Trustees for the Arkansas Public Employees Retirement System on Thursday voted to hire Stephens Inc. of Little Rock as the system's private equity consultant with the system aiming to ultimately invest about $500 million of its investment portfolio in private equity.
Trustees also voted to trim the system's target for an annual investment return from 7.15% to 7% after an actuary for the system's actuarial firm said in May that the system's current 7.15% target is reasonable, but it's toward the upper end of the range the firm considers reasonable.
Rather than increasing its existing employer rate of 15.32% of payroll charged to state and local governments to 16.51%, starting in fiscal year 2026 in concert with the reduction in its target for an annual investment return, trustees opted to extend from 14 years to 18 years the system's projected period for paying off its unfunded liabilities.
The system's unfunded liabilities will total about $2.1 billion June 30, said Mita Drazilov of the system's actuary Gabriel, Roeder, Smith & Co. The system's unfunded liabilities are the amount by which the system's liabilities exceed an actuarial value of the system's investments. Actuaries often compare the projected payoff period for unfunded liabilities to a mortgage on a house.
Drazilov said the system has seen significant progress in reducing its unfunded liabilities since they reached $2.5 billion in 2012.
The Arkansas Public Employees Retirement System is state government's second-largest retirement system with more than $10 billion in investments and more than 75,000 working and retired members. The Arkansas Teacher Retirement System is state government's largest retirement system with more than $20 billion in investments and more than 100,000 working and retired members.
In a voice vote with no audible dissenters, trustees voted to hire Stephens Inc. as the system's private equity consultant after interviewing officials from two other private equity consultants -- Callan of Chicago and Albourne America of Stamford, Conn. -- as well as from Stephens Inc. on Thursday.
Callan has been the system's general investment consultant for about 35 years, and proposed providing private equity consulting services to the system at no additional cost to the system for four years, said Brianne Weymouth, senior vice president for Callan.
Albourne America proposed its private equity consultant fees would be $300,000 a year for four years, while Stephens Inc. proposed its fees gradually increase from $54,000 in the first year to $155,000 in the second year, $254,000 in the third year and $354,000 in the fourth year, according to a written summary of the firms' proposals that was provided to trustees.
The trustees' investment-finance subcommittee on Wednesday recommended the full board interview Callan, Albourne America and Stephens Inc. on Thursday. The subcommittee also considered four other firms that submitted their qualifications to the system as possible private equity consultants. They were Cliffwater, Meketa Investment Group, NEPC LLC, and RVK Inc.
Larry Middleton, executive vice president of Stephens Inc., told the system's trustees on Thursday that Stephens Inc. pioneered private equity before it was called private equity, and private equity investments have provided "nice returns" for investors in recent years. Middleton said Stephens Inc. is an investment consultant for the Arkansas Local Police and Fire Retirement, which now has $600 million of its $3 billion investment portfolio in alternative and private equity investments.
Trustee Daryl Bassett, secretary of the Department of Labor and Licensing, said Albourne America is a super firm but its proposed fees are most difficult to consider, so "it's Callan or Stephens for me."
Trustee Larry Walther, secretary of the state Department of Finance and Administration, said he likes the idea of having different voices from two investment consultants. Callan has done a good job as the system's general investment consultant, but it would help to have another firm as a private equity consultant, he said.
System Executive Director Amy Fecher noted that the Arkansas Teacher Retirement System has a general investment consultant, Aon, and a private equity consultant, Franklin Park.
As of June 30 2022, the system included 42,771 working members with an average annual salary of $45,020, according to Gabriel, Roeder, Smith & Co.
The system also included 41,390 retirees, including those in the deferred retirement plan, with total annual benefits of $671.2 million or an average of about $16,216 a year, as of June 30,2022, according to Gabriel. There were 1,426 deferred retirement participants with a total payroll of $93 million, or about $65,217 a year, on June 30.
In fiscal 2022 that ended June 30,2022, state and local governments paid $320.8 million into the system, while the system's working members paid $81.2 million into the system, according to a system report. The system's working members, who contribute into the system, paid 5% of their salary into the system in fiscal 2022 and started paying 5.25% of their salary into the system, effective July 1, 2022, under Act 365 of 2021. Act 365 of 2021 will increase the percentage of salary that a working member who pays into the system contributes from the former 5% rate by 0.25 percentage point a year over an eight-year period until the rate reaches 7% of salary.
As of June 30, the system's unfunded liabilities totaled about $2 billion and the system's funding ratio is about 84%, according to Gabriel. The projected period for the system to pay off its unfunded liabilities is 14 years on June 30, Gabriel reported.