New data suggests public pension plans are “well situated” to recover from the current financial crisis.

“As the global financial crisis brings a renewed focus on retirement security, the report findings provide confidence in the management of retirement assets held by state and local pension funds,” said Beth Almeida, executive director for the National Institute on Retirement Security, which conducted the survey. “The data indicates that these institutional investors have performed largely as they should: they are prudent in their asset allocation and ‘buckle down’ during adverse circumstances. This investment behavior positions the funds to continue providing a steady, predictable retirement income to workers in the most efficient manner possible during bull and bear markets alike.”

A report by NIRS entitled “In it for the Long Haul: The Investment Behavior of Public Pensions” shows public pension plans are prudent for investors because they:

  • Actively rebalance investments in response to price changes.
  • Do not get caught up in a “herd mentality,” but rather follow the best investment practices in the industry. State plans, in particular, systematically follow the practices of performance leaders.
  • Hold higher risk assets when funding levels are higher, and assess their financial situation before modifying the plan’s asset allocation. If anything, public pensions are somewhat overly cautious following periods of lower funding, indicating they avoid “chasing returns.”
  • Hold smaller amounts of stocks when employers face higher contribution rates. This trend continued even after the 2000 bear market. This indicates that public pensions avoid pressure to invest more aggressively after experiencing losses.

“This analysis of public pensions’ past behavior can provide a guide as to how the funds may be reacting to today’s stunning market downturn,” said report co-author Dr. Christian Weller. “Our data suggest that public pensions followed well-established practices for prudent, long-term investing during the market plunge that occurred through 2001. Going forward, this is an indicator that public plans are well situated to recover from today’s financial crisis in a manageable way.”