Public pension funds are essentially big piles of assets that are managed to provide the best investment returns at the lowest risk. The assets are what public employees have to retire on. If they are well managed and employees and governments make their required contributions, the assets grow as they earn investment returns (accounting for over 60 percent of the annual increase in pension assets). The most important part of the pension fund equation is how well the fund managers do earning investment returns.
Even with a rough economy, public pension fund managers have had an 8.9 percent median annualized investment return over the last 25 years, according to Callan Associates. The investment returns have done a lot to keep the funds growing at a steady pace. This is all separate from debates about whether public employees have been promised overly generous benefits, which is a political discussion that must be had. Also, there is very wide divergence in how pension plans perform.
Even though historic rates of return for pension funds have been strong, there is a debate over whether pension funds should use an 8 percent investment return on forward-looking assumptions. In fact, over the last several years there have been disagreements over which investment return to use when projecting the size of future assets. One side is led by Keith Brainard, research director at the National Association of State Retirement Administrators. Brainard argues that actual historical returns are the best foundation for forward-looking projections.