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With some instability in the global economy, Treasurer Deborah Goldberg suggested the fund might lower its expectation.
“People are trying to work their way down to 7.5, and I felt we should start looking at 7 and 3 quarters,” Goldberg told members of the Pension Reserves Investment Management (PRIM) board’s investment committee on Tuesday.
A majority of the Pension Reserves Investment Trust (PRIT) fund is invested in equity, or ownership interests such as stocks that carry significant risks compared to other investments, such as fixed income.
As of the end of November, PRIT had 43 percent of its assets allocated in global equity and another 11 percent in private equity, tying the fund to economic growth.
In calendar year 2014 PRIT had an 8.2 percent return and in fiscal year 2014 the fund had a 17.6 percent return, both of which beat investing benchmarks, according to PRIM.
PRIM last lowered its assumed ROR two years ago. At that time, it stood at 8.25 percent.
New Jersey’s pension fund earned 7.3 percent on its investments last year, which state officials said beat market expectations.
But those gains didn’t live up to the 7.9 percent annual rate experts say is needed to keep troubled pension fund from adding to its liabilities.
The investments returned 7.27 percent, but were hurt largely because of market volatility in the second half of the calendar year, said Tom Byrne, acting chairman of the State Investment Council.
“For that period of time we were ahead of our benchmark by just a tiny bit but behind the 7.9 percent bogey,” Byrne said. “One period of time only tells you so much.”
Byrne noted that the investment council’s role is only half the battle. While it manages the state’s investments, it doesn’t have any say in setting or making pension contributions.
“The pension is still underfunded, and we can only do what we can do,” Byrne said.
Governors from both parties have underfunded the pension system since 1996, shortchanging the annual payments or skipping them altogether.
Pension officials defended the system’s recent dive into alternative assets; officials said those investments have earned the system an additional $2.8 billion in returns since 2010.
Photo credit: “New Jersey State House” by Marion Touvel – http://en.wikipedia.org/wiki/Image:New_Jersey_State_House.jpg. Licensed under Public domain via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:New_Jersey_State_House.jpg#mediaviewer/File:New_Jersey_State_House.jpg
Some experts, including a senior economist at the Japan Research Institute, have questioned whether Japan’s Government Pension Investment Fund (GPIF) is being too optimistic by assuming a 6 percent return per year on its domestic equity portfolio.
The managers of Japan’s huge Government Pension Investment Fund must have their heads in the clouds to expect domestic shares to return an impressive 6% a year, some observers say.
The $1 trillion fund’s new medium-term investment plan, released at the end of October, assumes that economic growth and other macroeconomic conditions will resemble the Japan of 1983-93. But its expected nominal return on Japanese equities is based on corporate earnings from 1983 to 1989 — the high-flying years before the nation’s asset-price bubble burst.
Japanese bonds make up 35% of the GPIF’s new asset mix, down from 60% in the old portfolio model. Meanwhile, the fund’s target allocations for domestic and foreign stocks have each more than doubled, from 12% to 25%, while its allocation for foreign bonds has risen from 11% to 15%.
When it comes to international bonds and equities, the GPIF expects nominal returns of 3.7% and 6.4% at best. But its “upside scenario” for domestic stocks has them rising at 6% — a rate at which an investment, if compounded, would roughly double in 12 years. To arrive at this number, the fund crunched share prices, dividends, earnings per share and other stock-related data from 1983 to 1989.
Although Japanese shares returned far more than 6% during the bubble era, they did so amid an unprecedented economic boom. The odds of such an earnings-supported-rally occurring again are debatable. As to why the fund’s baseline for domestic equity returns ends at 1989, not 1993 as in the economic assumptions, GPIF President Takahiro Mitani said it was to control for the effects of the bubble bursting.
Japan’s GPIF is the largest pension fund in the world with $1.1 trillion in assets.
The Kentucky Retirement System has lowered its assumed rate of return on investments from 7.75 percent to 7.5 percent.
The reduced assumption means the system will experience an uptick in unfunded liabilities, but it also ensures a higher annual payment from the state.
The action took place at a Board of Trustees meeting on Thursday. More details from CN 2:
The changes, presented to trustees earlier this year by actuaries with Cavanaugh Macdonald Consulting based on a five-year experience study, lower assumed returns on investments, price inflation, wage growth and wage inflation.
