pension fund performance

Arizona Fund’s Strong Performance May Lead To Bigger Retiree Benefits—But Not This Year

Tens of thousands of Arizona retirees were hoping to begin receiving larger benefit checks in the coming months. That may happen eventually for the 120,000 retired members of the Arizona State Retirement System (ASRS), but it won’t happen this year.

That’s because benefit increases, such as COLA increases, are tied to the fund’s long-term performance. And despite posting the second-best annual investment return in the last decade—18.6 percent net of fees—the ASRS still has work to do to meet the benchmarks that permit it to increase benefits.

From the Arizona Republic:

For a permanent benefit increase to kick in at ASRS, the trust must produce a rate of return in excess of 8 percent — the assumed rate of investment growth — for 10 years and generate a pool of excess earnings.

Simple averaging shows that benchmark has been met, but there is another caveat: The formula to pay cost-of-living adjustments uses a “geometric and actuarially smoothed average,” which takes into account compounding.

That formula, dragged down by heavy investment losses during the 2007-09 recession, puts the 10-year rate of return at 7.6 percent, [ASRS Chief Executive Paul] Matson said, which is below the trigger.

“We are certainly getting closer to it,” Matson said.

The funded status — a measure of the amount needed to pay current and future pension liabilities at ASRS — is projected to be 76.6 percent. Less money is needed from employees and employers the closer the figure is to 100 percent. A funded ratio of 80 percent is considered “healthy” in public retirement systems.

Arizona’s other major pension fund, the Arizona Public Safety Personnel Retirement System, posted an annual return of about 15 percent gross of fees.

The performance of the ASRS may not warrant benefit increases, but the fund’s investment staff may still be in line for bonuses. From the Arizona Republic:

Matson said it is unclear if his investment staff will receive bonuses, even with the exceptional financial returns. He said there are other benchmarks that must be met, and a determination won’t be made for eight to 10 weeks.

Matson said bonuses are needed to retain quality staff to oversee the portfolio and garner solid rates of return.

“Without good staff, there are detriments to performing well,” he said.

Pension360 has previously covered the controversial bonuses given to the investment staff of the other major fund in Arizona, the APSPR.

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

Value of New York City Funds Reach All-Time High After Big Returns

New York City’s pension funds together returned over 17 percent for fiscal year 2013-14, the City’s strongest return since fiscal year 2010-11. As a result, the value of the City’s pension system has reached an all-time high. From Reuters:

New York City’s pension system had a banner fiscal year in 2014, increasing its total value to a record $160.5 billion, Comptroller Scott Stringer is set to announce on Monday.

That is a nearly $19 billion increase from the fiscal year ending July 31, 2013, when the five pension funds had a combined value of $141.7 billion, according to records on Stringer’s website.

As a result of the funds’ performance, the city will save $17.8 billion over the next two decades, due to an above-average rate of return, according to a press release distributed to reporters on Sunday.

“Five years of positive returns are good news for the pension funds and for the city,” Stringer said in the release.

The five combined funds had a 17.4 percent rate of return on investments for FY2014, which ended on June 30. That tops the rates of 12.1 percent in FY2013 and 1.4 percent in FY2012, but falls short of the 23.2 percent rate in FY11. The rate in FY2010 was 14.2 percent.

The assumed rate of return, which is set by the city’s actuary, is 7 percent. That means that if the funds perform below that rate, the city must make up the difference with taxpayer money.

The $17.8 billion in savings will begin in FY2016 and will be phased in over a six-year period. Each year’s incremental savings will be repeated for 15 years thereafter.

New York City is now planning on decreasing its contributions into the System, as the required payments are tied to investment returns; the bigger the returns, the less money the state is legally required to pay into the system.

Over fiscal year 2013, the S&P 500 returned nearly 22 percent.

Pension360 had previously covered the lackluster private equity returns from New York City pension funds.

The New York City Employees’ Retirement System (NYCERS) was 65 percent funded as of 2013, while the New York State and Local Retirement System was 87 percent funded.

Photo: Manhattan amk by user AngMoKio. Licensed under Creative Commons

New York City Funds Lag Behind on Private Equity Performance

The private equity analytics firm Bison just came out with a list ranking the private equity performance of 50 public pension funds. New York City’s pension funds have been particularly active in PE funds, and are looking to invest even more in the area in coming years. So, how did the city fare?

You have to pay to see the full rankings, but the New York Post kindly outlined the results. And the news wasn’t good for New York City’s four largest pension funds. From the NY Post:

The worst performers — the New York City Employees’ Retirement System and the New York City Teachers’ Retirement System — tied for 45th place. The police pension fund, in 42nd place, and the firefighters fund, 37th, didn’t fare much better when it came to picking private equity firms, according to the analysis by Bison, a Boston analytics firm focused on the private markets.

“They have scores that put them closer to the bottom of that list than to the top,” Bison research manager Michael Roth said. “Fund selection could be better.”

New York funds’ reliance on private equity is part of a broader strategy to produce big returns. Across the city’s five funds, about 11.5 percent of assets ($18 billion) were committed to private equity fund.

Still, the strategy isn’t working as well for New York as it is for others. From the New York Post:

New York City Comptroller Scott Stringer has tasked his new chief investment officer, Scott Evans, who started this week, with figuring out how to boost the pension funds’ private equity portfolio.

“While we are concerned about long-term return in private equity, we have reason to be encouraged by the relative returns of our private equity portfolio in recent years,” a spokesman for the comptroller’s office said.

For the Massachusetts state pension, which ranks 6th, every $100 invested in private equity 10 years ago generated a 17.7 percent annual return and is now worth $512. The same investment in the five NYC pensions, which combined generated a 12.4 percent return, is worth $322.

Industry sources blame the city’s byzantine system under former New York City Comptroller Bill Thompson, who oversaw many of the pensions’ private equity investments from 2002 to 2009.

“The city was a hard place for private equity firms to navigate,” a placement agent said, adding that firms with the best records didn’t bother dealing with the city.

As of 2012, NYCERS was only 66 percent funded. The teacher’s fund was only 58 percent funded, the police fund was 64 percent funded, and the firefighters fund was a mere 52 percent funded.

Photo by Chris Chan via Flickr CC