NCPERS Response to Recent Bloomberg Article
March 5, 2009

Public pension plans, which have existed for more than a century in the United States, continue to be well-run institutions safeguarding retirement security for America’s public sector employees. Notwithstanding recent losses in value due to the economic climate—which has affected public pension plans, private pension plans, defined contribution plans, mutual funds and personal wealth—public plans are well suited for the future.

A recent Bloomberg article indicates that public pension plans routinely set their assumed rates of return far above what could be expected, and that the funds manipulate their numbers by smoothing investment returns.

In the article, the reporter suggests that the 7.75-8.00 percent expected rate of return for CalPERS was high, and to highlight his point he notes that CalPERS’ annualized return over the 10-year period ending December 31, 2008 was only 3.32 percent, and further, that the fund's value decreased by 27 percent when the market tanked last year. What the reporter doesn’t note is that over the past 24 years, CalPERS has exceeded its expected rate of return 17 times, with eight of those years more than doubling the 7.75 percent assumed rate of return. The reporter doesn’t note that despite the decline in the value of CalPERS assets last year, it beat the Dow—which lost 34.34 percent—by more than seven percentage points.

Furthermore, the reporter’s claim that smoothing—averaging investment gains and losses over a certain time period—hides the fund’s true financial state is simply not accurate. The purpose of smoothing is to reduce sudden, large swings in overall asset valuations. When asset returns are smoothed, it doesn’t just “paper over” losses, as the reporter claims, it also levels out the gains during years of positive returns. Smoothing isn’t employed irregularly to hide a single-year or short term losses; it is a tool that rolls with the pension fund throughout the years, whether good or bad. The technique simply allows pension funds to maintain more stable contribution levels. For budgeting purposes, this is desirable for taxpayers and employers alike.

The reporter also doesn’t make note of the fact that industry experts—from actuaries to investment consultants, both internal and external—provide counsel to public pension funds to help them determine the best course of action in ensuring that the retirement promises made to public sector employees are kept. Public plans regularly employ actuarial valuations and experience studies to adjust expectations to reality, for example.

To be fair, given the economy and the losses that we’ve seen throughout the financial markets, it is not unexpected that we see anti-pension ideologues—Chicken Littles in coat and tie—popping up more and more in the press. What is surprising is that the media continues to give their stories credence without fairly or accurately reporting the other side.

Yes, public pension funds have lost money this year. But, as noted above, so did private plans, defined contribution plans, and mutual funds, not to mention the companies whose stock these funds invest in. But in down markets, investors often lose money; likewise in up markets, investors often make money. That’s how it works. Pension funds, which are professionally managed by industry experts, set their assumed rates of return based on expert advice. Some years they hit the target, some years they exceed the target. And yes, some years the investment returns are less than expected. But pension plans aren’t funded for one specific year. They are funded into the future, over decades.

And even in this current crisis—with all its attendant losses—industry experts are suggesting that when the market finally turns for the better, the positive returns on investment could be just as dramatic as the losses seen recently.