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Market's slump erodes pension's gains

by Michael R. Wickline | October 8, 2019 at 2:17 a.m.

Amid volatile stock markets, the Arkansas Teacher Retirement System's investments gained a net $240 million in value to total $17.5 billion in the fiscal year that ended June 30, an investment consultant reported Monday to the system's board of trustees.

However, the total investments have dropped in value since the end of fiscal 2019, to roughly $17.2 billion, system Executive Director Clint Rhoden said after the trustees' meeting.

Trustee Robin Nichols of Jonesboro said watching the stock market each day is getting depressing.

"One day you are rejoicing and the next day you are not," she said.

In other action, the trustees authorized up to $110 million in new investments and a swap of about $184 million in timber investments for shares in a timber investment fund.

The Teacher Retirement System is state government's largest such agency, with its investment total and more than 100,000 working and retired members.

In fiscal 2019, its investment earnings totaled $933 million while $693 million was withdrawn to help pay retirement benefits, so the net gain was $240 million, according to the firm of Aon Hewitt Investment Consulting.


The investment return of 5.3% last fiscal year ranked in the top 59 percent of similar-sized pension systems in the nation, said P.J. Kelly of Aon Hewitt. The system's target investment return is 7.5% a year.

Kelly said it was another strange fiscal year, with the first two quarters of fiscal 2019, particularly the second quarter, "really bad for the stock market.

"The last two quarters in 2019, we actually saw a pretty nice bounce back in the equity markets," he said.

The system's investment return has averaged 10.9% a year over the past three years, 7.4% over the past five years, and 10.3% a year over the past 10 years to rank in the top 1% of similarly sized public pension funds during each period, Kelly said.

In fiscal 2019, the system's stock market investments earned 4.1% to reach $9.3 billion on June 30, while bond investments received a return of 6.4% to end up at $2.8 billion and private equity investments earned 12.8% to reach $2.1 million, according to Aon Hewitt.

Its real estate investments recorded a return of 5.7% to end up at $1.3 billion on June 30, while opportunistic/alternative investments had a return of minus 0.2% to reach $ 1 billion and infrastructure investments earned a return of 14.6% to total $291 million, the investment consultant reported.

Timber investments received a minus 0.3% return to reach $246 million on June 30 and agriculture investments earned a return of 3.5% to end up at $196 million, according to the consultant.


In the system's last actuarial valuation, unfunded liabilities were 80% funded as of June 30, 2018, with an actuarial investment value of $16.7 billion, which was well above the median of 72% of other public pension systems in the nation, according to Rhoden, the system's executive director. The unfunded liabilities were projected to be paid off within 28 years of June 30, 2018.

Unfunded liabilities are the amount by which the system's liabilities exceed an actuarial value of its investments. Actuaries often compare unfunded liabilities to a mortgage on a home.

The system paid out $1.17 billion in retirement benefits in fiscal 2019, while employers contributed $356.6 million, based on a rate of 14% of payroll. Working members contributed $130 million, based on a rate of 6% of their salary.

In November 2017, the system's trustees voted to implement several measures to raise money and cut costs over seven years. These actions were taken in response to the system's annual projected investment return being reduced from 8% to 7.5%.

The trustees have increased the rate charged to employers from 14% to 14.25% of payroll in fiscal 2020 that started July 1, and plan to increase it by 0.25 percentage point a year in each of the next three fiscal years until the rate reaches 15% in fiscal 2023. Each 0.25 percentage-point increase was projected to raise employer costs by about $7 million a year.

Trustees also increased the rate charged to members who pay into the system from 6% of salary to 6.25% in fiscal 2020 and plan to increase it by 0.25 percentage point for each of the next three fiscal years until it reaches 7% in fiscal 2023. Each 0.25 percentage-point increase was projected to raise members' contributions by about $5.5 million a year.

In other action Monday, the trustees voted to authorize the investment of:

• Up to $50 million in an infrastructure fund specializing in U.S. and Canadian energy and transportation assets. The fund is AxInfraNA II L.P., which is managed by Axium Infrastructure based in Montreal.

• Up to $30 million in a private equity fund that makes opportunistic and equity investments in middle market companies undergoing change and/or are in underserved industries or markets in North American. The fund is Clearlake Capital Partners VI L.P., which is managed by Clearlake Capital based in Santa Monica, Calif.

• Up to $30 million in an opportunistic/alternative reinsurance fund specializing in property catastrophe insurance coverage. The fund is Aeolus Catastrophe Keystone PF Fund L.P., which is managed by Aeolus Reinsurance based in Bermuda.

The trustees also voted to approve the swap of about $184 million of its timber investments in North Carolina, South Carolina, Virginia and Florida for a similar amount of shares in the BTG Pactual Open Ended Core U.S. Timberland Fund, which is managed by Georgia-based BTG Pactual, according to the system's staff.

The system's timber assets are primarily located in the south, while the BTG Pactual timberland fund has diversified holdings, including some in the Pacific Northwest that are expected to provide quality investment returns and also will increase the portfolio's geographic diversity, the system's staff reported.

The system's remaining timber investments -- valued at about $148 million in Arkansas, Kentucky, Tennessee and Wisconsin -- will continue to be held in a separate account and managed by BTG Pactual, according to the system's staff. (The main difference in the total $332 million value of these assets compared to the $246 million value reported by Aon Hewitt is a loan of about $70 million associated with the portfolio, said Rod Graves, deputy director for the system.)

In other action, the board elected trustee Danny Knight of Sherwood as chairman and trustee Richard Abernathy of Bryant as vice chairman. Knight is a retired superintendent of the Watson Chapel School District. Abernathy is executive director of the Arkansas Association of Educational Administrators.

Rhoden also announced that he has promoted system attorney specialist Martha Miller to the general counsel post as of Monday. Miller has worked for the system for about four years and has been a valuable member of the legal team, Rhoden said.

Miller's salary will increase from about $75,000 per year to about $89,000 per year, and the system has no plans at this time to advertise for the attorney specialist position that Miller vacated, he said.

The teacher retirement system's former general counsel, Laura Gilson, started work as the chief legal counsel for the Arkansas Public Employees Retirement System on Sept. 23. Gilson's salary in her new job is $112,953 a year, up from her salary of $91,936 a year at the teacher retirement system.

NW News on 10/08/2019

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