The New Orleans Municipal Employees Retirement System returned less than 5 percent in 2014, a number that is pushing some board members – including the city’s finance director – to consider a more passive investment strategy.
Trustee and city finance director Norman Foster argued this week that the fund should be investing in funds that passively follow indices like the S&P 500, which saw double digit returns in 2014.
Several board members expressed some frustration with the fund’s investment performance, none more than Norman Foster, the city’s finance director.
Foster argued that the city would have been better served by investing in index funds, passive investment vehicles that track the market and eliminate costly management fees. “I’ve made the case for passive investment, and I’ll be making it more and more,” he said.
Some of the performance lag can be attributed to the fund’s asset mix. Like many pension systems, the retirement system invests heavily in bonds, a strategy that minimizes risk but also limits returns during market booms.
Foster pointed out, however, that even when the asset mix is taken into account, the fund’s performance fell short of index benchmarks by nearly 3 percent, which means the managers failed to beat the market, despite collecting handsome fees.
Ian Jones, who advises the retirement system on investment issues, warned against dumping its asset managers based on one year’s worth of data.
The fund assumes a 7.5 percent annual return.
Over the past seven years, the fund’s returns have averaged 4.21 percent annually.
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The board of the New Orleans Municipal Employees Retirement System (NOMERS) – the city’s largest public pension fund – is considering a series of cost cutting measures, some that involve trimming benefits.
Under consideration: increasing employee contributions and raising the retirement age, according to NOLA.com. The changes are currently being examined the system’s actuary.
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New Orleans Municipal Employees Retirement System board at a January meeting released a list of the potential alterations, which included raising the retirement age and increasing the amount of money employees are required to contribute. The board forwarded the possible changes to its actuary to evaluate how they would impact the health of the pension fund, benefits for employees and the city’s budget.
Nearly all the proposals it released at the January meeting would affect only future employees. That means the city wouldn’t see much relief for many years.
Raising the employee-contribution rate from the current 6 percent of salary to 7 or 8 percent is among the only proposals by the board that would affect current workers and immediately impact the unfunded liability.
The board is examining these changes under request from City Council President Stacy Head, according to NOLA.com, who asked the board last year to come up with a list of possible benefit changes.
Pension costs are eating up increasingly large chunks of the city budget, and it’s likely the Council is looking for ways to cut those costs in the future.
Louisiana considers pension benefits as a contract between employee and employer. It’s likely, then, that legal action would accompany any benefit changes.
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