Pension returns climb, but hold the applause

The millions of government workers dependent on state pension plans got a mix of good and bad news in a recent report by the Pew Charitable Trusts.

The workers should be heartened by the average 12 percent return the funds generated in the year ending June 2013, the latest data available. Though many remain woefully underfunded, many have met or exceeded their investment return targets.

This performance, though, has come at a price. Pew estimates that fees have surged by approximately 30 percent as funds undertake far riskier investments than they have in previous years.

As recently as 1982, roughly half of pension assets were invested in bonds. They shifted to stocks in the 1990s as markets began their late-century rise. By 2006, Pew estimates that 61 percent of all assets were in equities. Six years later, pension money moved from equities to alternative assets such as hedge funds and private equity, which offered better returns than stocks and accounted for 23 percent of assets by 2012, up from 11 percent six years earlier. Stocks accounted for 50 percent of holdings, down from 61 percent.

"They are exposed to significant volatility in the financial markets, " said Greg Mennis, who directs Pew's public sector retirement systems research, in an interview. "Most plans provide significant information on performance and fees. However, there are opportunities for improvement."

For instance, many plans don't factor in fees when they disclose performance to the government workers they serve. It's critical information for investors to know because more fees for managers means less profit for them. Every bit makes a difference. For instance, a one-percentage point difference in annual returns on $3 trillion is $30 billion.

Pension plans are often political hot potatoes for governors. In New Jersey, Republican Chris Christie, a potential 2016 GOP presidential candidate, recently shifted $2.43 billion away from the state's pension plan so that he could balance the state's budget. Christie has repeatedly insisted that New Jersey can't afford to pay for the benefits that his predecessors had promised workers for years. State unions, not surprisingly, are crying foul.

The situation also is tough in Illinois where Democratic Gov. Pat Quinn and his allies are battling unions over a planned overhaul to their pensions needed to shore up the state's system, which has a $100 billion funding shortfall. A state judge has delayed implementing the changes Quinn is seeking until it can be determined if they're legal, according to the Chicago Tribune.