Pensions & Investments recent article "Plan Sponsors Brace for a Rough Ride" includes comments from NEPC's Phillip Nelson, Partner and Director of Asset Allocation.
P&I focused analysis on large U.S. public pension funds — the majority of which are underfunded with an average funded status of June 30 of 68%, data from the Center for Retirement Research at Boston College showed. The impending decade of expected low returns could jeopardize these plans' ability to reach fully funded status based on multiyear funding schedules set by state or municipal laws or board guidelines.
Corporate pension funds, on the other hand, are required to maintain adequate defined benefit funding under the Employee Retirement Income Security Act, regardless of market returns. Many corporations also have transferred their pension risk to outside parties.
The no-win situation facing public plan executives is "the investor's challenge," said Steven J. Foresti, chief investment officer, Wilshire Consulting, Santa Monica, Calif. "For most institutional investors, there's a gap between their assumed rate of return and the returns they can expect from their investments."
Given market return forecasts, Mr. Foresti and other consultants stressed the probability of pension funds meeting assumed rate of return targets of more than 7% over a 10-year period is low, but improves significantly over 20- and 30-year horizons. That longer-term investment horizon synchronizes well with pension funding schedules.
Investment consultants at NEPC LLC, Boston, emphasize to their public fund clients that the "No. 1 goal is to improve the funded status of the plan" over the next 10 years, said Phillip R. Nelson, partner and director of asset allocation.
"If they can maintain their current funded status over the next 10 years, it's more likely that they will see improvement in that status over 20 years," Mr. Nelson added.