* First-quarter pension holdings $2.93 trillion
* Earnings totaled $115.5 billion
* Pensions continue turning to alternative investments
By Lisa Lambert
WASHINGTON, June 27 (Reuters) - The assets held by U.S.
public pension plans have surpassed their pre-recession peaks to
reach record highs, but investment returns for the state and
local retirement systems have slowed from even a year ago even
as benefit costs rise.
For the 100 largest public-employee retirement systems, cash
and security holdings totaled $2.93 trillion in the first
quarter, the highest on records going back to 1968, according to
a U.S. Census report released on Thursday. The previous peak was
just before the financial crisis in the fourth quarter of 2007,
But earnings on investments, which are key to public
pensions' health as they provide 60 percent of the funds'
revenue, slowed. In the first quarter earnings on investments
totaled $115.5 billion, less than the $179.3 billion in the same
quarter in 2012, said Erika Becker-Medina, chief of statistics
in the Census governments division.
"When I look at the quarter-to-quarter differences, we're
increasing but not at the same rate as we were in 2010," she
At the same time, demands on pensions are increasing. The
systems' total payments in the first quarter, $60 billion, were
the highest on records going back to 1974, and 9.2 percent
higher than the same period in 2012. Payments have risen more
than 50 percent over the last five years, from $39 billion in
the first quarter of 2008.
A maturing workforce is driving the increase, with more
public employees retiring, said Keith Brainard, research
director at the National Association of State Retirement
Administrators. Given the aging trend, he expects payments to
continue to rise.
Public pension systems lack sufficient funds to cover future
benefits, with the Pew Center on the States estimating the total
shortfall for states and cities at $856 billion.
MORE PRESSURE, MORE RISK
In an attempt to boost returns on pension assets some funds
have turned away from low-risk, low-return investments.
The Census data shows that over the last year, pensions have
moved away from corporate bonds and into a broad category known
as "other securities," which includes hedge funds and real
estate trusts, said Becker-Medina. In the first quarter, other
securities made up more than one-fifth of pension investments.
The median investment return for public pensions was 5.2
percent in the first quarter, according to Wilshire Analytics.
For the calendar year through May 31, the median return for
pension plans was 7.45 percent, said Michael Schlachter,
managing director at Wilshire.
Pension funds generally aim for average, long-term rates of
return of between 7 percent and 8 percent, which results in
having "to have more in higher-risking assets."
But diversification into alternative investments does not
always boost returns.
More than half of the South Carolina retirement system's
assets are in "alternative investments" such as hedge funds,
said the state's treasurer, Curtis Loftis, and the systems'
financial returns are in the bottom 30 percent of pension funds.
"We had a mad rush to diversify our portfolio and the way
we've done so has raked in high fees and low returns," he said.
"Even in good years, like this year when there's been a run on
equities and all pension plans are doing really well, we are
still going to perform poorly."
In the quarter ending March 31, pensions' corporate stocks
holdings totaled a little more than $1 trillion, up 2.8 percent
from the first quarter of 2012, the Census said. International
securities totaled $591.6 billion - the highest level on records
that began in 2000 and 7.5 percent more than the year before.
Corporate bonds, though, decreased 10.1 percent from the
same period in 2012 to $333.4 billion.