Asset Allocation

NYSTRS defends defined benefit funds

The defined-benefit New York State Teachers’ Retirement System is defending its 8 per cent assumed rate of return at a time in the US when the limelight is focussed on pension fund structural issues.    According to a paper on NYSTRS’ website, recent studies have attempted to cast doubt on public pension funding methods basing their calculations on expected rates of return much lower than the 8 per cent annualised average that NYSTRS and other public pension plans use.

Two such reports characterise an 8 per cent assumption as “aggressive” and “unrealistic”, it says.

In defence of its own position, NYSTRS says that in the past 27 years, the actual rate of return exceeded the 8 per cent assumption 18 times, or almost 70 per cent of the time.

“Even with a record-low return of -20.5 per cent in the fiscal year ended June 30, 2009 (the second consecutive year of decline) the system’s 25-year rate of return was 9.8 per cent.”

According to the National Association of State Retirement Administrators, since 1985, the median public pension plan rate of return is 9.25 per cent – or 1.25 per cent greater than the 8 per cent rate labelled as “unrealistic” by critics, the paper says.

In addition NYSTRS is quick to point that switching from defined benefit to 401-k style defined contribution funds will not result in cost savings.

“Historically, DB plans have achieved higher investment returns than DC accounts. According to the National Institute of Retirement Security (NIRS), a simple 1 per cent difference in annual investment returns results in a 26 per cent cost savings over a person’s working career. NIRS also concludes the economic efficiencies of DB plans make them nearly half the cost of 401-k style plans. Quite simply, DB plan assets are professionally managed at significantly lower fees than DC plans. Statistics show the cost to operate a 401-k style DC plan is anywhere from $1.25 to $2.00 per $100 of assets. These appear as “fees” in benefit statements. By comparison, the median operational cost for that same $100 in a DB plan is 10 cents. NYSTRS does it even more cost effectively – about 7 cents per $100 of assets,” it says on its website.

NYSTRS says in the past 20 years, investment returns accounted for 86 per cent of income, refuting the claim that taxpayers are shouldering the burden of paying public pensions.

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