Abstract
During the recent financial crisis, public-sector pension plans have seen large declines in the value of their investment portfolios. This has affected entities from school districts, to local governments, to state governments. Among the most deeply affected in dollar terms was the California Public Employees' Retirement System (CalPERS), whose pension fund value declined more than $81 billion in 2008, down 31 percent. The declines in the value of pension assets have brought attention to several issues, such as funding status, the rates of return used to discount plan liabilities (known as the "discount rate"), and investment strategies. And, given public-sector plan sponsors' limited ability to increase worker contributions, increasing deficits in pension plans has raised the probability that higher-than-expected employer contributions will have to be made to make up for the larger-than-previously-projected shortfall, if any. Not surprisingly, many public plan sponsors are considering how to stabilize their contributions to the plans.
This paper reviews actual public pension plan contribution behavior from 2001 to 2006, pension asset allocations from 2003 to 2007, and the effect that investment performance has on employer contribution volatility. This analysis examines the volatility in employer contribution rates caused by the higher-return-seeking/higher-risk investment portfolios adopted by many pension plans, and whether plan sponsors will increase fixed-income investments in order to reduce volatility. It appears that, in the short run, a significant shift toward a lower-return investment policy in exchange for reduced volatility in employer contributions is unlikely to occur because of plans sponsors' expected high returns from current asset allocations based upon historical rates of return, their ability to use the assumed investment rate of return as the discount rate in calculating liabilities, and the understandable tendency of investment managers to not deviate from peer group investments, as fiduciary standards stress acting like other 'prudent experts' would in like circumstances.