Hawaii’s largest public pension fund is facing an uphill battle to reach its fiscal-year investment target after its assets declined more than $1 billion during the October to December quarter amid a market collapse.

The state Employees’ Retirement System, which provides retirement, disability and survivor benefits to 124,089 active, inactive (vested) and retired state, city and county employees, reported a 5.9 percent investment loss in the quarter ended Dec. 31 to reach the midway point of its fiscal year down 3.5 percent, according to a report presented to ERS trustees last week by Portland, Ore.-based Pension Consulting Alliance LLC.

The ERS targets an annual 7 percent assumed rate of return to help cover its financial obligations to current and former employees.

“The markets are notoriously unpredictable, especially in the short term,” ERS Executive Director Thom Williams said. “Achieving our 7 percent assumed investment return for the fiscal year appears at risk as of this moment … . Significant moves up or down can occur at any time. We will see what the markets deliver over the next few months but we remain steadfastly focused on the long term.”

ERS assets, which besides investments are affected by benefit distributions, contributions and expenses, ended the quarter at $15.8 billion after starting the period Oct. 1 with a market value of $16.9 billion. It was the first time that assets declined in a quarter by more than $1 billion since the quarter that ended Sept. 30, 2011.

“That drop (in 2011) included $125 million of benefit payments in excess of contributions, so not all of the drop was due to performance,” Chief Investment Officer Elizabeth Burton said. “There are also times when we increase assets by almost a billion a quarter, for example in September 2016.”

Last quarter there were $78.2 million of benefit payments in excess of contributions.

Burton said the only positive-performing major asset class in the October-December period was global bonds, which inched up 1.2 percent. Small capitalization stocks (off 17.5 percent), developed market equities (off 13 percent), commodities (off 9.4 percent), emerging market equities (off 7.4 percent) and real estate investment trusts (off 6.1 percent) were all in the red.

“Our portfolio lost 5.88 percent — a disappointing figure but far less than the broader stock market, which speaks to our portfolio diversification,” she said. “Our use of alternative strategies (private markets, crisis risk offset, etc.) improved our performance relative to peers who do not allocate to alternatives, some of whom experienced larger negative performance … . We do not expect positive performance when equities crater. However, we do expect our diversified exposure to provide downside protection, which it did.”

Last month, an actuary report from Gabriel Roeder Smith showed the shortfall in the pension fund had climbed to an all-time high of $13.41 billion and that it will take 25 years, or until June 30, 2043, before the pension is 100 percent funded. The ERS shortfall — the difference between ERS funds and the money needed to pay beneficiaries — is projected to reach $14.19 billion by 2023 before reversing direction.

The funded ratio — what is needed to meet future pension obligations — improved slightly last fiscal year to 55.2 percent from 54.9 percent a year earlier.

Williams said beneficiaries should not worry, due to pension reforms that are in place that eventually will eliminate the unfunded liability. Those pension reforms include increased contributions from employers, namely taxpayers, that are based on a percentage of an employee’s pay. The higher payments will cut into the shortfall in future years. Williams said the shortfall is expected to keep increasing for the near term until the higher contributions take hold.

Lawmakers passed legislation in 2017 to close funding shortfalls that were created partly due to existing unfunded liabilities, retirees living longer and lower projected investment returns.

“Declines such as we have experienced have to be put into context,” he said. “For a given percentage decline the nominal effect appears greater the larger your portfolio while the relative percentage remains the same. We don’t get to experience the up periods in the markets without enduring some of the downs.”