STUMP » Articles » South Carolina Pensions: Asset Trends » 14 February 2017, 05:58

As mentioned, I’m working my way through Theodore Konshak’s posts on South Carolina pensions, but before I get into his particular findings, I’m going to do a high-level overview of what South Carolina public pension trends have been.

Within the Public Plan Database, there are 2 public pensions represented: South Carolina Police and South Carolina RS.

The total # of participants for the Police plan is 57K.

The total # of participants for SCRS is 486K.

I’m going to concentrate on the larger plan. Looking at the description, it seems that both state and local employees are in SCRS, including teachers. That’s why it’s so large.

Doing a lazy google, I see that the population of SC is approximately 10x the number of participants in the SCRS. 10% of the state population. Hmmm. I will come back to that another time.

ASSET GROWTH TREND

Most of the graphs below come straight from the Public Plans Database page for SCRS.

Here are the net (market value) assets:

We’ve seen this pattern many times before — bit hit from the financial crisis/recession, and some recovery since then. But not quite as fast-growing as the equity market as a whole.

INVESTMENT RETURNS

So what have the returns looked like?

Here is the PPD graph:

Now the graph itself shows the one-year returns falling short of, and exceeding, the assumed return on assets used in valuation (the red line). They also show the snapshot-in-time of the 5-year and 10-year average returns for SCRS compared to other public pensions. Not that great in terms of performance – missing others by over a full percentage point, which really adds up over the years.

But I wasn’t happy with that graph. The one-year returns are fairly meaningless for such a long-term liability, right? Let’s graph those 5-year and 10-year averages over time:

The black line is the assumed rate of return on assets — interesting it started out at the “conservative” level of 7.2%, got bumped up to 8% in 2008 (now why might that be….), and then came back down to 7.5% in 2011.

Hmmm.

The 5-year return is still fairly short-term for a pension plan, but that 10-year return was under the assumed rate of return even before the financial crisis and recession.

I don’t really want to hear about how it was the fault of 2008 that pension funds underperform. Many were underperforming a too-high target well before 2008.

ASSET ALLOCATION

Here is the ugly part. Back in 2014, I wrote about South Carolina’s very high allocation to alternative assets. And I was using info from 2013.

No state has rushed into the loosely regulated investment pools as South Carolina has. As of June 30, [2013] the pension had invested 56 percent of its portfolio with firms including Goldman Sachs Group Inc. (GS), Bridgewater Associates LP and Apollo Global Management LLC. (APO)

For the most recent snapshot from the PPD, and the execrable pie charts, here ya go:

Check out that yellow wedge. It’s huge.

But let’s go to the historical graph:

Again, note the key year of 2008. That’s fiscal year 2008, which ended mid-2009. So that allocation choice was made after the bottom dropped out of the market.

So that yellow line (alternative assets) shot up while blue line (equities) came down.

INVESTMENT POLICY

I decided to take a look at the investment reports from the state org tasked with managing pension assets.

I will start with the oldest on this page, from 2012-2013. The investment allocation policy is on numbered page 10.

Sorry if that’s too small – I will pull out the key numbers: 30% equities, 25% fixed income, 6% real estate/commodities, 32% in alternatives, and a 7% floating around for cash/short duration or just “slack”.

Now these are the targets, not the actuals. But this is what should be driving actual investment behavior.

Let’s look at the most recent policy published.

Interesting change in presentation. Kind of difficult to make head-to-head comparisons, but I will try to match like to like.

Public equity:
2013: 30%
2016: 33.6%

Fixed income (public):
2013: 25%
2016: 22.9%

Real estate/commodities:
2013: 6%
2016: 8%

Private markets (debt & equity)
2013: 17%
2016: 14.5%

Opportunistic:
2013: 15%
2016: 20%

The “alternatives” we’ve been talking about have been private markets and “opportunistic” (aka hedge funds/global asset allocation).

In 2013, that totalled 32%; in the 2016 policy, it’s 34.5%. I’m not seeing that there has been much of a change in investment policy at all, even though these alternative allocations seem to be underperforming not only the target return on assets, but also underperforming the other public pension funds out there.

Now, I want to remark about the graphs I have vs. what I’m seeing in these investment reports — I think part of the issue is that the Public Plans Database is marking down the real estate holdings at 0, and it’s not. That said, even if I remove the real estate holdings from the PPD data, the allocation to alternatives for South Carolina is still very high compared to other pension plans out there.

Before I’m even seeing what’s happening on the liability side, the asset side is not looking good.

ADDITIONAL: NEW CIO

While tweeting out this post, I came across this piece of news from September: South Carolina taps new CIO

Geoffrey Berg was named chief investment officer of the South Carolina Retirement System Investment Commission, which oversees the investment of the $28 billion South Carolina Retirement Systems, Columbia.

Mr. Berg was selected by the RSIC at a meeting on Thursday.

Mr. Berg, who joined the RSIC in 2008, has served as acting CIO since September 2015 after Hershel Harper Jr. announced his departure to become CIO of the $60 billion UAW Retiree Medical Benefits Trust, Detroit.

Before assuming interim CIO duties, Mr. Berg served as the RSIC’s head of public markets.

Rebecca Gunnlaugsson, chairwoman of the RSIC, expressed appreciation for Mr. Berg’s performance as interim CIO, noting “Geoff really stepped into the leadership role.”

She also noted the commission’s pleasure that the internal candidate was the best among candidates presented by executive recruiter Korn Ferry after a nationwide search.

Hmmm. Also, maybe nobody else wanted to do it. You can never tell from such announcements.

ADDITIONAL ADDITIONAL: MORE ALTERNATIVES

And then I found this from a year ago: South Carolina Retirement System looks to add ILS asset class

The South Carolina Retirement System Investment Commission will look to add an allocation to the insurance and reinsurance linked (ILS) asset class as it makes significant changes to its portfolio mix and targets more complex and diversifying investments.

According to Pensions & Investments magazine, the Commission discussed changes to the $28.2 billion South Carolina Retirement Systems asset allocation mix at a board meeting yesterday. The System manages assets on behalf of public employee pension funds for the state and is seeking to become more diversified and to target newer opportunities, such as ILS.

The ILS allocation will be made within an “other opportunistic” investment bracket, which will also see the pension fund asset manager allocate to other “complex” asset classes. The “other opportunistic” bracket will have 2% of assets allocated to it, which amounts to roughly $560m.

I just want to indicate that much of ILS issuance out there is what are called “cat bonds”, which has nothing to do with felines, and has everything to do with hurricanes and earthquakes.

Good thing the state of South Carolina doesn’t have exposure to such catastrophes outside their portfolio… (I like how they mention no Cat 5 hurricanes have hit them. It doesn’t take a Cat 5 to wipe your beach house out to sea.)

Compilation of South Carolina posts