A new primer released this week by the National Institute on Retirement Security gives an overview of the public pensions investment process, which has garnered increased attention in the wake of economic shocks that recently have impacted all investors.
The primer, co-authored by Ronnie Jung, CPA, who previously served as executive director of the Teacher Retirement System of Texas, and Nari Rhee, PhD, manager of research for the National Institute on Retirement Security, looks at how public pensions allocate assets and set expected rates of return, including:
- Distribution of investments across stocks, bonds, and other asset classes to maximize returns and minimize risk.
- Principles that guide how public pension funds invest and the institutionalized practices through which plan trustees set investment policies.
- Evaluation and management of investment related risk.
- Investment return assumptions among public pension funds in comparison to historical performance and the future outlook.
"We developed this issue brief to provide interested policymakers, journalists, and citizens with a basic understanding of how a public pension system manages its investment," said Diane Oakley, NIRS executive director. "Public pension funds currently hold some $3 trillion in assets under management that provide retirement security for some 19 million workers. So it's critical that stakeholder have access to an accurate overview of the process including key players, investment policies, risk management, and rate of return assumptions. We hope this primer becomes the 'go-to' tool on public pension investments."
The primer offers four key highlights:
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Public pension funds have a clear division of labor for making investment-related decisions. Fiduciary standards apply to each key role in the investment process.
Public pension funds have rational and systematic processes for setting asset allocation in a diversified portfolio, estimating expected investment returns, and evaluating investment performance.
The board of trustees of each public DB pension fund determines the acceptable level of risk that is prudent for their plan given its particular circumstances. They then adopt an asset allocation that is designed to maximize returns within the established level of risk.
The level of risk assumed by public pension funds, as indicated by the percentage of assets invested in equities, is consistent with other institutional investors and with many prudent individual investors.
The National Institute on Retirement Security is a non-profit organization established to contribute to informed policymaking by fostering a deep understanding of the value of retirement security to employees, employers, and the economy through national research and education programs.
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