Public Pensions Earnings Season: How are the Assets Doing?
by meep
In yesterday’s post, I talked about how discount rates work, and the primary thing to consider is this key item:
The higher the discount rate, the less costly pensions appear to be.
The theory is that the discount rate is supposed to reflect the expected return on assets, but… well, I will get to the theory another time.
For right now, let’s actually look at asset performance. Or rather, reporting on the same.
A lot of pension funds have a financial year that runs from July 1, and given how notable teachers pensions are to public pensions, that makes sense. I do not have enough experience to say the timing of retirement for non-teachers. I can see summer being very popular.
So there have been a variety of news stories giving the asset performance information for pension funds.
HOW ARE THE ASSETS DOING?
New Jersey’s pension investments are still making money, but the gains appear to be in sharp decline this year, state officials said Wednesday.
Governor Christie’s administration has helped delay a looming crisis in the pension system by playing the global markets over the last five years, drumming up more than $35 billion just by picking winning investments.
But the solid pace of growth for the pension system’s $79 billion portfolio will taper off in coming years, state officials said, opening a new problem for the retirement funds at a time when they already face a series of funding troubles and a political logjam.
…..
But the heyday may be ending. New Jersey is not likely to hit its target rate of 7.9 percent investment gains for the 2015 fiscal year, which ended last month, Byrne said.Pension investments had posted gains of only 4.58 percent through May, a month before the end of the fiscal year, Byrne said. A final report for the entire year will be released in September, officials said.
The state is on track for a much lower rate of growth compared with the previous fiscal year. In May 2014, for example, returns of 14.3 percent had come in by that point in the fiscal year — far above the 4.58 percent seen this year. In May 2013, growth was at 13.3 percent.
hode Island’s state employee pension fund made 2.22 percent in investment returns for the budget year that ended June 30, state General Treasurer Seth Magaziner announced Tuesday.
That was below the pension fund’s internal benchmarks and substantially below the 7.5-percent assumed rate of return set for the pension fund, but Magaziner applauded what he said were good returns in a particularly challenging year for investors.
“It was a very difficult year for the markets overall,” Magaziner told The Providence Journal Tuesday evening. After other state pension funds report their performance, “I suspect that we’ll be close to the median when those numbers come out.”
As of June 30, the state’s pension fund had a market value of $7.97 billion.
We’ve got the two major funds in California who have their own disappointing performance to report.
The California Public Employees’ Retirement System fell short of its annual return target in fiscal 2015, as public pensions around the U.S. struggle through one of their worst years since the financial crisis.
The $301 billion pension fund, the largest in the U.S. by assets and known as Calpers, said it earned 2.4% on its investments for the fiscal year ended June 30 because of a slump in the markets and weak private-equity returns. The performance was just shy of its internal goal of 2.5%. It was Calpers’ poorest year since 2012, when it earned 1%, and down from 18.4% in 2014.
Internal goal? It means they make up a benchmark to compare against — the benchmark, though, is created of the asset type allocation they had picked, and the deviation from that benchmark indicates the investment managers underperformed the broad market.
The benchmark is not based on what the liabilities are doing. It obviously isn’t being measured against the discount rate/assumed rate of return.
The California Teachers fund Calstrs also did poorly:
The $191.4 billion California State Teachers‘ Retirement System, West Sacramento, had a 4.8% rate of return for the fiscal year ended June 30 — higher than the 4.6% custom policy benchmark but 270 basis points below 7.5% its assumed rate of return, according to preliminary investment results released Friday.
One more for good measure, Nevada:
CARSON CITY — The Nevada Public Employees Retirement System has reported a preliminary 4.1 percent rate of return on its investments in the 2015 fiscal year that ended June 30, bringing the plan’s total assets to $34.4 billion.
The return comes off a 17.6 percent return in fiscal year 2014, the plan’s fourth best in its 30-year history. PERS investments saw a 12.4 percent gain in 2013, 2.9 percent in 2012 and a record 21 percent in 2011.
PERS Investment Officer Steve Edmundson said agency staff was not surprised at the moderation in the pace of investment gains last year.
