Academic journal article Social Security Bulletin

State and Local Pension Plans' Equity Holdings and Returns

Academic journal article Social Security Bulletin

State and Local Pension Plans' Equity Holdings and Returns

Article excerpt

This article examines the recent trends in the size and performance of the equity investments ofstate and local pension plans. It also provides a context for the discussion about investing some portion ofthe Social Security trust fund reserves in private equities.

Summary

This article explores recent trends in the size and performance of the equity investments of state and local pension plans. It also provides a context for the discussion about investing Social Security trust fund reserves in private equities. Equity holdings and returns for five of the largest private pension plans were compared with those of state and local pension plans. Key findings discussed in the article include:

* Equities were the largest investment in the aggregate portfolio of state and local pension plans in 1999 and represented 67 percent of the $3 trillion in aggregate state and local pension assets. Equity allocation of the five private plans resembled that of the aggregate.

* About 80 percent of state and local pension plan holdings were domestic equities in 1999. The five largest plans had about the same domestic/foreign allocation of equity investments during that same period.

* In 1999, state and local pension plans held about 11 percent of the U.S. equity market, which includes foreign equities held in the United States. State and local pension plans held about 10 percent of domestic equities in the U.S. equities market that same year.

* Returns on equity investments over a 10year period were more than 17 percent for both private pensions and state and local pension plans. Although private plans tend to have slightly higher total returns, the difference stems from the higher equity asset allocation of the private pensions that were studied.

Introduction

The magnitude of public entities' equity investments and the performance of those investments have both been raised as issues in the discussion of investing Social Security trust fund reserves in private equities. Both proponents and opponents of that idea have used evidence from the equity investments of state and local pension plans to support their positions. Opponents have argued that public entities have been unsuccessful equity investors and that their investments unduly interfere with investments of the private sector. Proponents say that other public entities already have a substantial presence in the U.S. equity market.

This article explores recent trends in the size and performance of the equity investments of state and local pension plans. The article:

* Examines the asset allocation of state and local pension plans in the aggregate and of the five plans with the most assets,

* Discusses the aggregate domestic equity holdings of state and local pension plans,

* Explores the degree to which state and local pension plans hold a share of the total U.S. equities market, and

* Reviews existing research on how returns on public pension investments compare with those of private pension investments.

Most Assets Are in Equities

Equities are the largest investment in the aggregate portfolio of state and local pension plans.1

The aggregate equity holdings of state and local pension plans were about 67 percent of their total assets, or $2 trillion, in 1999.2 Government securities accounted for 12 percent; corporate/foreign for 10 percent; and other assets (mortgages and other securities) for 11 percent. Total financial assets of the roughly 2,140 state and local pension plans were over $3 trillion that year.3

The aggregate equity allocation of state and local assets is not representative of all plans. For example, the 1997 Public Pension Coordinating Council (PPCC) survey of 379 state and local pension plans found that smaller plans tended to have a lower equity allocation than larger plans.' A 1996 Wilshire Associates report on state retirement systems reported a median equity allocation of about 50 percent, which indicates that most plans have less than 67 percent in equities. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.