Retirement gains logged for teachers
System’s investments rise $1.2B in value in quarter
Arkansas Teacher Retirement System’s investments increased by about $1.2 billion in value during the last quarter to $21.2 billion as investment markets rebounded during this period, an investment consultant told the system’s board of directors on Monday.
The teacher retirement system earned an investment return of 7.1% in the quarter that ended Dec. 31, which ranked in the top 41% of its peer public retirement systems across the nation, said Katie Comstock of Aon Hewitt Investment Consulting.
During their meeting Monday, the trustees voted to increase the system’s target asset allocation to bond investments and reduce the system’s target allocation to stock market investments in a move aimed at taking advantage of higher interest rates and slightly reducing financial risk for the system.
The teacher retirement system is state government’s largest retirement system with more than 100,000 working and retired members.
During the first six months of fiscal year 2024, the system posted an investment return of 4.8%, Comstock said. Fiscal year 2024 started July 1, 2023, and ends June 30, 2024. The system’s target investment return is 7.25% a year.
She said the system’s investment gains during the quarter that ended Dec. 31 more than made up for the system’s investment losses during the first quarter of fiscal year 2024 that ended Sept. 30. During the first quarter of fiscal year 2024, the system’s investments dropped in value by about $745 million to $19.9 billion, Aon Hewitt Investment Consulting said in a report to the the system’s board of trustees in December.
The system’s trustees on Monday voted to reduce its target asset allocation for stock market investments from 53% to 48% and increase its target asset allocation for bond investments from 15% to 20%. The system’s other target asset allocations are 15% in real assets, including real estate, timber, agriculture and infrastructure investments; 12% in private equity; and 5% in opportunistic and alternative investments.
The trustees’ approval of
the change in the system’s asset allocation targets on Monday will mean the transition of about $1 billion of the system’s assets from the stock market to the bond markets, officials for Aon Hewitt Investment Consulting said.
Trustees voted Monday to invest up to $800 million with bond investment manager Baird Advisors of Milwaukee, Wisc., in the company’s Core Plus Bond strategy. The other approximately $250 million will be placed in a bond index fund.
“The main driver of this [increased allocation to bond investments] is that the return that you get from fixed income has improved quite a bit,” said P.J. Kelly of Aon Hewitt Investment Consulting.
Several years ago, trustees reduced its target asset allocation for bond investments from 20% to 15% to reflect the fact the system was “able to sustain a higher level of risk and at that time you were rewarded for taking that risk” in the stock market, he said.
“In the last few years, that risk-reward trade-off isn’t nearly as attractive as it was,” Kelly said. “So in other words, you are getting much more return from fixed income.”
In the event of a potential investment market dislocation, the system’s increased bond investment allocation “kind of gives you a little bit more dry powder … in a safe area that could very well perform well in an equity downturn or some other kind of disruption of the financial markets,” he told trustees.
Increasing the system’s investment allocation in bonds and reducing the investments in stock markets will reduce the system’s expected rate of investment return from 7.76% a year to 7.66% a year, but that is still more than the system’s target investment return of 7.25%, Kelly said.
System Executive Director Mark White said he recommended the increase in the system’s asset allocation to bonds and reduction in the asset allocation to stocks because there is now a much different interest rate environment with higher interest rates, and while the stock market is doing well, it makes sense to reduce financial risk to the system because there is a lot of uncertainty, along with geopolitical tensions and the presidential election.
In other action Monday, trustees certified the election of Keri Hamilton and Kelsey Bailey to the board of trustees to terms starting July 1, 2024 and expiring June 30, 2030. Hamilton ran unopposed for Position 4 on the board — a certified member in the 4th congressional district — and Bailey ran unopposed for Position 7 on the board, who is employed in a position not requiring state licensure.
In December, trustees appointed Hamilton, a Magnolia High School English teacher from Stamps, to fill what was the Position 4 vacancy on the system’s board of trustees. She fills the vacancy on the board that resulted from the retirement of former trustee Kathy Clayton of Malvern, who had served on the board from July 1, 2013, until Nov. 1.
In September, trustees appointed Bailey, chief deputy finance and operations officer for the Little Rock School District, to what was the Position 7 vacancy on the board created by the departure of Kelly Davis of Fort Smith, who retired in Arkansas effective July 1.
The board of trustees includes 11 elected members, and the state treasurer, state auditor, bank commissioner and secretary of the state Department of Education.
On June 30, the system’s unfunded liabilities totaled $4.5 billion based on total liabilities of $25.5 billion and a funding value of assets of $21 billion, so the system is 82% funded, which is similar to June 30, 2022, according to system actuary Gabriel Roeder, Smith & Co.
The system’s projected payoff period for its unfunded liabilities is 26 years as of June 30, Gabriel reported. Actuaries compare the projected payoff period for unfunded liabilities to a mortgage on a home.
The system’s employers contribute 15% of their payroll into the system, and the system’s working members who pay into the system contribute 7% of their salary. The system’s employers contributed $503.4 million to the system and the system’s members contributed $188.6 million to the system in fiscal 2023, according to White.
The trustees voted Monday to set the employer contribution rate at 15% of payroll and the employee contribution rate at 7% of salary during fiscal year 2025 that starts July 1, 2024.
On June 30, the teacher retirement system included 68,249 working members who are not in the system’s deferred retirement plan and 54,646 retired members, according to Gabriel Roeder, Smith & Co. As of June 30, the system’s number of deferred retirement plan members totaled 3,138.
On June 30, the system’s 68,249 working members, who are not in the deferred retirement plan, had an average age of 44 years old, average service of 10.1 years and an average salary of $45,897 a year, according to the actuary.
On June 30, the system’s 3,138 deferred retirement plan members had an average salary of $70,134 a year, the actuary reported
The system’s 54,646 retired members had an average retirement benefit of $24,643 a year on June 30, according to Gabriel, Roeder, Smith & Co.
LAST QUARTER
According to Aon Hewitt Investment Consulting, the system’s investments reached the following values as of Dec. 31 and earned the following investment returns during the last quarter:
■ Stock market investments of $11.6 billion, an investment return of 11.7%.
■ Bond investments of $2.9 billion, an investment return of 5.1%.
■ Private equity investments of $2.9 billion, an investment return of 0.8%.
■ Real estate investments of $1.5 billion, an investment return of minus-1.8%.
■ Opportunistic/alternative investments of $1 billion, an investment return of 3.2%.
■ Infrastructure investments of $479 million, an investment return of 0.4%.
■ Timber investments of $339 million, an investment return of 0.3%.
■ Agriculture investments of %243 million, an investment return of 0.1%.
The system’s investment return averaged 9.7% a year during the past five years to rank among the top 3% of the system’s peer public pension systems across the nation, and averaged 8.1% a year over the past 10 years to rank in the top 3% of the system’s peer public pension systems, Comstock said.