Many members of underfunded public pensions don’t know how far short their pensions are falling and at how much risk that puts them. (Photo: Shutterstock)

A new study from Spectrem Group finds that most members of public pension  funds are unaware that their pensions are not just underfunded, but falling short of performance targets.

Even though equities set records throughout 2017, according to the study, “a significant number of U.S. public pension funds remain woefully underfunded.” And what’s worse is that members of these pension funds don’t know how far short  their pensions are falling, and at how much risk that puts them.

In addition, the study also indicates a broad gap between how members want their funds managed and the actual approach many managers may be taking.

Respondents include members from CalPERS, the NYC Retirement Systems (NYC Funds) and a “national” group, including individuals from the New York State Common Retirement Fund, the Florida Retirement System, the Missouri State Employees’ Retirement System, The Teacher Retirement System of Texas, and a small group from other public pension plans.

Nearly half of members overall (48 percent) say they’ll be relying on their pension for at least half of their retirement income, and as a result they of course want those pension funds to exhibit strong performance, with 92 percent considering their pension funds’ ability to generate returns at or above the funds’ target level to be important or very important.

CalPERS members were the most likely, at 96 percent, to identify this as important or very important.

They also expect their funds’ ability to meet or beat the market important or very important (93 percent), with CalPERS members again the most likely to focus on this factor (97 percent). And 95 percent believe the funds’ ability to effectively manage risk is important or very important.

They also think they know more than they do—both about their pensions and about the funds themselves.

While 56 percent think they’re very well informed or moderately informed about their actual investment return (56 percent), their target investment return (54 percent), the expenses and fees paid (60 percent) and the benefit structure (61 percent), 40 percent think their funds have performed in line with the market for the past few years.

But often that’s not the case.

While 46 percent of NYC Funds members believe their pension fund has outperformed the market, their returns have actually been below both market performance and their target level; the same is true for the 42 percent of CalPERS members who also think it’s outperformed, but its returns have been below the fund’s own target level.

And just 31 percent of members believe their pension is underfunded, when in fact, all respondents’ pensions are underfunded to some degree; 80 percent of NYC Funds members believe their pension is fully funded, when their fund is only approximately 68 percent funded.

Members are also more ignorant than they think they are of their funds’ portfolio allocations and risk levels. More than 20 percent of CalPERS assets are allocated to higher-risk alternative investments, but just 14 percent of CalPERS members think the fund holds more than 10 percent in alternative investments. And just 13 percent of NYC Funds members think the fund holds more than 10 percent in alternatives, when it actually holds 12 percent.