State retirees see loss on investments

LITTLE ROCK — The Arkansas Public Employees Retirement System’s investments dropped in value by about $500 million last quarter to $9.59 billion amid volatile investment markets, an investment consultant told the system’s Board of Trustees on Wednesday.

The system’s investment return for the quarter that ended Sept. 30 was minus 4.41%, said Brianne Weymouth of the San Francisco-based Callan investment consulting firm. That ranked in the bottom 41% among similar public pension systems in the nation.

However, the value of the public employees retirement system’s investments has rebounded since Sept. 30 to about $10.14 billion, said Carlos Borromeo, the system’s chief investment officer.

The public employees retirement system is the state government’s second-largest retirement system, with more than 80,000 working and retired members.

On Wednesday, 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 June 1, 2024. They also directed Callan officials to propose a pacing schedule for the system to begin making private equity investments over the next several years.

In August, trustees decided not to reduce the rate it charges state and local governments to 15.17% of payroll in fiscal 2025 as the system’s working members, who contribute into the system, begin paying higher percentages of their salary into the system over the next several years.

In fiscal 2022, which ended June 30, the system’s state and local government employers 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 paid 5% of their salary into the system in fiscal 2022 and began paying 5.25% of their salary into the system effective July 1, under Act 365 of 2021. Act 365 will increase the percentage of salary that a member pays from the former 5% rate by 0.25% a year over an eight-year period until the rate reaches 7% of salary.

As of June 30, the system included 42,771 working members with an average annual salary of $45,020, a 7.8% increase over June 30, 2021, the system’s actuarial firm of Gabriel, Roeder, Smith & Co. reported.

The system 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 are 1,426 deferred retirement plan members with a total payroll of $ 93 million, or about $ 65,217 a year, as of June 30.

INVESTMENT VALUES

According to Callan, the system’s investment performance in the quarter that ended Sept. 30 included:

• A $200 million decline in the value of the system’s domestic stock market investments to $3.52 billion.

• A $223 million drop in the value of the system’s international stock market investments to $2.13 billion.

• An $85 million decline in the value of the system’s domestic bond investments to $1.79 billion.

• A $32 million drop in the value of the system’s real assets — real estate, timber, energy and farmland investments — to $1.55 billion.

• A $ 10 million slip in the of the system’s diversified strategy investments to $482 million.

Last quarter’s investment losses came on the heels of the system’s investments falling in value by $1.5 billion to about $10 billion in fiscal 2022 amid declining stock and bond markets.

The system’s overall investment return in fiscal 2022 was minus 10.54% and ranked in the bottom 32% among similar public retirement systems across the nation, Callan reported to the board in August. The median investment return among the system’s peers across the nation in fiscal 2022 was minus 9.35%, according to Callan.

The $1.5 billion drop in the value of the system’s investments in fiscal 2022 came after the system’s investments benefited from robust markets and increased by $2.5 billion in value to $11.6 billion in fiscal 2021, which ended June 30, 2021. The system’s investment return in fiscal 2021 was 31.49%.

The system’s current target investment return is 7.15%.

Over the last five years the system’s investment return has averaged 5.28% a year to rank in the top 36% of similar public pension systems, according to Callan.

Over the last 10 years, the system’s investment return has averaged 7.36% a year to rank it in the top 27% of similar public pension systems.

The trustees on Wednesday opted to direct Callan officials to develop a pacing schedule for how much the system would allocate during each of the next several years for private equity investments — putting the system on track to eventually invest 5% of its investments in private equity investments.

Private equity investments are long-term private unlisted investments in operating companies, typically accessed through limited partnerships, and have the potential to outperform publicly traded investments in stocks and bonds, John Jackson of Callan told the system’s Board of Trustees.

An allocation of 5% to 10% of the system’s investments for private equity is supported by the system’s liquidity profile, according to Callan’s written report to the system’s Board of Trustees.

Trustee Jason Brady said he is a strong proponent of the public employees retirement system’s beginning to invest in private equity, based on his experience with private equity investments made by the Arkansas Teacher Retirement System.

Trustee Andrea Lea, who is the state’s auditor, said it makes sense for the public employees retirement system to invest in private equity.

She said she has served on the board for eight years, and she questioned why this is the first time that the system’s board is considering private equity investments.

Weymouth said the board didn’t express an interest in pursuing private equity investments in 2019.

She said Callan presented the trustees with options for the system in invest in private equity and for its investment portfolio to keep the same overall investment risk.

Under one of these options to place 5% of the system’s investments in private equity, the system would increase its target for total investments in the domestic stock market from 33% to 35% and increase its target for fixed income investments from 18% to 20%. It would also reduce its target in the international stock market from 24% to 19%; ax its 4% target for convertible bonds; and keep its 16% target for real assets and its 5% target for diversified strategies.

Under the system’s asset valuation method, market gains and losses are phased in and recognized over a fouryear period, with the aim of avoiding swings in the employer rate charged to state and local governments, according to the system’s actuarial firm of Gabriel, Roeder, Smith & Co.

As of June 30, the system’s actuarial accrued liabilities totaled $12.23 billion and an actuarial value of the system’s assets totaled $10.22 billion, leaving unfunded liabilities of about $2 billion, and the system’s funding ratio is 84%, according to Gabriel. The system had the same funding ratio on June 30, 2021.

The projected period for the system to pay off its unfunded liabilities is 14 years on June 30, down from 16 years on June 30, 2021. Actuaries often compare the projected payoff period for unfunded liabilities to a mortgage on a house.