With many states facing tough budgetary decisions, in part because pensions are requiring greater contributions, the Institute for Pension Fund Integrity decided to compare pensions through another metric besides the funding ratio. How well a pension is funded is important for determining the overall health of the system, but if the investments are not performing well, the system will continue struggling. Using a passive investment strategy as the guiding marker, IPFI has ranked pension systems across all fifty states based on their performance.
The findings were released in a new paper, Public Pension Performance: Comparing Pension Investments to Passive Index Portfolios.
IPFI drew data the Vanguard Total Stock Market Index and Vanguard Total Bond Market Index to build two passive index investment portfolios for comparison: one portfolio was 60% stocks, 40% bonds, and one was 50% stocks and 50% bonds. After thorough analysis, IPFI identified several key points:
- Only five of the 52 pension funds that were analyzed outperformed the 60/40 passive index investment portfolio.
- Only one state had both strong pension performance and is well funded. South Dakota is 100.1% funded and was 71 basis points stronger than the 60/40 index portfolio.
- California was the 10th worst performing pension system, 116 basis points less than the 60/40 portfolio. However, California is almost 69% funded. This is important because the state is known for their activist investment strategies and has lost about $7.8 billion since 2000 due to various divestments based on political and social investment strategies.
- Wisconsin, which has the best funded pension system in the country, performed 72 basis points worse than the 60/40 portfolio. This proves that fund performance is not the only needed metric to ensure a healthy pension. Wisconsin has reliably contributed the actuarially determined amounts to the system, helping its funded status.
- The politicization of pension fund investments does have an impact on overall fund performance, and if a pension fund can’t beat a basic balanced passive investment strategy, it is time to reevaluate the current investment strategies and leaders in charge.
In developing this strategy and in response to the subsequent analysis, IPFI President and former Connecticut Treasurer Christopher Burnham said, “If a fund can’t outperform a basic balanced passive investment strategy, it is time to fire the fiduciaries and outsource the management of the pension fund to a simple, no cost, passive mutual fund.” He continued saying, “We hope this information will be used to provoke a discussion of the failure of the way some state fiduciaries and administrators manage our precious retirement and taxpayer dollars.”
IPFI is dedicated to bringing greater transparency and accountability to public pensions, fighting to keep politics out of the management of pension investments. This research, along with other quantitative and qualitative analysis that the organization provides, seeks to provide retirees, taxpayers, and policymakers with the data needed to ensure that pensions will continue providing for the hardworking Americans who dedicated their careers to the public sector.
Read IPFI’s latest paper, Public Pension Performance: Comparing Pension Investments to Passive Index Portfolios