State pension system earns $382 million
Quarter ending March 31 saw 4.64% investment gain
The Arkansas Public Employees Retirement System’s investments gained $382 million in value in the quarter that ended March 31 to $10.45 billion, an investment consultant reported Wednesday to the system’s board of trustees.
The system’s investment return was 4.64% last quarter, investment consultant Callan said.
The trustees later tabled considering cutting the system’s target investment return from 7.15% a year to 7% until they hold a special board meeting within about 30 days.
In other action, they voted to terminate domestic stock investment manager Intech, which managed about $402 million for the system as of March 31, and temporarily place the funds in an index fund.
Trustees also authorized the system to issue an expedited request for qualifications for a private equity consultant, and board Chairwoman Candace Franks to decide whether the trustees or the investment and finance subcommittee of trustees will interview the prospective private equity consultants, depending on the number of prospective consultants. The system is aiming to ultimately invest 5% of its investment portfolio in private equity investments.
The public employees retirement system is state government’s second-largest retirement system, with more than $10 billion in investments and more than 80,000 working and retired members. The Arkansas Teacher Retirement System is state government’s largest retirement system with about $20 billion in investments and more than 100,000 working and retired members.
The system’s investments
were valued at $10.48 billion at the end of April, said Carlos Borromeo, the system’s deputy director of investments and finance.
In the quarter that ended March 31, the system’s domestic stock market investments were valued at $3.91 billion after earning an investment return of 5.69% and the system’s international stock market investments were valued at $2.68 billion after obtaining an investment return of 9.15%, according to Callan.
The system’s bond investments were valued at $1.89 billion at the end of last quarter after earning an investment return of 3.34%, and the system’s real assets — including energy, real estate, farmland and timber — were valued at $1.52 billion at the end of last quarter after earning a return of minus 2.56%, Callan reported. The system’s diversified strategies investments were valued at $368.9 million at the end of last quarter after earning an investment return of 1.90%.
In the year that ended March 31, the system’s investment return was minus 5.15% to rank in the top 60% of similar public pension systems, according to Callan.
In the three-year period that ended March 31, the system’s investment return averaged 12.55% a year to rank in the top 19% of similar public pension systems, Callan reported, and the system’s investment return averaged 6.53% a year over the past five years to rank in the top 40% of similar public pension systems.
CUTTING TARGET INVESTMENT RETURN
Mita Drazilov of the system’s actuary, Gabriel, Roeder, Smith & Co., told trustees that Gabriel officials believe the system’s current annual target investment return of 7.15% remains reasonable, but it’s toward the upper end of the range they would consider reasonable.
Given that capital market expectations during the next five years may revert to the expectation levels seen in calendar years 2019-2022, Drazilov said Gabriel officials believe it’s also reasonable for the board of trustees to consider lowering the system’s annual target investment return and presented 6.75% and 7% as options for the trustees to consider.
In November, the system’s board of trustees voted to keep the rate charged to state and local governments at 15.32% of their payroll in fiscal 2025, which starts July 1, 2024.
Drazilov said the system could have to increase the rate charged to state local and governments to 16.51% of employee payroll, starting in fiscal year 2026, if it reduces its annual target rate of investment return from 7.15% to 7%. That would cost state and local governments about $27 million more a year, he said. Fiscal 2026 begins July 1, 2025.
Instead of increasing the rate charged to state and local governments, another option for the trustees would be to extend from 14 to 18 years the projected period for paying off the system’s unfunded liabilities if the system reduces its annual target investment return from 7.15% to 7%.
In fiscal 2022, state and local governments paid $320.8 million into the system, while the system’s working members paid $81.2 million into the system, according to a system report. The system’s working members, who contribute into the system, paid 5% of their salary into the system in fiscal 2022 and started paying 5.25% of their salary into the system, effective July 1, 2022, under Act 365 of 2021. Act 365 of 2021 will increase the percentage of salary that a working member, who pays into the system, contributes from the former 5% rate by 0.25% a year over an eightyear period until the rate reaches 7% of salary.
Trustee Daryl Bassett, secretary of the state Department of Labor and Licensing, said reducing the system’s annual target rate of return to 7% would put the system closer to the expectations of capital markets, and the trustees’ goal has been to reduce the system’s unfunded liabilities.
Trustee Barry Moehring, who is the Benton County judge, said “raising the contribution rate is going be tough on a lot of our folks.”
Before the trustees tabled consideration of reducing the annual target investment return, trustee Jason Brady said he wants to give them more time to weigh their options and to consult trustee Larry Walther, who is secretary of the state Department of Finance and Administration, and the state’s chief economic forecaster, John Shelnutt, before the trustees take action. Alan McVey, the finance department’s chief of staff, represented Walther at the trustees’ meeting Wednesday.
As of June 30, the system included 42,771 working members with an average annual salary of $45,020, according to Gabriel, Roeder, Smith & Co.
The system also included 41,390 retirees, including those in the deferred retirement plan, with total annual benefits of $671.2 million or an average of about $16,216 a year, as of June 30, according to Gabriel. There were 1,426 deferred retirement participants with a total payroll of $93 million or about $65,217 a year on June 30.
As of June 30, the system’s unfunded liabilities totaled about $2 billion and the system’s funding ratio is about 84%, according to Gabriel. The projected period for the system to pay off its unfunded liabilities is 14 years on June 30, Gabriel reported. Actuaries often compare the projected period for paying off unfunded liabilities to a mortgage on a home.