NCPA - National Center for Policy Analysis

Betting on the Big Returns: How Missouri Teacher Pension Plans Have Shifted to Riskier Assets

August 4, 2015

Defined-benefit public employee pensions are increasingly relying on investment returns, rather than employee and employer contributions, to pay for the guaranteed benefits to pensioners. This makes the selection of a plan\'s investment strategy important. Nationally, public employee pension plans have shifted investments from low-risk, low-return strategies which rely on fixed-income investments to high-risk, high-return strategies which include more equities and alternative investments.

An examination of national trends yields:

  • From 1984 to 2013, investment returns accounted for 62 percent of pension plan revenue.
  • A Pew Study revealed that public pensions have shifted assets away from fixed-income investments towards riskier investments.

Researchers with the Show-Me Institute found in Missouri that:

  • All of the major public pension systems has shifted assets to more risky investments, namely equities.
  • From 1992 to 2014, fixed income assets in the largest pension system have dropped from 85 percent to 24 percent.
  • Equities have risen from 15 to 48 percent.

Given these shifts, there should be some mechanism to ensure that if returns do not come in as expected and there is a funding shortfall, taxpayers are protected.

Source: Michael Rathbone and James V. Shuls, "Betting on the Big Returns: How Missouri Teacher Pension Plans Have Shifted to Riskier Assets," Show-Me Institute, July 2015.

 

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