How Did Six Major Pension Funds Escape The Downturn?

The National Institute on Retirement Security report, “Lessons from Well-Funded Public Pensions: An Analysis of Six Plans that Weathered the Financial Storm,”


In this climate of alarming and doom-laden pension reports, the National Institute on Retirement Security has good news.

According to the institute’s recent report, “Lessons from Well-Funded Public Pensions: An Analysis of Six Plans that Weathered the Financial Storm,” six large US state pension plans, which together represent about ten percent of total public fund assets, were able to survive the 2008-2009 downturn with their assets intact.

The authors of the report, Dr Jun Peng, associate professor at the University of Arizona, and Ilana Boivie, an economist and NIRS director of programs, point out that the six funds –the Delaware State Employees Pension Plan; Idaho Public Employee Retirement Fund; Illinois Municipal Retirement Fund; the New York State Teachers’ Retirement System; North Carolina Teachers and State Employees Retirement System; and the Teacher Retirement System of Texas – followed what seem to be relatively simple guidelines to get there.

So how did the six achieve what in these times seems an amazing feat? Here is the formula followed by the six:

1. Employers made their full annual required contributions and maintained the stability of those contributions over time at a rate at least equal to the ‘normal cost’. (Normal cost is the portion of the present value of benefits that is attributable to the current year under the actuarial cost method).
2. Employees paid their share of contributions.
3. Benefit improvements, like multiplier increases, are actuarially valued and properly funded when adopted.
4. Cost of living adjustments were made responsibly.
5. Anti-spiking measures were adopted: the final average salary used to determine the pension benefit was not increased beyond normal expectations. (For example, not using overtime, vacation or sick leave to spike the final salary figure).
6. The plan used “reasonable” actuarial assumptions for the discount rate and inflation rate in determining fund valuations. Four systems used real rates of return (the difference between the discount rate and inflation) assumptions of 4.25 percent or less.

NIRS warns that not every plan followed an identical path to get to an overfunded status, but in broad terms they adhered to a set of disciplined rules that got them there. Each fund has achieved a long-term return, defined as 25 years, of over 9 percent.

Ronnie Jung, executive director of Texas Teachers remarked that at $100 billion in assets today, the fund is back to where it was before the downturn. He believes that plans like his played a key role in bringing stability back to the markets. As it didn’t use leverage and had substantial liquidity, says Jung, the fund was able to take advantage of bargains on the secondary markets. Recent fund-level changes at the Texas pension include moving to reduce dependency on pubic markets, make the fund as diversified as possible, expanding the hedge fund allocation from 5 to 10 percent and looking at emerging markets but looking at currency impacts.