Overall, the board reported a 12 percent net return for the fiscal year, which ended June 30. That’s well above the ERB’s annual 7.25 percent target, reflecting today’s robust stock markets, plus positive performance in other assets, said Chief Investment Officer Bob Jacksha.
“The bull stock market is certainly a big part of it, since public equities returned in the double digits,” Jacksha said. “But we also had good returns on our other investments.”
Last year’s net returns totaled more than twice the pension fund’s annual deficit for FY 2017, which reached $400 million. That’s the difference between the amount paid into the fund by active members and the amount paid out to retirees.
The State Legislature increased member contributions and restricted some retiree benefits in 2013 to shore up the fund. But the annual deficit will persist for decades given the maturity of the fund, which includes about 46,000 retirees and about 60,000 active members.
“One-hundred percent solvency could take more than 80 years, but we have fund sustainability,” Jacksha said. “We can pay benefits every year into the future projecting out more than 30 years.”
Last year’s returns won’t move the needle much on long-term solvency, but it shores up that payout sustainability.
“It was a very good year for the investment portfolio,” said ERB Chair Mary Lou Cameron. “The board will continue to take a long-term view in our efforts to ensure secure retirement benefits.”
The ERB has diversified its holdings to lower dependency on stocks and bonds and reduce volatility as markets rise and fall. Public equities now account for only about 35 percent of investments, down from about 70 percent 10 years ago.
In contrast, holdings in private equity funds, real estate and hard assets such as energy and infrastructure have expanded, now jointly accounting for about one-fourth of fund investments. And those assets are producing significant returns.
Private real estate holdings generated more than 12 percent in net returns in FY 2017, and private equity nearly 17 percent, Jacksha said.
Reduction in public equities meant lower returns in the current bull market compared with other investment funds. The ERB ranked 69th for returns among its peers last year. But that’s a trade-off that allows the ERB to still earn significant returns on stocks and bonds while maintaining more long-term stability, Jacksha said.
The ERB now ranks ninth among its peers for three-year returns, 49th for five-year earnings and 27th for returns over 10 years.
“In a year like last year, with equities up 18 or 19 percent, we expect to be below the median on returns because we now have lower exposure,” Jacksha said. “We accept that to avoid volatility.”