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.


Full article available at https://jor.pm-research.com/content/early/2020/09/28/jor.2020.1.075 (© 2020 PMR. All rights reserved.)

Keywords: Long-term/retirement investing, pension funds, performance measurement, retirement, wealth management

JEL Classification: H75