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Without Reform, High Pension Fund Returns Just Delay the Inevitable


Reuters reports that many public pension funds are enjoying double-digit returns for fiscal year 2013. That’s considerably higher than the expected rate of return for public pensions, which often falls somewhere between 7 and 9 percent, and much higher than their recent returns, which have in many cases been in the low single digits. Although one year of high returns is not enough to repair years of damage, it can at least give funds some breathing room while recent reforms take effect:

“It is a marathon, not a sprint,” said Keith Brainard, at the National Association of State Retirement Administrators. “I do not think any one-year returns are likely to affect the thinking about pension reforms but we have seen very strong returns since the low point of the equity market in 2009 and it is encouraging,” he said.

Recent reforms by many U.S. cities and states have seen retirement benefits for new hires cut, and their contributions into pension plans raised. It will be several years before these reforms start to have an effect on gaps in pension funding.

The reprieve is welcome news, but there is a real danger that it will take pressure off fund managers and local politicians to implement and reinforce much-needed reforms. It’s easy for funds to do well when the stock market is riding high and the S&P is breaking records left and right. Unfortunately, this isn’t the usual state of affairs, and many of these plans could find themselves back where they started when the market returns to Earth. Will pension funds take this respite as an opportunity for reform, or are they getting just enough rope to hang themselves?

[Stock graph image courtesy of Shutterstock]

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