Hawaii’s public employees pension fund dug a little deeper hole for itself last quarter as it tried to climb out of a $12.44 billion shortfall.

The Employees’ Retirement System, which has introduced bills in the Legislature seeking to increase employer contributions to reduce its unfunded liability, saw its investments gain just 0.9 percent in the fiscal second quarter ended Dec. 31 amid a rise in interest rates that drove down bond yields.

Despite the investment return uptick, ERS assets actually declined slightly — by $81.3 million — to $14.91 billion because of distributions made to ERS members, according to a report presented to ERS trustees Monday by Portland, Ore.-based Pension Consulting Alliance LLC.

But ERS Chief Investment Officer Vijoy Chattergy said the portfolio is still outperforming its peers on a one-, three-, five- and 10-year basis. He also said the portfolio has picked up ground since the start of the year.

“We’re probably about $15.3 billion right now,” Chattergy said. “The portfolio has benefited from the post-election rally. We run a diversified portfolio and (in September) made a decision to build a risk-centric portfolio with the type of equity strategies we implemented. So we are less sensitive to equity markets now, which means we’re not going to run up as much in a bull market and run down as much in a drawdown. That creates a more stable return stream over the long term, which we think is a more healthy and more robust way to manage our assets.”

The pension fund, which had a 4.5 percent return in the fiscal first quarter, is now up 5.4 percent midway through the fiscal year. ERS set an assumed rate of return this year of 7.55 percent, which means the portfolio is ahead of its annualized target. The ERS also lowered its target to 7 percent beginning in the new fiscal year on July 1 to reflect anticipated market conditions.

ERS has introduced bills in the Legislature that would increase employer contributions on a phased-in basis. The pension fund, which provides retirement, disability and survivor benefits to more than 120,000 active, retired and inactive state and county employees, was only 54.7 percent funded at the end of the past fiscal year.

For general employees the ERS is asking that employers increase their contributions by 2 percent a year for the next four years. That would result in an employer contribution rate at the end of that four-year period of 25 percent.

Similarly, the ERS bills would increase employer contributions for police and fire employees by 4 percent a year for the next four years, resulting in a 41 percent contribution rate at the end of that period.

“It’s vitally important to our long-term sustainability,” ERS Executive Director Thom Williams said.

Over the past 12 months, the ERS portfolio posted an investment return of 7.9 percent to beat the 7.8 percent return of its nearly 70 peers with assets greater than $1 billion. The ERS also is ahead of its peers for the past three years (4.9 percent versus 4.6 percent), five years (9 percent versus 8.3 percent) and 10 years (5.3 percent versus 5.2 percent).

“Those are amazing results,” said Neil Rue, managing director of Pension Consulting, financial adviser to the ERS board. “Every single year it’s outperformed the policy benchmark and outperformed the median (public) fund. I’ve never really seen that.”

Rue said the challenge with last quarter was that the Federal Reserve raised interest rates.

“That hurt bonds, which are the traditional diversifier in the portfolio,” he said. “The ERS is changing its portfolio structure to be less dependent on bonds as a diversifier exactly for that reason.”

The principal protection category of the ERS portfolio, which is made up of U.S. government-backed bonds, fell 1.1 percent in the fourth quarter. The portfolio’s broad growth investments (equities, option-writing strategies, private equity, private real estate and fixed income corporate bonds) increased 1.3 percent last quarter while inflation-adjusted investments (inflation-linked bonds) fell 0.2 percent.