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U.S. public pension investments jump, costs surge too

By Lisa Lambert

WASHINGTON (Reuters) - Asset values at U.S. public pension funds rose 8.4 percent in the latest fiscal year to the highest level in more than 40 years, but their costs also rose, the U.S. Census reported on Monday.

Most retirement systems ended fiscal 2013 on June 30. In the final quarter of that fiscal year the cash and securities holdings of the 100 largest public-employee pensions were $2.944 trillion, up 8.4 percent from a year earlier and the highest level since the Census began collecting pension data in 1968.

Still, quarterly growth in their investments has been slowing at the same time they are having to pay more to retirees. Benefits and withdrawals also reached record highs in the quarter, jumping 16.8 percent from a year earlier to $62.2 billion.

"It looks like we're stabilizing instead of growing," said Erika Becker-Medina, chief of statistics in the Census governments division. She noted that on a quarter-to-quarter basis, the assets level was up just 0.4 percent.

Investments provide the lion's share of retirement system revenues, with employers and employees also pitching in funds. During the 2007-09 recession, the financial crisis caused those investments to crumble just as states confronting collapsing revenues cut their pension contributions and also laid off employees.

Pensions have slowly marched back to health since holdings reached a low of $2.1 trillion in 2009. In fiscal 2013, investments finally surpassed the peak they reached in 2007 before the recession began.

Governments across the country have reformed pension policies in the aftermath of the funding crisis. Some began making the full contributions that their actuaries suggest. Others have had employees pitch in more, raised retirement ages, and cut annual cost of living adjustments to benefits.

The Census data showed that governments and employees both are now pitching in greater amounts of money.

Government contributions increased over the year by 2.3 percent to $22.8 billion, while employee contributions rose 11.2 percent to $11.4 billion. Government contributions have been creeping up over the last few years, Becker-Medina noted, pointing out that in the quarter that ended on June 30, 2008, government contributions were $18.39 billion.

"This data confirms what we've been seeing, which is that strong equity markets and increasing contributions from both employers and employees are driving higher public pension asset values," said Keith Brainard, research director at the National Association of State Retirement Administrators. "While quarterly and annual changes in contributions tend to be steady, investment earnings typically are lumpy and more volatile."

Over the year, corporate stock holdings of pension plans increased 7.4 percent to $1.01 trillion and their international securities rose 16.8 percent to $592.6 billion. U.S. government securities rose over the year by 6.9 percent to $267.1 billion. Corporate bond holdings fell 9 percent to $330.8 billion.

Retirement systems' earnings on investments were $38.28 billion in the quarter, down from earnings of $115.49 billion the previous quarter but better than $16.3 billion in losses they had in the same period in 2012.

Public pensions "have stood out in returns versus other institutional peers for the primary reason that one of the assets classes that held up well in the second quarter was U.S. equities," said Steve Foresti, managing director and head of the Investment Research Group at Wilshire Consulting in Los Angeles.

Wilshire recently found that for the year ended June 30, public pensions had a median investment return of 12.4 percent. Most pensions plan for returns of between 7 and 8 percent.

During the quarter, the Dow Jones industrial average rose 2.3 percent, the Standard & Poor's 500 2.4 percent, and the Nasdaq 4.2 percent.

The S&P 500 had the strongest first half of any year since 1998, as well. The final two quarters of most pensions' fiscal years represent the first half of calendar 2013.

The retirement systems' financial reports for fiscal 2013 will not be released for a while. Looking at the financial reports for fiscal 2012, Wilshire found that the median funding level for 134 state pensions was 71 percent, meaning they have enough assets to cover 71 percent of their costs.

"With their asset allocation and how markets have performed, I expect to see improvement," said Foresti about the funding level for fiscal 2013. "I'd estimate they will be 75 percent."

(Reporting By Lisa Lambert; Editing by David Gregorio)

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