Public pension fund assets are invested in diversified portfolios that include public and private equities, bonds issued by the U.S. and foreign governments and corporations, real estate, hedge funds, infrastructure, and other asset classes. Over time, earnings on investments constitute the largest portion of public pension fund revenues, which also include contributions from employers and employees.
Public pension asset allocations typically are developed as part of a process that considers the plan's liability stream, or projected benefit payments, expected revenue from contributions, and investment earnings.
Based on the latest information from the Public Fund Survey, the average public pension fund asset allocation is as follows:
- Public equities: 51%
- Fixed income: 25%
- Real estate: 6%
- Alternative investments: 13%
- Absolute/Real return: 1%
- Cash: 3%
- Other: 1%
Investment policies and practicesMost public funds maintain an investment policy to guide the investment of assets. A GFOA Best Practice "Creating an Investment Policy", states in part:
A written investment policy is the single most important element in a public funds investment program. An investment policy should describe the most prudent primary objectives for a sound policy: safety, liquidity, and yield. It should also indicate the type of instruments eligible for purchase by a government entity, the investment process, and the management of a portfolio. Such a policy improves the quality of decisions and demonstrates a commitment to the fiduciary care of public funds, with emphasis on balancing safety of principal and liquidity with yield. Adherence to an investment policy signals to rating agencies, the capital markets and the public that a government entity is well managed and is earning interest income suitable to its situation and economic environment.
Recommendation. The Government Finance Officers Association (GFOA) recommends that all governing bodies adopt a comprehensive written investment policy and review and update its policies, if necessary on an annual basis.
The best practice proceeds to identify the process that should be carried out to develop the policy.
Below are studies and reports pertaining to "best" or suggested investment practices.
- Global Investment Performance Standards
- Best Practices Manual, Investments, Massachusetts Public Employee Retirement Administration Commission
- Private Equity Principles, International Limited Partner Association
- Best Practices for the Hedge Fund Industry - Report of the Asset Managers' Committee to The President's Working Group on Financial Markets
- Principles and Best Practices for Hedge Fund Investors - Report of the Investors' Committee to The President's Working Group on Financial Markets
- Tobacco Divestment and Fiduciary Responsibility, A Legal and Financial Analysis