The new assumptions, KRS Executive Director Bill Thielen said, will cost the state roughly $95 million more per year in contributions for the Kentucky Employees Retirement System for state employees in non-hazardous positions during the next biennial budget, based on current plan valuations and payroll figures. They will not take effect until next year’s year-end plan valuations, he said.
The updated assumptions would push KRS’s unfunded liabilities to $19.5 billion, up from $17.8 billion currently, according to figures presented by Cavanaugh Macdonald Consulting.
At least one of the KRS trustees voiced concerns about approving the new guidelines at Thursday’s meeting. Personnel Cabinet Secretary Tim Longmeyer suggested delaying a vote until January so the board could meet with the governor’s office, legislators and others affected by the change.
“My concern is we don’t live in a bubble, so $95 million a year is a significant uptick,” said Longmeyer, who abstained from voting on the updated assumptions.
KRS Trustee Randy Overstreet, though, urged the board to move forward with the proposal. Nothing would change between now and January, he said.
“I’m thinking that we almost have the responsibility to follow the experts’ recommendations, and you’re right, it’s not a science, but it’s the best information we have to act on and move forward on since we have for the 20 years I’ve been on this board,” Overstreet said.
KRS has forecast a 7.75 investment return since 2007. But earnings in KERS non-hazardous averaged only 6.52 percent over the past decade, leading some critics — including lawmakers — to argue for a more cautious outlook.
The National Association of State Retirement Administrators reported that of 126 public retirement plans surveyed in October, 48 assumed a return of 7.5 percent or lower, while 78 assumed a higher rate.
The median rate was 7.75 percent, but more than half have cut their assumption since 2008, the group said.
KRS administers nearly a dozen defined-benefit plans for state workers, including the 21 percent funded KERS non-hazardous plan.
Colorado Treasurer Walker Stapleton has for years pushed the state toward initiatives designed to improve the health of its pension system, and open pension data was a big part of Stapleton’s plans.
Back in 2011, Stapleton filed a lawsuit seeking the release of retirement benefit data for Colorado’s highest-earning pensioners. But the state’s pension fund, the Public Employees Retirement Association (PERA), said the information was confidential and refused to release it.
Since then, two lower courts have sided with the pension system on the issue. Stapleton appealed the rulings all the way to the state Supreme Court—but the Court announced today that they wouldn’t be hearing his case. From the Associated Press:
The Colorado Supreme Court has decided not to hear a lawsuit from state Treasurer Walker Stapleton seeking information about employee benefits in the state’s pension system.
Stapleton, a Republican, has sought non-identifying information about the top 20 percent of the pension’s beneficiaries and their annual retirement benefit. He says the information would help him to assess the health of the state pension’s program and how to keep it solvent.
Neither Stapleton nor the Court have released statements addressing the turn of events.
Last year, Stapleton convinced the Board of the PERA to lower its assumed rate of return from 8 percent to 7.5 percent. The Denver Post:
Colorado’s Public Employees’ Retirement Association voted 8-7 to lower its expected rate of return on investments to 7.5 percent, down from 8 percent.
State Treasurer Walker Stapleton has urged the board for three years to lower its rate of return, warning of an eventual collapse and bailout of the pension system for 300,000 teachers and state workers.
[The] vote means the pension fund’s unfunded liability will increase by about $6 billion to $29 billion, Stapleton estimated.
“In the short term, that’s not a good thing,” Stapleton said. “But it makes it all the more imperative that we find a way come together … and commit ourselves to fixing this problem sooner rather than later.”
The vote was a shift in philosophy from three years ago, when the board voted 10-5 to keep its rate of return at 8 percent.
The rate is used to predict investment growth over the next 30 years. Numerous economists have suggested a realistic expectation is 6.5 percent to 7.5 percent for state funds nationwide.
PERA’s average actual rate of return over the last decade has been over 8 percent. But over a different ten-year period—2001 through 2011—it returned only 3 percent annually on average.
Photo: “Denver capitol” by Hustvedt – Own work. Licensed under Creative Commons Attribution-Share Alike 3.0 via Wikimedia Commons