US - A $6.5bn increase in New York City's pension costs was largely due to poor market performance rather than overly generous benefits, a study has found.
"Retirement Security NYC", an initiative launched by New York City Comptroller John Liu to provide research on public employee pension issues, said poor returns accounted for 48% of the rise in costs, which soared from $1.2bn in fiscal year 2001 to $7.7bn in fiscal year 2010.
The findings were published this week in a new report entitled: "The $8 Billion Question: An Analysis of NYC Pension Costs Over the Past Decade, commissioned by Liu and validated by independent actuaries.
The report said poor returns were by far the largest contributing factor to the increase, adding $3.1bn in additional costs in FY 2010, and $15.2bn over the decade.
The second-largest factor was benefit increases, which accounted for 44% of the additional cost. It added $2.4bn in FY 2010, and accounted for an estimated $13.7bn over the course of the decade. However, it said almost all of the benefit improvements were enacted in 2000, with those introduced since accounting for just 4% of the increase in pension cost.
The next largest factor was actuarial losses and revisions in actuarial assumptions and methods, due to a variety of factors including increased longevity, salaries, overtime, disability, early retirement, and buy-backs of service. It added $790m in FY 2010, and totalled nearly $1.7bn, or 5%, over the ten year period.
The final major factor was higher than expected investment and administrative fees, which added $313m to expenses in FY 2010, and totaled $982m, or 3%, during the decade.
"The data challenges widespread notions that overly generous benefits played the leading role in the escalation of City contributions," deputy comptroller for budget and accountancy Simcha Felder said. "In fact, the study found that the major factor in the rise in employer contributions to the city's pension funds has been poor market performance. The lower than expected investment returns accounted for 48% of the cost increase."
The report also provided information about the pension fund reset in 2000, which effectively absorbed $17bn of excess investment returns experienced in the prior decade. That reset immediately lowered pension costs by $1.1bn annually. However, the reset eliminated the cushion that would have protected against subsequent adverse market conditions.
"New York City has successfully managed its pension funds for more than a century," Liu said. "While pension reform is needed, radical changes to retirement benefits should not be made based solely on one of the worst decades in market performance.
"Residents of the city should be proud that in spite of tough economic times, the New York City Pension Funds continue to meet their obligations."
The current asset value of the New York City Pension Funds is $114.9bn, which indicates a 17% percent rate of return fiscal year to date (July 1, 2010 - January 31, 2011).
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