To explore these questions, we recently analyzed a representative band of open public pension portfolios. We found that the distance between expected and assumed median returns is narrowing but nonetheless significant. At the same time, our work also points to practical steps many plans could take to close the gap in a prudent way – building resilient portfolios that sit for potential growth while mitigating downside risk. 224 billion. (See Figure 1 for details.) Working with data gathered by Pensions & Investments, we used BlackRock (BLK)’s Aladdin system to map the portfolios to your most recent capital market assumptions and calculate their expected risk and come back characteristics.

We then structured the results according to different plan characteristics, to see what trends we could discover and identify lessons that plans could study from their peers. It wasn’t an enormous surprise that a most these plans have a gap between their own assumed comes back and the expected return for their portfolios based on BlackRock (BLK)’s capital market assumptions. Comparing the two for each plan, we discovered that about 70% of the plans may miss their mark over another a decade. Some caveats: Our dataset gave us the plans’ allocations by 2018 but assumed earnings as of 2017, therefore the results were missed by us of any recent reductions in return assumptions.

Also, BlackRock’s assumptions are median or beta quotes and don’t take account of any potential alpha the plans may capture. Still, we think our results are illuminating. As Figure 2 illustrates, the projected gaps are not standard; nor are the return assumptions. As the average assumed rate of come back is 7.25%, the number (excluding an outlier) runs from 6.5% to 8%. Note, however, a higher assumed rate of come back need not imply a projected shortfall. Plans can elevate their expected earnings by increasing the development possessions allocation or changing its composition.

The difficulty, of course, is based on concentrating on those additional comes back without breaking the chance budget – because as risk goes up, so does the possibility that those higher “expected” returns won’t be achieved. We can obviously see this challenge in our sample group. Fifteen of the plans have expected returns of 7.25% or more. For this cohort, the common level of risk (defined as standard deviation) is 12.5% – more than 110 basis points greater than the 11.4% average risk for the group all together.

The key question for these plans is if they are being effectively compensated for the additional risk. No matter size or funded position, most of the plans inside our research have about three-quarters of their portfolios committed to alternatives and equities, which we group jointly as growth assets. Plans with funding ratios above 90% have more U.S.

Plans with funding ratios below 60% hold more non-U.S. Is the strong performance of U.S. Did underperforming non-U.S. hedge and equities funds are likely involved in the lower funded position of the former group? Separating cause and effect requires historical data on individual plans. But the most crucial question is about the future.

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• Least liquid stocks (small trading volumes)
• Better rates than many standard bank or investment company accounts
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Based on these allocations, BlackRock (BLK)’s capital market assumptions reveal that both cohorts are likely to fall short of their average assumed rates of return, and by similar margins of about 45 basis points, excluding an outlier again. The highest-funded cohort, moreover, has an expected return of 6.68%, below the 6.92% average for the analysis group as a whole, and it is taking somewhat more risk than average to focus on that return. The driver here is our modest perspective for U.S.

If programs in this cohort haven’t done so already, they need to rethink their positioning. With growth possessions in particular, risk is an integral insight in allocation decisions. Plans need to know not only how much risk these are taking, but also its factor structure and whether they are being effectively compensated for receiving it. The average 75% allocation to growth assets for our study group means that these plans are, normally, heavily exposed to the economic growth risk factor.