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Hawaii’s largest public pension fund, seeking to make up an $8.58 billion shortfall, posted a 1.7 percent investment gain last quarter to fall further behind its targeted investment return rate for the year.
Halfway through this fiscal year, the state Employees’ Retirement System fund was up just 0.6 percent, according to a report presented to ERS trustees Monday by Portland, Ore.-based Pension Consulting Alliance Inc.
At its current pace, the fund will miss its targeted annual return of 7.75 percent, which could jeopardize the system’s ability to pay down its unfunded liability within the 26-year period ending June 30, 2040. In December a report by actuary Gabriel Roeder Smith & Co. showed the ERS fund had only 61.4 percent of what it needed to pay all the pensions promised as of June 30, and based on current assumptions wouldn’t be 100 percent funded until fiscal 2040.
The ERS, which provides retirement, disability and survivor benefits to 118,466 active, retired and inactive state and county employees, targets a 7.75 percent long-term return rate to help fulfill its pension obligations. Pension reforms — including cutting benefits for new employees and increasing contributions — were implemented over the past four years to bring down the unfunded liability.
Given the fluctuation of the markets, ERS Chief Investment Officer Vijoy "Paul" Chattergy stressed Monday that the assumed rate of return is meant to be achieved over the long term, as it’s not practical to hit that average every year. Over the last 12 months, the ERS fund was up 6.6 percent, but its three- and five-year returns were up an average of 12.5 percent and 9.4 percent, respectively.
"It’s been an extremely challenging six months," Chattergy said. "It puts us in a tough position to make our required return over the next six months. We’ll need a couple strong quarters to do that. But given the volatility and some of the market dislocation, including the sell-off of oil, the portfolio kind of held its ground, and we’re pleased with that."
The value of the fund increased by $157.5 million over the last three months of the year to $14.08 billion in assets as of Dec. 31, just shy of the all-time high of $14.12 billion reached June 30.
The assumed rate of return will be slightly easier to hit in future years. The ERS board in September lowered its target to 7.65 percent for the fiscal year ending June 30, 2016; 7.55 percent for fiscal year ending June 30, 2017; and 7.5 percent beginning July 1, 2017, all the way out to June 30, 2040.
The ERS also began phasing in new investment guidelines in October so that future investments will be based on risk rather than asset class. The new categories will now be based on growth risk (equities), inflation risk (securities that increase in value when inflation goes up) and interest rate risk (treasuries and bonds).
The ERS also is searching for a new executive director. Wes Machida was appointed by Gov. David Ige to take over as the new state director of finance. Deputy Executive Director Kanoe Margol took over as interim executive director Dec. 27. Chattergy said the ERS hopes to complete the search process in the next four to six months.
Following a 1.1 percent drop in the July-September period — its first losing quarter in two years — the ERS fund rebounded over the final three months of 2014 on the strength of a 4.9 percent gain from its domestic equity holdings. Total fixed income, which includes domestic and international holdings, rose 1.8 percent, but international equities fell 3 percent.
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