The next decade for Public Employees Retirement Association

Bruce Krasnow’s recent article in The Santa Fe New Mexican (“New Mexico holds trove in pensions, investments,” Jan. 2) hit the nail on the head when it comes to offering important commentary on the state’s investment funds, including the Public Employees Retirement Association or PERA.

We at PERA agree with Mr. Krasnow’s key points on fees and managing risk in “volatile” equities. Indeed, a central part of PERA’s investment approach is predicated on prudently managing costs and fees and ensuring we have a risk-focused and diversified investment portfolio.

Many will remember that in 2013 the Legislature, the board and others worked together on pension reform to meet the difficulties presented by the Great Recession of 2008. Despite adjustments from pension reform, the PERA benefit remains one of the best in the country and generates more than $1 billion to New Mexico’s economy annually.

PERA recently completed its annual valuation of the health of the system, which indicated that, if we meet our expectations, we would be able to pay 88 percent of our liabilities over a 30-year period. This is a good, solid position, but we have more work to do to get to our goal of 100 percent funding, and to ensure we more sustainably weather future economic storms.

Over the past few years, PERA has moved toward a strategy to more efficiently manage total risk and better balance the amount of risk coming from equities. This approach has resulted in PERA having lower overall risk and a lower amount of equities than most public pension peers.

PERA is a long-term investor, and the goal is to have steady returns over time that match our required actuarial hurdle of 7.25 percent and help moderate the impact of market downturns which, as we saw in 2008 can be very detrimental to the health of the pension system. The downside of this strategy is when the market roars, like in 2017, performance may lag others with more risk in their portfolio even though the system still produces double-digit results. But at PERA, our strategy isn’t to always hit home runs but instead to be steady and thoughtful investors.

Moreover, PERA believes managing costs and fees efficiently and holding outside managers to account is an essential component for good stewardship of the trust fund, particularly with active management and value-added strategies. Over the past few years, PERA has reduced costs and manager fees paid to outside managers by over 23 percent, saving $10 million annually.

Recently, some have argued that public pension plans like PERA should adopt a fully passive and indexed approach across the fund and avoid altogether active management and value-added strategies. For the sake of argument, let’s take the advice of the detractors and evaluate the results.

Based on current market expectations, a full indexed approach at the same level of risk in our current portfolio would earn nearly 1 percent less in return over the long term. Over the next 10 years, that could result in a loss of $1.25 billion to $1.5 billion to PERA, excluding the effect of compounding.

Meeting the challenges of the next 10 years won’t be as simple as costcutting and investing solely in passive strategies. However, we believe that PERA’s continued focus on risk balance, while considering other strategies that produce value add, will help to ensure a healthy and sustainable pension benefit for the state and our 90,000 members for many years to come.