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Retirement Planning > Retirement Investing

Pension Fund Members Don't Know Their Plans Are Underfunded: Study

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U.S. public pension fund members are generally unaware that their pension is underfunded and of the risk this poses, according to a survey released Thursday by Spectrem Group.

The study also reveals a wide gap between how members want their pension funds managed and the actual approach many managers take.

The survey, conducted online in the second half of November, compared CalPERS and NYC Retirement Systems (NYC Funds) against a “national” group, comprising individuals from the New York State Common Retirement Fund, the Florida Retirement System, the Missouri State Employees’ Retirement System and The Teacher Retirement System of Texas, as well as a small group from other public pension plans.

All told, 807 CalPERS members, 771 NYC Funds members and 1,687 “national” members responded to the survey.

The survey results showed that 48% of members said they would rely on their pension for at least half of their retirement income.

Ninety-two percent of respondents considered their pension fund’s ability to generate returns at or above its target level important or very important, and 93% said the same about their fund’s ability to generate returns at or above overall market performance.

In both instances, CalPERS members were the respondents most likely to identify these things as important or very important.

Ninety-five percent of respondents believed the fund’s ability to effectively manage risk was important or very important.

“There’s a clear disconnect between pension fund managers, who are testing new investment styles and strategies, and members, who would prefer to see their pension fully funded,” Spectrem Group president George Walper said in a statement.

“Pension fund managers should refocus their efforts on the wants and needs of their investors, prioritizing investment decisions to maximize performance, while limiting votes to shareholder proposals that directly impact their fund and its members.”

A recent study found that many retirement plan participants regret not having saved more for retirement.

What They Believe vs. Reality

Fifty-six percent of members surveyed believed they are very well or moderately informed about their pension’s actual investment return, 54% about its target investment return, 60% about expenses and fees paid and 61% about the benefit structure.

They were less confident in their knowledge of the costs associated with shareholder activism, the composition and investing experience of the fund’s board and the amount of time fund managers spent reviewing and voting on shareholder proposals.

However, the survey results uncovered a clear gap in how much members really knew about their pension’s actual performance and funding level.

Forty percent of members believed their funds had performed in line with the market for the past few years — often not the case, according to Spectrem. Forty-six percent of NYC Funds members believe their pension fund has outperformed the market, when in fact their returns have been below both market performance and their target level.

Likewise, 42% of CalPERS members held this mistaken belief.

Only 31% of members believed their pension was underfunded, when in fact, all respondents’ pensions were underfunded to some degree, according to Spectrem. Notably, 80% of NYC Funds members thought their pension was fully funded, when it is only approximately 68% funded.

Members’ poll responses showed a lack of in-depth knowledge of their pension fund’s portfolio allocations and the riskiness of its investments.

One example: Although more than 20% of CalPERS assets are allocated to what Spectrem called “higher-risk” alternative investments, just 14% of its members thought that more than 10% of the fund was represented by alternative investments.

Similarly, only 13% of NYC Funds members believed alternative investments represented more than 10% of their portfolio, when in reality these vehicles comprised 12% of the portfolio.

The survey found that 37% of CalPERS members and 32% of NYC Funds members wanted to see their fund reduce the amount they had invested in alternative energy.

Fund Management and Voting

Asked about fund management, 75% of members said that the most important issue for pension fund managers should be to focus on maximizing returns and getting the pension fully funded. Just 14% wanted fund managers to focus first and foremost on advancing social and political causes.

Eighty-six percent of members who identified returns as the most important area of focus for managers said the fund should make decisions to maximize returns, not to advance social or political causes. Ninety percent of the members who said the advancement of social and political causes was important for management indicated that fund performance was still somewhat or very important.

Some two-thirds of members believed investment managers should focus their time and resources first and foremost on ensuring that investments meet or exceed both the fund’s target level and the overall market performance. Only 11% said managers should use fund resources to advance worthy political and/or social causes.

The survey results showed that members also wanted greater transparency from their pensions, given that significant costs are incurred by the fund as part of the shareholder proposal voting process. 

Spectrem noted that pension funds receive and vote on thousands of shareholder proposals a year, few of which have majority support. This leaves some investors concerned that the time and resources dedicated to this activity could be better spent elsewhere.

Seventy-four percent of members — and 86% of NYC Funds members and 77% of CalPERS members — said their fund should abstain from voting on a proposal if it could not explain and justify its vote.

Eighty-nine percent of CalPERS members were slightly or very concerned that extensive voting on shareholder proposals was diverting time and resources from more important priorities.

Moreover, 46% believed CalPERS may have gone too far with its challenges to companies, with members 71 and older the most concerned. Forty-three percent — and half of those between 31 and 50 — said every dollar spent on these activities was one less dollar allocated to leveraging the best investment research available.

NYC Funds members responded in roughly the same way to this issue.


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