America’s public pension plans make over-optimistic return assumptions

PROMISING A PENSION is a long-term and expensive business, especially if the payout is linked to earnings. But whether the employer is private or public, the cost ought to be the same in the long run and so, you might assume, would be the investment approach. Until 2008 that was true for American pension plans: private and public-sector schemes had roughly the same asset allocation.

But a new report by Jean-Pierre Aubry and Caroline Crawford of the Centre for Retirement Research (CRR) at Boston College shows that things have changed. Public plans have 72% of their portfolios in risky assets (equities and alternatives such as hedge funds), and private plans just 62%. Since private plans have more scheme members who are retired, they should have a less risky approach, because they must focus on paying benefits immediately rather than on long-term growth. However, even allowing for this and other factors such as plan size, public-sector schemes are taking more risk.