By Yali N’Diaye

WASHINGTON (MNI) – As debates about the funding levels of public
pension funds continue, a think tank identified six key features of
plans that were able to maintain a well-funded status despite the
recession and had recouped large portions of their investment losses by
the end of 2010.

The study considers that while “a few” public pension plans “are
severely underfunded, there are still many public pension plans that are
consistently well funded, even in the wake of the Great Recession.”

Looking at six of those well managed funds, the study identified
features that include economic and actuarial assumptions “that can
reasonably be expected to be achieved over the long term.”

The six plans tend to have a “traditional” asset allocation mix,
the National Institute on Retirement Security said in a study published
Wednesday on the “Lessons from Well-Funded Public Pensions: An Analysis
of Six Plans that Weathered the Financial Storm.”

Authors Jun Peng and Ilana Boivie added that, “In general, asset
allocation for these six plans is in line with their rate of return
assumptions, at least in terms of the allocation to fixed income
securities.”

The six public pension plans in the study are : Delaware State
Employees Pension Plan, Idaho Public Employee Retirement Fund, Illinois
Municipal Retirement Fund, New York State Teachers’ Retirement System,
North Carolina Teachers & State Employees Retirement System and Teacher
Retirement System of Texas.

Together their assets represented 10% of public pension assets that
totaled $2.93 trillion at the end of 2010.

“Despite the difference in allocation between public equity and
fixed income, the overall traditional asset allocation of the six
systems allows them to achieve a fairly similar rate of return over a
long stretch of time, although plans with a larger allocation to
fixed-income securities experienced less volatility over time,” the
study said.

North Carolina, however, has the most allocation to bonds (about
40%) and Illinois MRF has a target of 29% for bonds. “The other plans,
with an expected return at or close to 8%, typically allocate between 25
to 30% to fixed income and cash.”

The authors also noted that by the end of last year, the six plans
had “already recouped a significant portion of the assets lost in 2008
and 2009.”

Beyond economic assumptions, the study identified practices related
to funding policy and benefit design:

— Employer pension contributions that pay the full amount of the
annual required contribution (ARC), and that maintain stability in the
contribution rate over time;

— Employee contributions to help share in the cost of the plan;

— Benefit improvements, such as multiplier increases, that are
actuarially valued before adoption and properly funded upon adoption;

— Cost of living adjustments (COLAs) that are granted responsibly,
for example through an ad hoc COLA that is amortized quickly, or an
automatic COLA that is capped at a modest level;

— Anti-spiking measures that ensure actuarial integrity and
transparency in pension benefit determination.

“The existence of such well-funded pension plans illustrates that
public pensions can be designed to be affordable and sustainable, even
through one of the most substantial economic downturns,” the study
concluded.

** Market News International Washington Bureau: 202-371-2121 **

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