U.S. public pensions underperform in third quarter

[November 10, 2014]  By Hilary Russ

(Reuters) - U.S. public pension funds performed worse in the third quarter than all other institutional investment plans, according to a Wilshire Trust Universe Comparison Service report to be released on Monday.

Public pensions lost a median 1.00 percent in the third quarter, compared with a median drop of 0.84 percent for all plans over the same period. Wilshire's benchmark investment performance measure is gleaned from nearly 1,600 plans, including corporate plans, foundations and endowments.

The biggest losers: small public pensions with less than $1 billion of assets. Their returns were down a median 1.07 percent for the quarter.

Larger corporate funds with more than $1 billion of assets had the best showing for the second quarter in a row, losing just 0.54 percent this past quarter.

Overall, the various plans suffered their first negative quarter since the second quarter of 2013, Wilshire said.

The funds' underperformance was a surprise, said Robert Waid, managing director at Wilshire Associates, in a quarter when the Barclays U.S. Aggregate Index rose 0.17 percent.

"This is a quarter where classic diversification did not pay, with U.S. small-cap, international equity, real estate and commodities all underperforming," Waid said in a statement. "This explains why the median performance for all plan types underperformed the classic 60/40 portfolio."

In the second quarter, public pensions' performance had improved greatly, returning a median 3.71 percent and outperforming peers, Wilshire data showed.

Investment earnings provide nearly two-thirds of all public pension revenues, with the rest coming from employers and workers. That dynamic left the retirement systems vulnerable during the financial crisis, when their holdings plummeted to record lows.

Across the country, battles have erupted over whether states have enough money to pay promised benefits. Those fights are expected to expand to more states next year after Tuesday's mid-term elections ushered in Republican gains in some state houses and governors' mansions.

(Reporting by Hilary Russ; Additional reporting by Lisa Lambert and Tim Reid; Editing by Lisa Shumaker)

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