Whitepaper – Evaluating Pension Investment Strategies: A Comparison of Top- and Bottom-Performing State Public Pension Funds to a Passive Index Portfolio

The Institute for Pension Fund Integrity released their latest whitepaper today – “Evaluating Pension Investment Strategies: A Comparison of Top- and Bottom-Performing State Public Pension Funds to a Passive Index Portfolio.”

In our previous report, “Public Pension Performance: Comparing Pension Investments to Passive Index Portfolios,” we introduced a method for comparing each state’s public pension fund to a passive index portfolio. Clear and justified metrics of comparison allow retirees and taxpayers to easily understand their pensions and their strengths and weaknesses.

Now, we return to these funds to further deconstruct their investment portfolios by analyzing their various asset allocation configurations. This inquiry intends to illuminate possible correlations between asset allocation and performance or, conversely, eliminate this factor as a determining driver of pension fund performance.

Our major conclusions are these:

  • Asset Allocation – Overall, asset allocation did not drastically vary among the top- and bottom-performing funds. Global and domestic equity was, on average, by far the largest part of a pension fund’s portfolio. The top and bottom five funds’ distribution of these assets was nearly identical.
  • High Performing States – South Dakota consistently outperformed other states’ pensions, in both its ranking against the 60/40 strategy and its funding ratio. South Dakota’s commendable prioritization of benchmarks and fiduciary responsibilities exemplify the values of a successful pension.
  • Persistent Unfunded Liabilities – States across the nation continue to grapple with underfunded and poorly performing public pension systems. Understanding public pension fund performance is the first step toward creating a new plan of action to better fund each state’s retirement system. In the process, we must empower plan fiduciaries to fulfill their obligation of increasing returns for contributing plan members and resist the increasing pressure to wield public pension funds as weapons in current political debates.
  • Rise in prevalence of ESG and alternative investment strategies – This analysis is especially prevalent due to the trend in recent years to seek alternative investment strategies based on social, political, or otherwise divergent methodologies rather than those based on pure pecuniary interests. One of the most prevalent of these trends has been the emphasis of environmental, social, and governance (ESG) factors in pension fund investments. ESG investment can be an important tool for diversifying portfolios and impacting corporate governance, but ultimately has not been shown to garner the same return on investment as passive investment strategies.
  • Proxy Advisory Firms and Public Pension Funds – The outsized role played by the duopoly of proxy advisory firms in the U.S. has drawn criticism in recent years as a means for fund managers to avoid responsibility in the decisions impacting their fund’s performance. Unfortunately, there remains limited transparency into the decision-making process of these proxy advisors, and public pension performance seems to indicate that their recommendations do little to boost returns on investment. Among the five states ranked lowest against the 60/40 investment strategy, four rely on services from these firms. Meanwhile, the state with the highest performing public pension fund, South Dakota, receives no proxy advisory assistance.
  • A need to return to fiduciary obligations – Public pension fiduciaries need to focus solely on the financial returns of their investments. Considering the egregious unfunded liabilities facing public pensions across the United States, the emphasis on ensuring strong returns is more important than ever. IPFI has long pushed for the principle that while individual investors should be free to choose whatever strategy best meets their needs, the fiduciary duty which is the cornerstone of pension fund management must always prioritize maximized returns with reasonable risk above any other political or social considerations.

“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,” notes IPFI President Christopher Burnham. “We hope this information will be used to provoke a discussion of the successes and failures of the way some state fiduciaries and administrators manage our precious retirement and taxpayer dollars.”

Read IPFI’s latest whitepaper HERE.