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Poor performance for public pensions could cost taxpayers big-time

By   /   July 24, 2012  /   No Comments

By Ryan Ekvall | Wisconsin Reporter

MADISON – The Wisconsin Retirement System’s investments are falling far behind expectations, and that could cost beneficiaries and taxpayers big.

Preliminary figures show the core investment fund returned just 1.4 percent over the fiscal year ending June 30 2012. WRS assumed its investments would earn 7.2 percent.

Over the same time, the S&P 500 returned 3.14 percent.

Even the fund’s more recent gains — investments earned 5.9 percent in the half year from January 1, 2012 to June 30 — wasn’t enough to make up for the first six months of the fiscal year.

Vicki Hearing, spokeswoman for the State of Wisconsin Investment Board, which manages WRS assets, said the final numbers may change, but not much. The difference between preliminary and final results generally runs in the “tenths of a percent,” she said, as financials from private markets — private equity, loans and real estate — come in.

She said final numbers will be reported in four weeks.

If the lower than assumed investment returns hold until the end of the 2012 calendar year, WRS will pay out smaller pension checks paid to retirees so that it doesn’t fall below established funding ratios.

Beginning May 1, 2012, for example, 96,000 pensioners took a 7 percent decrease in their pension checks due to the fund’s actuarial loss in 2011.

“Currently 48 percent of annuitants are now at their core base annuity,” Department of Employee Trust Funds Deputy Secretary Rob Marchant previously told Wisconsin Reporter. “Even if we hit our 7.2 percent assumed rate, next year 28,000 more will be reduced to their core annuity.

Although recent earnings are lower than expected, Hearing said SWIB looks at long-term investment trends to judge performance.

“We look at the 10-year average because we’re long-term investors,” she said. “The 7.1 (percent 10-year return) is very close to the 7.2 (percent assumed rate of return).”

The Department of Employee Trust Funds changed the assumed rate of return to 7.2 percent, from 7.8 percent, in March 2011. The fund’s five-year return on investment is 2.1 percent.

Economists in the pension world say a public pension fund’s assumed rate of return should reflect the guaranteed nature of pension benefits. That would require public pension operators to assume a rate more in line with a long-term U.S. Treasury bond, currently less than 3 percent.

Moody’s Investor Services, the global credit rating agency, recently proposed valuing public pension funds like their private-sector counterparts, which would make the rate equal to that of a high grade corporate bond — currently 5.5 percent.

Using those more conservative rates of return, WRS is underfunded between $30 and $60 billion. It is nearly fully funded using looser pension accounting standards.

The Badger State’s public pension system is viewed as a model of high-performance compared to many states with massive unfunded liabilities. Those states would look much worse if examined under market-value standards.

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