State vs. Local Management of Pension Assets: Effects of the Massachusetts Chapter 68 Public Pension Reform

Abstract

By some estimates, underfunded public retirement systems in the United States represent liabilities that could impose $4 trillion on taxpayers and municipal employees, depending on how governments choose to respond to shortfalls resulting from a system’s inability to meet its pension obligations. While there has been a wide range of responses (and nonresponses) to state and local pension underfunding, it is instructive to examine Massachusetts, where in 2007, the state government enacted legislation to identify underperforming local systems and require them to cede control of their pension investments to the state’s Pension Reserves Investment Management (PRIM). The decade that has passed since enactment of this reform provides an opportunity to evaluate its economic impact. This article evaluates and quantifies the effect that PRIM management has had on the investment returns received by the local systems that transferred assets to PRIM after 2007, with a focus on within-system effects. Results indicate that underperforming local systems received substantial benefits from the shift to PRIM’s investment management. These findings provide lessons for other states in which locally managed pensions have fallen into a position of severe underfunding. TOPICS:Long-term/retirement investing, pension funds, performance measurement, retirement, wealth management Key Findings • After the Massachusetts state government enacted legislation (“Chapter 68”) in 2007 to identify underperforming local retirement systems, a substantial number of local systems transferred all, or nearly all, of their pension assets to the state’s Pension Reserves Investment Management (PRIM). • It is estimated that, on average, local systems that transferred assets to PRIM experienced an increase in annual gross returns of 8.9 basis points for every 10% of their assets transferred to PRIM. • In dollar terms, it is conservatively estimated that these local systems collectively gained $321 million (nearly 7% of their total unfunded liability in 2016) as a result of transferring their assets to PRIM after the implementation of Chapter 68.