The Arkansas Teacher Retirement System's investments dropped in value by $921 million in the past fiscal year to $16.6 billion amid turbulent stock markets, an investment consultant told the system's board of trustees Monday.
The system's investment return in fiscal 2020 was minus 1.4%, compared with a median of a positive 1.4% return for similar-sized public pension systems across the nation, consultant Aon Hewitt Investment Consulting said in a report to trustees. Fiscal 2020 ended June 30.
The system's investment losses totaled $203.1 million in fiscal 2020, but the system also had to withdraw $718 million out of its funds to help pay retirement benefits to retirees, Aon Hewitt Investment Consulting said in its written report.
Trustee Robin Nichols of Jonesboro said the investment performance is "kind of depressing, but we'll move on."
The system's investments rebounded in value to about $17.5 billion by the end of August, with an investment return of about 6.7% in the first two months of current fiscal 2021, "so hopefully we can keep that track going forward," said P.J. Kelly of Aon Hewitt.
The teacher retirement system is state government's largest retirement system with more than 100,000 working and retired members.
The negative 1.4% return in fiscal 2020 was driven by investments in certain funds managed by Allianz Global Investors during the first quarter of this year, but those funds were liquidated in the second quarter, said Katie Comstock of Aon Hewitt.
"If those funds had earned benchmark returns ... the portfolio would have earned a little bit north of 3 percentage points," Comstock told the system's board of trustees, so "that has had a tremendous impact on your performance."
COMPLAINT FILED
The system filed a complaint in July in federal court in New York seeking to recover losses that the system claimed it incurred as a result of negligence and breaches of fiduciary and contractual duties by Allianz Global Investors U.S., LLC, and related-defendants.
The complaint alleged that Allianz deviated dramatically from the market-neutral strategy its contracts and fiduciary obligations required the firm to follow. The system estimated it suffered $700 million to $800 million in trading losses through three funds managed by Allianz when the board authorized the hiring of two securities monitoring firms in late June to file the lawsuit.
Allianz Global Investors spokesman John Wallace said Monday, "As we set out at the time, the Structured Alpha portfolio sustained losses during the severe market rout in late February and March.
"While the losses were disappointing, the allegations made by ATRS ... are legally and factually flawed, and we will defend ourselves vigorously against them," Wallace said in a written statement.
HISTORICAL PERFORMANCE
The system paid out $1.2 billion in retirement benefits in fiscal 2020, while employers contributed $475 million to the system and members chipped in $151.6 million, system Executive Director Clint Rhoden said after the trustees' meeting.
The system's investment return has averaged 6% a year over the past five years, 8.8% a year over the past 10 years and 8.2% a year since April 1986, according to Aon Hewitt. The system's target rate of return is 7.5% a year.
In fiscal 2020, the system's stock market investments had an investment return of minus 6.4% to end up valued at at $8.8 billion, while its bond investments had a return of 6.4% to reach $2.2 billion, according to Aon Hewitt. Its private equity investments had a return of 4.9% in the fiscal year to end up at $2.3 billion.
The system's real estate investments earned an investment return of 2% to reach $1.3 billion in fiscal 2020, while its opportunistic and alternative investments had a return of minus 5.3% to end up valued at $878 million. Timber investments had a return of 12.2% to reach $297 million, according to Aon Hewitt.
Infrastructure investments had a return of 8% to reach $270 million, and agricultural investments had a return of 1.8% to end up at $201 million in fiscal 2020, according to Aon Hewitt.
As of June 30, 2019, the system included 68,457 working members who were not in its deferred retirement plan and made an average annual salary of $39,065, according to an actuary report from Gabriel, Roeder, Smith & Co. It also had 3,707 working members who are in its deferred retirement plan and made an average annual salary of $62,812, the Gabriel report said.
The system also had 48,677 retired members with an average annual benefit of $23,588, Gabriel said.
As of June 30, 2019, the system was 80% funded based on a $17.4 billion actuarial value of assets and $21.7 billion in liabilities with a projected payoff period of about 28 years, Gabriel reported. The unfunded liabilities totaled $4.29 billion as of June 30, 2019.
Actuaries often compare the projected payoff period for unfunded liabilities to a mortgage on a house.
Gabriel's actuarial report for the system as of June 30, 2020, is expected to be released during the trustees' meeting in December.
In other business, the trustees authorized:
• The sale of the system's properties in Texarkana and West Memphis. State Department of Human Services offices are located in these two properties, Rhoden said afterward.
The deal has not closed yet, but the current offer is from JLB Capital Acquisitions LLC, he said. The expected purchase price is $3.8 million, he said.
• An investment of up to $50 million in Los Angeles-based Kayne Anderson Capital Advisor L.P.'s Kayne Anderson Real Estate Partners VI, an opportunistic real estate fund focused on senior housing and medical offices.
• An investment of up to $40 million in PGIM Real Estate Europe's PGIM Real Estate Capitol VII, a real estate fund specializing in junior and senior debt in the European real estate market.
• An investment of up to $30 million in Franklin Park Corporate Finance Access Fund L.P, a fund of funds managed by Franklin Park investing in smaller buyout, growth and turnaround private equity funds.
• The minimum amount of the lump sum death benefit for all eligible members at $6,667. Members who retired on or before July 1, 2007, also will receive an additional $666.60 for each contributory year of service credit up to the maximum amount of $10,000; and all other members will receive an additional $333.30 for each contributory year of service credit up the maximum amount of $10,000.
State law provides that as of July 1, 2007, 1o or more years of actual service is required to qualify for the lump sum death benefit, but retired members who retired on or before July 1, 2007, must have five or more years of actual service to qualify for the lump sum death benefit, according to the system.
State law and a board rule provide that the board adjust the amount of the lump-sum death benefit each year and prorate the amount of the benefit based on the ratio of the member's contributory and noncontributory service credit.
• An interest rate of 3% on regular deferred retirement plans in fiscal 2021.
• Declared two trustee positions, held by Janet Watson of Bryant and Richard Abernathy of Benton, vacant and decided to fill the positions through appointment by the board.
The term for Watson's successor will end June 30, 2022, and the term for Abernathy's successor will end June 30, 2024, Rhoden said. The deadline for applicants for the two posts will be about Nov. 1 and the board will hold a special meeting to fill the two posts before the board's meeting in December, he said.