Hawaii’s largest public pension fund eked out a small increase in its fiscal third quarter as assets climbed to an all-time high of $13.7 billion.
The state Employees’ Retirement System posted a 1.5 percent investment gain in the January-March period to boost its nine-month fiscal-year return to 12.5 percent, according to a report presented to ERS trustees Tuesday by Portland, Ore.-based Pension Consulting Alliance Inc., which advises the ERS trustees on investments. The fund, which provides retirement, disability and survivor benefits to 115,350 active, retired and inactive state and county employees, targets an annual 7.75 percent fiscal-year return to help fulfill its commitment.
Despite the record asset total, the fund is still far short of its pension obligations. It was 60 percent funded as of June 30 and came into the fiscal year with an unfunded liability — all benefits due qualified recipients — of $8.49 billion. But due to pension reforms made in the past three years by the ERS trustees, Gov. Neil Abercrombie and the state Legislature, the fund is expected to be 100 percent funded by June 30, 2041, if investment returns hit their targets and mortality rates are in line with expectations, according to an independent actuarial report released in December by Gabriel, Roeder, Smith & Co.
"For the year we are up double digits, and at that rate it could double the 7.75 percent target for the fiscal year (ending June 30)," ERS Administrator Wes Machida said. "If that’s the case, we’ll be in a good situation to improve our funded ratio, which was reported at 60 percent last fiscal year."
Last quarter, the ERS’ 1.5 percent return trailed the 2.1 percent return of 71 median public funds with assets greater than $1 billion. The ERS return also lagged its 2.2 percent benchmark, which comprises indexes invested in a similar way to ERS’ portfolio managers. Over the past 12 months, though, the ERS fund exceeded the median public fund,13.2 percent versus 12.3 percent, and the benchmark, 13.2 percent versus 12.9 percent.
"The year started out tough. Markets went down in January and kind of recovered a little bit in February and March," ERS Chief Investment Officer Vijoy "Paul" Chattergy said. "The improvement was modest given that people were coming to terms with Fed tapering (reducing its bond repurchasing program). Where the portfolio was really held back in the quarter was in our international equity area as well as real estate. U.S. equities continued to contribute a positive performance."
Total fixed income, which include domestic and international holdings, led the way in the quarter among the larger categories with a 2.4 percent return. Domestic equities rose 2 percent while international equities inched up 0.2 percent.
In other categories, inflation-adjusted returns linked to bonds and timber increased 6.4 percent; private equity, which is reported on a one-quarter lag, rose 5.1 percent; covered option calls (equities with downside protection) increased 2.1 percent; and real estate, reported on a one-quarter lag, edged up 0.9 percent. Some categories didn’t include December results due to unavailability when the ERS report was produced.