“The fund is up 11.4 percent annualized for the five-year period ended June and PERS’ annualized return since inception remains above 9 percent,” he said. “We continue to be pleased with the way the investment portfolio has performed in different market environments.”
I am not going to do any math in today’s post, but I will show why simply taking an average of these annual returns is misleading in a future post.
But these returns are being compared against either their “custom benchmark” or prior years returns.
Why not compare them against the market?
MARKET RETURN COMPARISONS AND ASSET ALLOCATION
A few days ago I went to Morningstar to look at S&P 500 returns, and the 1-year return then was 8.91%, and as of today I see the 1-year return is 7.96%. Still pretty close to each other.
I’m not bothering to do the calculation myself from June 30, 2014, to June 30, 2015 — the values are still going to be about 8 to 9%.
But remember that “custom benchmarks”. Let’s just take a look at Calpers using the Public Plans Database. They don’t have the 2014 data in yet, but let’s look at the asset allocation.
Look at that yellow line. The alternative assets….coming to match the amount in cash and bonds.
I don’t feel good about that.
So how has that performed?
That’s not that good, either.
This is what Calpers officially had to say about these results:
The California Public Employees’ Retirement System (CalPERS) today reported a preliminary 2.4 percent net return on investments for the 12-months that ended June 30, 2015. CalPERS assets at the end of the fiscal year stood at more than $301 billion.
Over the past three and five years, the Fund has earned returns of 10.9 and 10.7 percent, respectively. Both longer term performance figures exceed the Fund’s assumed investment return of 7.5 percent, and are more appropriate indicators of the overall health of the investment portfolio. Importantly, the three- and five-year returns exceeded policy benchmarks by 59 and 34 basis points, respectively. A basis point is one one-hundredth of a percentage point.
“It’s important to remember that CalPERS is a long-term investor, and our focus is the success and sustainability of our system over multiple generations,” said Henry Jones, Chair of CalPERS Investment Committee.
It marks the first time since 2007 that the CalPERS portfolio has performed better than the benchmarks for the three- and five-year time periods, and is an important milestone for the System and its Investment Office. CalPERS 20-year investment return stands at 7.76 percent.
When the funds underperform, we often hear “we’re long-term investors”.
The Public Plans database only goes back a little more than a decade, so only gives a 10-year annualized return, which isn’t that different from the 20-year annualized return, so that’s nice to check.
But let us compare this against what fund managers said last year.
WHAT DID THEY SAY LAST YEAR? AND THE YEAR BEFORE THAT?
I’m going to pick on Calpers, because they have a nicely organized press release page. (Thanks, guys!)
To be really simple, I’m going to link to the investment result press release for each year, with the title of the press release. I’m going in reverse chronological order. Let me know if you see what changed.
- CalPERS Reports Preliminary 2014-15 Fiscal Year Investment Returns
- CalPERS Reports Preliminary 2013-14 Fiscal Year Performance of 18.4 Percent
- CalPERS Reports Preliminary 2012-13 Fiscal Year Performance of 12.5 Percent
- CalPERS Reports Preliminary 2011-12 Fiscal Year Performance of 1 Percent
Okay, I thought I was onto something, but maybe they just changed PR people. I am not going to start searching for 2011 and prior press releases.
Let’s take a look into how they wrote the press release each year, first starting with the July 2012 announcement:
The California Public Employees’ Retirement System (CalPERS) today reported a 1 percent return on investments for the 12 months that ended June 30, 2012, falling short of its benchmark that returned 1.7 percent. CalPERS assets at the end of the fiscal year stood at more than $233 billion.
….
CalPERS 1 percent return is below the Fund’s discount rate of 7.5 percent, a long-term hurdle lowered recently in response to a steady decline in inflation and as part of CalPERS routine evaluation of economic assumptions. CalPERS 20-year investment return is 7.7 percent.
The California Public Employees’ Retirement System (CalPERS) today reported a 12.5 percent return on investments for the 12 months that ended June 30, 2013, outperforming its benchmark by 1.5 percentage points. CalPERS assets at the end of the fiscal year stood at more than $257.8 billion.
