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Pension system investments grow

Gain in 1st quarter puts value at $11B, board members told by Michael R. Wickline | May 20, 2021 at 3:31 a.m.
Arkansas Public Employees Retirement System Executive Director Duncan Baird is shown in this photo.

The Arkansas Public Employees Retirement System's investments increased in value by $361 million last quarter to reach $11 billion, the system's investment consultant reported Wednesday.

The system's investment return was 4.22% in the quarter that ended March 31, investment consultant Callan LLC said in a report to the system's board of trustees.

The system's investment performance last quarter was strong, said Brianne Weymouth of Callan LLC.

The system's investment return in the year that ended March 31 was 42.17% to rank among the top 8% of the nation's public pension systems, Weymouth said. During the past 10 years, the system's return has averaged 9.12% a year to rank in the top 18% nationally. The system's target return is 7.15% a year.

"The more aggressive posture of your fund, the higher allocation of growth assets, has really helped your performance," she told trustees during their quarterly meeting.

The system's investment portfolio totaled $11.3 billion at the end of April, system Executive Director Duncan Baird said after the meeting.

Also Wednesday, the board terminated one investment manager and hired two others and learned what the system is doing to fix problems found by the Arkansas Legislative Audit.

With more than 80,000 working and retired members, the Public Employees Retirement System is the state government's second-largest retirement agency behind the Arkansas Teacher Retirement System, which has more than 100,000 working and retired members and about $20 billion in investments.

The public employees system includes 44,373 working members with an average annual salary of $40,469 and 39,805 retired members with an average benefit of $16,003 a year as of June 30, according to its actuary.

State and local governments paid $299.4 million into the system in fiscal 2020, while system members contributed $71.4 million, according to a system report.

In the quarter that ended March 31, the system's domestic stock market investments earned a return of 6.24% to reach $4.6 billion, while its international stock market investments posted a return of 4.70% to end up valued at $2.8 billion, Callan LLC reported.

The system's domestic bond investments last quarter recorded a return of minus 3.07% to be valued at $1.6 billion and its real asset investments earned a return of 6.5% to reach $1.2 billion, according to Callan.

The system's bond investments underperformed last quarter, ranking in the bottom 26% of the nation's public pension systems, Callan reported.

As of March 31, the system's real asset investments include $794.4 million in core real state investments with an investment return of 1.95% last quarter, $253.7 million in value-added real estate investments with a return of 6.15%, $169.2 million in energy investments with a return of 29.4%, and $80.6 million in timber investments with a return of 2.4%.

The system's diversified strategies investments last quarter reached $494.5 million after posting an investment return of 0.82%.

As of June 30, the system's unfunded liabilities totaled $2.42 billion with a projected pay-off period of 24 years, according to the system's actuary. Actuaries compare unfunded liabilities to a mortgage on a house.

Board member Larry Walther, who is secretary of the state Department of Finance and Administration, asked Baird how the system's investment gains would affect its unfunded liabilities.

In August, the actuary will report on the system's unfunded liabilities as of June 30, Baird said. The actuary recognizes the system's investment gains or losses each fiscal year over a four-year period.

MANAGER TERMINATED

The trustees voted to terminate domestic stock market investment manager Golden Capital Management, which managed $287.4 million for the system as of March 31.

Weymouth of Callan said Golden Capital Management was founded in March 1999. Wells Fargo purchased the firm in 2017. In 2019 and 2020, two of the firm's three co-founders departed, and earlier this year Wells Fargo announced that it is going to sell the asset management firm, she said.

Golden Capital Management approached a system official to sign off on the transition to the private equity firms that will buy a majority stake in the firm, Weymouth said.

"We took a step back and said, 'Does Golden really still belong in the portfolio? Do we need them?' and we determined that there is overlap with this portfolio and the S&P 500, so ... we would like the terminate the Golden Capital strategy," she said.

Weymouth said some of the funds managed by Golden Capital Management will be shifted into bond investments and "in the future any sort of target allocation of Golden would just go into the S&P 500 Index [fund]."

Baird said he agrees with Weymouth's recommendation.

The trustees later voted to invest $100 million with two non-core real estate investment funds.

They voted to invest $50 million with Harrison Street Real Estate Partners Fund VIII, and $75 million with Starwood Opportunity Fund XII, Baird said.

The trustees ' action on Wednesday came after they voted in February to change the composition of the system's real asset investments.

They voted in February to increase their target percentage of those investments for core real estate from 61% to 70% and for value-added real estate from 14% to 20%. They also voted to trim the share for public real estate investment trusts from 6% to a range of 0-5%.

The target percentage of real asset investments for energy stocks was cut from 13% to zero and for timberland was cut from 6% to 5%, but increased for farmland from zero to 5%.

AUDIT FINDINGS

The latest Arkansas Legislative Audit's findings are tied to overpayments of pensions, Baird told trustees.

The system had pension overpayments of about $147,000 to 48 individuals in fiscal 2020 because of the death of system retirees, he said, and that's been an ongoing issue for the system.

"Many times what we see is a member retired, they die [and] the death is not reported to us" in a timely manner, Baird said, so the system ends up paying the benefit to the retiree at the beginning at the month that the retiree is not entitled to.

The system uses three death verification services, but "based on our research, none of these services can provide you with perfect data," he said.

Board member Andrea Lea of Russellville, who is the state auditor, said, "To me this is totally understandable.

"This is probably a difficult thing to keep up with because of timing."

Baird said the system wants to "start contacting our members more and try to maintain better information, more up-to-date information on our members."

"The other part is we want to have new tools for recouping an overpayment," he said. The Legislature enacted a bill in this year's regular session to allow the system to make claims against tax refunds in the case of pension payments, "so we think that will be a tool that could help us recoup some of the overpayments that we have seen," he said.

Legislative auditors also found the system made about $10,200 in pension overpayments to about a dozen retirees because the system incorrectly applied a 6% cost-of-living adjustment to these retirees in July 2019 rather than 3%, Baird said.

"This was related to a system update that went into place in May of 2019 that was later corrected in an update that happened in November of 2019," he said. No one at the time realized that the system update created this error, he said.

"We want to beef up our review of the COLA on an annual basis."

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