Pension Funds Are Having the Best Returns In History

To say that pension funds are doing well in 2021 might be an understatement. The median one-year return on funds is 27 percent according to numbers from Public Plans Data.

The closest their returns have been to this is back in 1985 when median returns were 22.8 percent. Yearly returns vary but are usually around 11 percent.

The performance tide appears to be lifting all boats as even the worst performing plans are having a breakthrough year. Funds like the Washington D.C. Fire and Police fund and Teachers’ Fund, both of which ranked at the bottom for ten-year performance in 2019, had returns over 20 percent in 2021. All other terrible performers over the last decade would also see returns in the high 20’s to mid 30’s.

In general, the vast majority of plans’ returns tend to follow each other. With the exception of a few outliers each year, most plans have a good year simultaneously. The best and worst performers are not far from average performers for that year.

And they have bad years simultaneously as well. Like in 2009, when the median return was -17 percent due to the financial crisis and the vast majority of plans had returns in the negative teens as well.

Pension fund performance could be related to the ongoing positive performance of the stock market, but in previous years the stock market has been no indicator of fund performance.

From 2010-2019, the Dow Jones would see a consistent bull market, yet certain years would be terrible for pensions. Median one-year returns in 2015 and 2016 were both below 3 percent.

Funds don’t always follow the stock market. For example, the Vanguard Index fund, one of the largest funds that tracks a basket of major stocks, has intermittently seen negative annual returns that doesn't correlate with general stock market performance like the Dow Jones average or the S&P Index.

While the Vanguard Index regularly has returns in the 20’s, it is offset by years of negative returns. For that index, 2021 is not so different from other years like 2009, 2013, and 2019 that also saw high return rates. In the end, the Vanguard Index has a similar average return to that of pensions: around 11 percent.

Pension Bailouts

Decent returns are a good thing for the pensions who have been struggling for years. Many were underfunded—not enough capital to provide retirees with the income previously guaranteed—despite having positive returns.

The higher returns are all the more important considering recent inflation, which can affect their solvency. Pensions calculate how much they owe retirees based on how much is put into the pension plus an adjustment for present-day value—how much the fund is valued at in the future based on current day trends.

With inflation, the fund will need to grow that much more to account for the devaluing of the dollar. If they aren’t making enough of a return to account for inflation, they too will be underfunded.

In the U.K. pension funds that were trying to offset the risk to their funds from inflation and low interest rates put their money in liability-driven investments (LDIs). But that bet recently turned sour as interest rates increased, leading to major losses to the U.K. funds and some American corporate pensions.

Some U.S. pensions already went belly-up during the pandemic and had to be been bailed out by the Biden administration. The process is ongoing but $6.2 billion has already been doled out via the American Rescue Plan Act (ARP) as of May of 2022. In July, Biden revealed a full plan to bail out other multi-employer pensions.

The bailout has been criticized by Education and Labor Committee Republican Leader Virginia Foxx (R-NC) for subsidizing poorly run pensions, specifically the multi-employer ones, that should be increasing their premiums—the amount per person paid to the Pension Guaranty Benefit Corporation (PBGC)—the government agency that guarantees retirements benefits for the pension funds—each year to help manage the plans. She highlighted how single-employer plans have premiums set at $88 per person, while multi-employer plan premiums are a “meager” $31 per person.

Other groups contend that PBGC has no solvency issues and potential premium increases will be a burden on smaller plans.

According to a 5-year report by PBGC, most multi-employer plans are not likely to be insolvent. Before ARP was passed, PBGC was likely to be insolvent by 2026. According to the report, ARP would set premiums at $52 in multi-employer plans in 2031 and indexed to inflation for years after.

While PBGC is a government entity, it is not funded by tax revenue but through the pension investments.