….
CalPERS 12.5 percent return is well above the Fund’s discount rate of 7.5 percent, the long-term return required to meet current and future obligations. CalPERS 20-year investment return is 7.6 percent, while its return since 1988 is 8.5 percent.
Hmmmm. Interesting addition.
The California Public Employees’ Retirement System (CalPERS) today reported a preliminary 18.4 percent return on investments for the 12 months that ended June 30, 2014. CalPERS assets at the end of the fiscal year stood at more than $300 billion.
The gain marks the fourth double-digit return the Pension Fund has earned in the last five years. [except 2011-2012, I suppose]
…..
CalPERS 18.4 percent return is well above the Fund’s discount rate of 7.5 percent, the long-term return required to meet current and future obligations. CalPERS 20-year investment return is 8.5 percent, while its return since 1988 is 8.9 percent.
And for a reminder, Here is the July 2015 announcement:
The California Public Employees’ Retirement System (CalPERS) today reported a preliminary 2.4 percent net return on investments for the 12-months that ended June 30, 2015. CalPERS assets at the end of the fiscal year stood at more than $301 billion.
Over the past three and five years, the Fund has earned returns of 10.9 and 10.7 percent, respectively. Both longer term performance figures exceed the Fund’s assumed investment return of 7.5 percent, and are more appropriate indicators of the overall health of the investment portfolio. Importantly, the three- and five-year returns exceeded policy benchmarks by 59 and 34 basis points, respectively. A basis point is one one-hundredth of a percentage point.
“It’s important to remember that CalPERS is a long-term investor, and our focus is the success and sustainability of our system over multiple generations,” said Henry Jones, Chair of CalPERS Investment Committee.
It marks the first time since 2007 that the CalPERS portfolio has performed better than the benchmarks for the three- and five-year time periods, and is an important milestone for the System and its Investment Office. CalPERS 20-year investment return stands at 7.76 percent.
Okay, there are all sorts of numbers being thrown around in the most recent announcement, and the basis for comparison keeps changing.
What was the importance of return since 1988? I think they’re measuring from a prior low point.
The 3-year and 5-year benchmarks are more about the performance of the investment managers, given the constraints of asset allocation they work under. Yay for them. But it has nothing to do with whether the asset performance is in line with what is needed long-term.
Looking at the specific breakout, though, I am concerned. Some of the double-digit returns are on asset classes that can be hard to value. They look great, until all of a sudden you find out the actual market value, when you actually had to sell to get cash, was very different from what is being said.
One likes to see what component of the investment return is a change in “fair value” (i.e., what you think the asset is worth if you sold it) and what component is from actual realized capital gains or from actual cash flows thrown off from the investments (such as rent, lease payments, coupons from bonds). Then one can see how “real” the investment return is.
HOW LONG TERM ARE THEY THINKING?
As I said, I am not saying that Calpers is particularly egregious in their PR game with regards to what they emphasize and what rulers they put up in front of the public. It’s just that theirs was the easiest for me to get at.And, after all, Calpers is the largest non-federal pension fund in the U.S.
(An aside about other states’ sites I checked out: New Jersey’s site seems to have been designed in 1998,, and Illinois’s report won’t be out until October.)
I’m not linking to the other press releases I have found over history, but there is a theme of shifting the basis for comparison. And that comparison shifting doesn’t really bode well for saying one is really thinking long-term.
Especially if one picks a prior low point to compare against. (Since 1988, Calpers? Really?)
To put in a little praise, it does seem that Calstrs puts up the same time horizon comparisons each year. They give the 3-, 5-, 10-, and 20-year returns, as well as show what their benchmark indices were. I even dipped into the archive and found out they’ve been doing this since 2011. Way to go!
I will note I could find no press release on investment performance for Calstrs in 2009. I wonder why.
Here is my point: if you keep changing what numbers we’re looking at, I wonder just how long-term the management of the fund is.
And why I should trust the choice of discount rate.
But that’s for another (or many other) posts.
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