PROVIDENCE – Rhode Island’s state and local pensions had 10-year average returns of 5.1% and 17-year average returns of 5.7%, according to a new report issued by Fitch Ratings Tuesday.
The median average returns of public pension plans in the 50 states over the 17-year span was 6.4%. Rhode Island was one of six states in the nation that had returns of less than or equal to 6%, the report said, including Indiana, Maryland, Hawaii, Maine and Connecticut.
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The report also said that Rhode Island’s actual returns missed their targets in many of the years from 2001 to 2017, which it said could have a potentially meaningful impact on funding progress. Thus, while Rhode Island’s state and local public pensions posted a 5.7% average return in the measured time frame, it fell short of the 7.9% assumed rate of return by 2.2 percentage points.
Rhode Island was one of seven states in the United States that the report noted had underperformed on average by a margin of more than 2% in the span of the report, with Rhode Island’s actual returns underperforming in eight of 17 years.
The state overperformed in nine of the 17 years measured, in 2004-2007, 2010, 2011, 2013, 2014 and 2017. Overall, the state’s public pensions investments lagged behind the national median average enough to be considered statistically significant in the report.
Nationally, all public pension liabilities grew by a 5.2% compounded annual growth rate, while pension assets posted a CAGR of 3.4%.
The report also noted that many public pensions in the nation had increased their investment allocation into equities and alternatives from 2001 to 2017, including real estate, private equity, hedge funds and commodities, thus increasing the level of risk in the plans. The report said that such a class of assets could preserve long-term returns, but expose the plan sponsors and participating governments to short-term volatility and will force participants to absorb the consequences of the heightened risks.
Nationally, risky asset allocation increased from 67% in 2001 to 77% in 2017. Rhode Island had a 79.6% allocation to equities and alternatives, below its 2017 target allocation of 80.5%, according to Fitch Ratings.
The report said that Fitch regards the pension systems’ lowering of investment return assumptions as a positive credit factor. The ratings agency said that it views high-return assumptions as unrealistic and adjusts assumptions to a standard 6% target for public pension plans that use higher assumptions.
Chris Bergenheim is the PBN web editor. You may reach him at Bergenheim@PBN.com.
