* 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, $2.929 trillion.
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 said.
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.
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.