Moore: Sounding the Alarm on Pension Fund Returns
Monday, October 12, 2015
As the Rhode Island pension fund goes, so goes Rhode Island.
As much as anything else, the pension fund has a massive impact on the state budget. Any time the state has to put more money into the pension fund, in order to make up for a lack of returns from the market, that's less money that can be used to fund road repairs or feed the poor.
And by that measure, the year didn't go well at all. In fact, it went horrible. The state got just a 2.2 percent return on its investment. That's far short of the 7.5 percent return the state expects to get to keep the fund solvent.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTWhat's confusing is the fact that state Treasurer Seth Magaziner, at least during his campaign, made it seem like he agreed that the state needs superior returns because made returns of the pension fund a major issue. Magaziner complained last year that the pension fund's returns weren't above the median over the several years prior--despite the fact that the fund consistently outperformed Harvard, Massachusetts, and the state of California (prior to Raimondo's entering the state treasurer's office).
Returns Still Matter
"Our state's pension system has been under-performing our peers for years," Magaziner said, during a debate against fellow Democrat candidates on July 13, 2014.
If Magaziner was sincere during his campaign, he must be pulling his hair out now.
That's because, in the time since he made that comment the state's pension fund has performed progressively worse than the average return for its size. For fiscal year 2015, The Wilshire Trust Universe Comparison Service (which compares the returns of pension funds with assets larger than $5 billion), (the RI fund has roughly $8 billion) calculated the median return of public plans with more than $5 billion in assets at 3.4%. That means the Rhode Island pension fund performed more than 50 percent worse than the average!
Boston College's Center for Retirement Research's website doesn't contain the information comprised of all the nation's state pension funds as of yet, but it will be more than interesting to see where Rhode Island ranked last year. Here's a safe prediction: nowhere near the median, and close to the bottom. So far, and I've been watching closely, only two state pensions have reported worse returns than RI last year. Keep in mind, many states have more than one pension system.
All this means that we should be changing our investment strategies, as they're clearly not working. The investment scheme that Gina Raimondo implemented for Rhode Island was based on the notion that the state was hedging against risk.
Weak in Good Years and Bad
That meant that in good market years, the state wouldn't see the stellar returns. And we certainly didn't. In fiscal year 2014, the Wilshire average return was 17.3 percent. Rhode Island got a return of 15.2 percent--that's a 14 percent lower return. In 2013, the Wilshire average was 12.5 percent. Rhode Island got a return of 11.07 percent return--a 13 percent lower return.
So in great years our pension fund performed worse than the average. But wait a second. In a relatively bad year like last fiscal year, the fund performed worse when compared to the average on a percentage basis. What gives here?
Let's be honest here: Over the last few years, it's been proven that the state's current investment strategy isn't working.
A Flawed Strategy
Two years into former Treasurer Raimondo's tenure, in 2013, the state pension fund was actually beating the Wilshire average, with a 10 year return of 7.42%, which was better than the median plan’s 7.23% over the same time period.
Back then, we had an old school method of investing, spearheaded by former Rhode Island General Treasurers Frank Caprio and Paul Tavares. Basically, the state bought a mix of stocks and bonds and mimicked the broader market. The state shied away from the fancy and exotic alternative investments, particularly hedge funds. Here the thing: it worked.
To be fair, Magaziner can't be held responsible, certainly not completely, for the meager returns of the pension fund last year. He came into office 6 months into the fiscal year.
Old Method Worked Better
But if Magaziner wants Rhode Islanders to feel confident in his ability to garner exceptional returns, which he promised during his campaign, he should be changing the state's investment strategy.
Instead, the young treasurer is doubling down on what I consider Raimondo's flawed investment strategy. That's what's so concerning.
Magaziner has kept the same Chief Investment Officer that served under Raimondo, Ann-Marie Fink. What's even worse, he has kept the same approach of investing in hedge funds, which are incredibly costly, risky, and quite frankly, useless.
To his credit, Magaziner has improved the transparency and receptiveness to questions in the treasurer’s office (compared to what it was with the previous administration).
But it won't matter if the state pension fund continues to provide less than average pension fund returns. Here's hoping Magaziner has a change of heart and changes the state's investment strategy away from one that pleases the Hedge Fund Cowboys on Wall Street and towards one that does right by our taxpayers and retirees. It's not too late.
Russell Moore has worked on both sides of the desk in Rhode Island media, both for newspapers and on political campaigns. Send him email at [email protected]. Follow him on twitter @russmoore713.
Related Slideshow: Pension Fund Management Fees
Below are 38 private equity firms which were paid management fees for money state pension fund has yet to invest with them. For each firm, the firm name or individual fund name is listed, along with the following: the total money the state has committed to investing with them, the amount the state has provided, the amount the state has yet to provide, the management fee rate, and the amount in management fees the firm was paid for the money that it had not yet been provided. Figures are for fiscal year 2014. Data were obtained from publicly available documents from the state Treasurer’s office.
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