State pension fund up 7.7%, surpasses target

Hawaii’s largest public pension fund achieved a 7.7 percent investment return for the fiscal year to exceed its annual target and take a step toward narrowing its $12.93 billion shortfall.

The state Employees’ Retirement System, which provides retirement, disability and survivor benefits to more than 135,000 active, retired and vested state, city and county employees, targets an annual 7 percent assumed rate of return to help cover its financial obligations to current and former employees. The fund’s fiscal- year return was boosted by a 12.5 percent increase from its domestic and international equity growth investments, according to a report presented to ERS trustees Monday by Portland, Ore.-based Pension Consulting Alliance LLC.

“We’re really happy with the way this turned out for the fiscal year,” said acting Chief Investment Officer Howard Hodel, who took on additional responsibility with his risk management position after Vijoy Chattergy resigned in mid-February for undisclosed reasons. “We have a target rate of 7 percent and got 7.7 percent, so we exceeded that, as the excess return added over $100 million extra into the portfolio above our target.”

Hodel will relinquish his acting investment officer role when Elizabeth Burton, managing director of the Quantitative Strategies Group at the Maryland State Retirement Agency, takes over Oct. 1.

The ERS portfolio, which gained 0.7 percent in the fiscal fourth quarter, finished the year with $16.46 billion in assets. That was down slightly from the $16.58 billion where it started the April-June period but up from $15.62 billion at the start of the fiscal year.

Hodel said the fourth- quarter drop in assets is entirely due to benefit payments exceeding contri- butions. The state front-loads its contributions at the beginning of the fiscal year, which means that the state essentially completed its contributions for the fiscal year before the fourth quarter began.

“Our benefit payments are about $120 million a month, and we also get contributions from the cities and counties, but the state front-loads its contribution,” Hodel said. “The state contributes around $600 million, and the cities and counties $250 million to $260 million that is paid regularly every month. Members also contribute. So the ERS pays out about $1.5 billion in benefits a year, and we take in less than $1.2 billion, with the state contributing more than half of that and the members and counties about a quarter each.”

The ERS portfolio matched its benchmark return for the year and saw all of its investment categories exceed their benchmarks.

“Overall it was a great fiscal year for corporate earnings growth, particularly in the U.S. (helped by the federal tax cut that took effect in January),” Hodel said. “Seventy-five percent of our assets are in broad growth. We’re very happy with the results, and we also brought down the risk in the portfolio quite a bit this year. The volatility in the portfolio was much lower than two or three years ago.”