Hawaii pension fund soars to 26.2% year-on-year return

Hawaii’s largest public pension fund, which has caught up to a $ 14.6 billion deficit, has achieved what is believed to be the best fiscal year in its 95-year history.

The state employee pension system, which provides benefits to more than 148,000 members and beneficiaries, posted a return on investment of 26.2% for the fiscal year ended June 30 as its assets reached a record $ 21.4 billion, according to a new quarterly report presented to ERS Directors by investment adviser Meketa Investment Group.

“We will be celebrating our accomplishments this year, but only for a moment,” ERS executive director Thom Williams said in an email. “There is always uncertainty in front of us. I always stress that we are focusing on the long term and that the investment challenges we face have not abated; in fact, they grew up. The global investment landscape is more complex than ever, so it’s critical that we have access to the tools and talent to keep pace, but more importantly, to excel. “

The ERS fund was established by the state legislature in 1925 and came into effect in 1926. Williams said that there had been several custodian banks for the fund over the years and each kept their own records. He said his current custodian, Bank of New York Mellon, had records dating back 27 years, to 1994.

“But I think it’s safe to say that our team produced the highest year-round return on investment in fund history,” said Williams. “While the overall market direction has played an important and significant role in our results, the primary attribution of performance, at least from my perspective, goes to our investment team. This highly skilled group of investment professionals have built a diverse portfolio of assets and selected some of the best investment managers and opportunities available in the world.

The ERS fund closed the year with a 5.6% gain in the April-June quarter amid a difficult 12-month period plagued by the devastating COVID-19 pandemic and economic uncertainty that as a result. The fund outperformed its benchmark over the one, two, five and 10 year periods as well as the most recent quarter. The benchmark index is a composite of various sector returns intended to mimic the investments of the ERS portfolio.

The portfolio, however, tracked the median public fund with assets above $ 1 billion over all of the aforementioned periods. The ERS has structured its risk-based portfolio so that it outperforms its peer funds during market sell-offs and underperforms during bull markets.

The increase in the fund’s assets of $ 885 million in the April to June quarter compared to the prior quarter includes a cumulative outflow of $ 247 million which was primarily used to pay out benefits to beneficiaries and, to a lesser extent, administrative costs.

The fund’s private growth category, which buys higher-yielding investments that rely on private markets, jumped 11.4% in the April-June quarter to dominate all segments of the ERS portfolio. Public growth, which includes global equities as well as global bonds and debt, rose 5.9% over the same period.

For the year, private growth jumped 55.5% and public growth jumped 33.8%.

“We are well diversified across the portfolio so that our performance is not dependent on any macroeconomic scenario,” Elizabeth Burton, ERS chief investment officer, said in an email. “We still believe in ‘diversification of our diversifiers’ and continue to assess investments across the platform which should perform positively in the event of a rate hike but should not hurt the portfolio if it does not materialize. not.”

The ERS pension fund is not expected to be 100% funded until June 30, 2046, if all assumptions are met regarding contributions, an annualized average return on investments of 7% and mortality expectations, according to the annual report for the ‘fiscal year 2020 of the independent auditor Gabriel. Roeder Smith who came out earlier this year.

The portfolio’s capitalization ratio was 55.3% as of June 30, 2020. The annual report for fiscal 2021 is not expected to be finalized until January.

Williams said the 2021 blockbuster performance for fiscal year 2021 is expected to reduce the number of years it will take for the fund to be 100% funded.

“I expect our funding level to go from 55.3% to between 57% and 58%,” he said in an email. “Most importantly, I anticipate that our full funding period will decrease to between 2 and 3 years. Our unfunded liability will decline this year, for the first time in decades, years ahead of schedule. Initial projections were for our unfunded liability to peak in 2026. ”

A new report from the nonprofit Pew Charitable Trusts, based on data from fiscal year 2019, found that state government employee pension systems have been at their best since the start of the Great Recession over a dozen years ago. The report attributes the improvement to a booming stock market and longer-term measures by states, including increasing taxpayer contributions to public pension funds and reducing promised pension benefits, especially for workers. newly hired.

Pew estimated that public pension systems have enough assets to pay more than 80% of their obligations, the first time since 2008 they have been so well funded. South Dakota and Wisconsin had fully funded public pension plans at the end of fiscal 2019, while the plans in Illinois and New Jersey were just under 40%.

Hawaii, whose capitalization ratio is now higher than the data included in the report, was 54.9% in the study.

In Hawaii, lawmakers passed legislation in 2017 to close funding gaps that were created in part due to existing unfunded liabilities, retirees living longer, and lower expected investment returns. These pension reforms included an increase in contributions from state and county employers, namely taxpayers, which are based on a percentage of an employee’s salary. These contributions were phased in over a four-year period for general and police and fire service employees. Employee contributions have remained constant.

The new higher employer rates were to remain constant once established. The higher payments will reduce the shortfall in the years to come.

Williams said the strong performance for the past year will accelerate the time it takes for the fund to meet its financial obligations.

“It’s great to exceed investment forecasts, but what is more important is the impact that higher than expected yields have on the funding of our bonds,” he said. “We recorded 3.5 years of expected future returns in one year. Assuming investment returns hold and contributions hold at current levels, this improves our funding position and reduces the time it takes to amortize our nearly 3-year unfunded liability! “

Williams warned that the investment team cannot be overtaken by the performance of the portfolio over the past financial year.

“I don’t expect a repeat of this year’s spectacular comebacks,” he said. “One could argue that we have advanced the expected returns in the years to come. Assuming we are globally in control of the spread of COVID, I expect solid, but not spectacular, growth in the coming year. I have no doubts that the Fed will do all it can to control inflation. “

Hawaii Pension Fund by Honolulu Star-Advertiser