributed by taxpayers.

NCPERS’ analysis also said the shift to defined contribution plans “increases income inequality and slows down the economy.”

The report found that the investment of pension fund assets contributed $587.5 billion to the economy, which in turn yielded $125.7 billion in state and local revenues. It also said that $303.1 billion paid to retirees in pension checks during 2016 contributed $757.8 billion to the economy and $151.9 billion to state and local revenues.

“The argument that taxpayers cannot afford public pensions has gained traction despite a woeful lack of empirical evidence to support it,” said the report. “Time and again, defined-benefit pensions for firefighters, police officers, teachers, and other public servants have ended up on the chopping block, even though plan participants have consistently held up their end of the bargain.”

Tags: Contributions, Hank Kim, National Conference on Public Employee Retirement Systems, Pension

The Canada Pension Plan’s (CPP) investment portfolio returned 11.6% net of all costs for the fiscal year ended March 31, outperforming its benchmark of 9.8%, and helping boost the fund’s total net assets to a new high of C$356.1 billion ($277.7 billion) from C$316.7 billion at the end of fiscal 2017.

“Soaring public equity markets through the first nine months of the fiscal year were the primary source of growth,” Mark Machin, CEO of Canada Pension Plan Investment Board (CPPIB), said in a release. “As volatility returned during the fourth quarter, our private holdings proved resilient, adding significant value.”

The investment board manages Canada’s national pension fund on behalf of 20 million Canadians. Despite the results, Machin said he expects the fund’s value will fall by at least 12.5% in a single year approximately once per decade.

“Strong relative returns this year is certainly good to see,” he said, “but we expect significant swings in performance relative to this benchmark in any single year because of our deliberate choice to build a prudently diversified portfolio beyond just public equities and bonds.”

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

The investment portfolio’s five-year annualized net nominal return was 12.1%, while its 10-year annualized net nominal return was 8.0%. The C$39.4 billion increase in assets in 2018 consisted of C$36.7 billion in net income after all CPPIB costs, and C$2.7 billion in net contributions. The fund also said all of its investment departments provided positive returns during the fiscal year.

“Our investment framework actively seeks to manage risk, maintain balance, and help contribute to the sustainability of the CPP itself,” said Machin. “While we don’t expect every investment department to produce gains in any given year by design, all our departments made strong contributions this fiscal year.”

In the five-year period up to and including fiscal 2018, CPPIB has contributed C$150.1 billion in cumulative net income to the fund after all costs, and C$215.6 billion since CPPIB’s inception in 1999.

The fund’s asset allocation as of March 31 was 38.8% in public equities, 20.3% in private equities, 12.9% in real estate, 11.1% in government bonds, cash, and absolute return strategies, 8% in infrastructure, 6.3% in credit investments, and 2.6% in other real assets.

The fund measures its performance against a market-based benchmark, which represents a passive portfolio of public market indexes that reflect the level of long-term total risk that it believes is appropriate for the fund. The fund said its investment portfolio’s single-year net dollar value-added return was C$5.7 billion more than the reference portfolio’s return, after deducting all costs.

For fiscal 2018, the fund also paid C$1.03 billion in management fees and C$709 million in performance fees to external managers, as well as C$401 million in transaction costs. However, Machin suggested that the fees were worth it due to the returns generated by active management.

“Our active management strategy has added nearly C$20 billion to the fund since the start of the active management program in 2006,” said Machin, “and created a more resilient portfolio by taking advantage of our comparative advantages.”

Tags: Canada, Canada Pension Plan Investment Board, Fiscal 2017, Pension, Returns