Attention to pensions.

• Author: Petrini, Anna
• Position: StateStats - Statistical data

Even when global equity markets aren't reeling, U.S. public pension fund administrators wrestle with how best to invest trillions of dollars in assets. And until recently, they were on a post-recession roll--with many plans experiencing double digit returns in four of the five years preceding this one. But high returns may be waning. During Fiscal Year 2015, most major public employee retirement plans had only modest gains. Interest rates remain low, and observers are still debating what the implications will be of this year's global market upheavals.

Will the trend toward lower returns continue? The answer is key to pension fund officials who rely on assumptions about future rates of return to calculate the present value of their obligations. If those assumptions are off, the effects on plan funding could be worth billions and the consequences for retirees and taxpayers serious. Many public retirement systems have lowered their investment return assumptions since the Great Recession.

To achieve their target investment returns over the long term, fund managers regularly recalibrate their mix of investments. Over the last 25 years, many have swapped out U.S. stocks and fixed-income investments, such as government bonds, for international investments in hopes of attaining higher returns. During the last decade, some have shifted substantial portions of their assets into alternative investments, such as private equity and hedge funds.

Although some experts argue that public pension funds with these riskier or more complex investments are more vulnerable to market swings, others caution against reading too much into...