long-term liabilities

If another market downturn comes, officials at the South Dakota Retirement System want to be ready. That’s why they spent their last meeting talking about what they could do to mitigate damage if another downturn comes and plagues fund investments.

Among the options discussed: lower the fund’s assumed rate of return and raising the retirement age of new hires.

More from the Rapid City Journal:

The system trustees began talks at their quarterly meeting last week about what might be done if the system’s portfolio drops below 100 percent of fair value.

They are looking at possible responses in different scenarios, such as another crash where the value keeps dropping to the 80 percent range or worse.

The fair value stood at 107 percent of long-term liabilities as of the June 30 end of the 2014 fiscal year.

Among the questions now are whether the assumed rate of return for investments is too high at 7.25 percent annually and if so what should it be.

State investment officer Matt Clark said the council already is operating on an assumed rate of return that is less than the trustees’ assumption of 7.25 percent, because of the current conditions in the markets.

[…]

Trustees intend to take closer looks at various special benefits that aren’t available to all members because of their ages and marital status.

Trustees want costs and usage numbers for each of the special benefits.

Based on estimates using 2011-era use patterns, the special benefits are being subsidized by other members to the equivalent of about $1.6 billion in long-term liabilities.

That is approximately one sixth of the system’s current fair value.

Trustee Jason Dilges, who is the governor’s commissioner of finance and management, asked for analysis showing what would happen if various special benefits didn’t apply to new employees.

Administrator Rob Wylie emphasized during the several hours of discussions Thursday that nothing is close to a decision.

He said a fifth meeting might become necessary in 2015 because of the additional work, however.

One general consideration might be recommending that a higher retirement age of 67 be applied to new employees of the governments that are SDRS members.

State government and state universities are the largest members of the system. Many school districts, counties, cities, law enforcement agencies and special units of government participate as well.

State law requires corrective actions when the system’s value falls below 80 percent. The most recent corrective actions came in 2010.

One was the flexible cost of living adjustment that ranges from a minimum of 2.1 percent to a maximum of 3.1 percent depending on the system’s funded status each year.

The South Dakota Retirement System controls $10.6 billion in pension assets.

Photo credit: “SouthDakota-StateSeal” by U.S. Government. Licensed under Public domain via Wikimedia Commons

The results of a new survey from IPE magazine reveal that the world’s pension funds agree they are long-term investors. But there is disagreement about what “long-term” actually means.

From Investments & Pensions Europe:

One-quarter of respondents to the Focus Group survey for the November issue of IPE said 3-5 years constituted a ‘long-term’ view, while nearly 78% of respondents considered themselves to be long-term investors.

Only one respondent rejected the label outright.

One UK pension investor pointed to the need for a long-term approach based on long-term liabilities, while an Austrian pension fund argued that it was important to take a generational view – at least when managing the assets of beneficiaries up until 45.

There was less agreement among the 36 European respondents, managing nearly €290bn in combined assets, as to what constitutes ‘long term’ when investing in public market assets.

More than one-third of pension investors said taking a 7-10 year view was long term, whereas nearly 14% believed the better definition was considering investments over the course of a business cycle.

One-quarter of funds said a 3-5 year time horizon was adequate, and 17% argued in favour of a generational view, spanning 15-25 years.

One respondent, a UK local authority scheme, said the long-term perspective manifested itself in asset allocation decisions, pointing to the development of emerging markets over the course of a generation.

The fund added: “Stock selection does tend to take a shorter view, and this is probably dysfunctional.”

A second UK corporate fund questioned whether the idea of long-term investing in public markets was compatible.

“The idea that long-term investment should be public market inherently seems to be at odds with long-term investing,” it said.

“Public markets are driven by short-term liquidity and [mark-to-market] ideology, which is anathema to long-term investing, which is about long-term, sustainable cash flows.”

Despite this, nearly half of respondents did not see a problem in finding external public market asset managers “willing and able” to invest for the long term, and only 9% rejected the notion out of hand.

One-quarter of respondents said asset managers could be found, but only for certain asset classes.

A Swedish investor blamed the regulatory environment, not asset managers.

“[The] main hassle is the short-term view of the regulator and new regulations where you value your liability against a short-term model,” it said.

A second Swedish investor concurred.

“If anything,” it said, “regulation is a problem – in particular, its tendency to change radically every 5-10 years.”

When asked which factors prevented long-term investing, 24% cited the regulatory environment and 21% the maturity of their liabilities.

Only 20% said the asset management industry’s unwillingness or skill was at fault.

One respondent cited the career risk of misguided long-term investments.

For more, see IPE’s analysis here.

Tag: long-term liabilities

South Dakota Pension Officials Brainstorm Ways to Guard Funding Status Against Another Market Downturn

Survey: Pension Funds Disagree on Time Horizon of Long-Term Investing