To better maintain Arizona’s largest public pension fund’s long-term obligations, more than 200,000 members of the Arizona State Retirement System (ASRS) will have to increase their contributions, AZCentral reports.
Expecting modest long-term economic growth that may hinder large gains, the $40 billion system has reduced its 30-year long-term outlook, which could make the increased contributions last several years.
While employees contribute around $2.2 billion each year to ASRS, the fund currently pays out around $3.3 billion per year to beneficiaries. With the retirement system’s waning opinions on future returns, the state will increase contributions by 0.3% at the beginning of the new fiscal year in July.
Despite the fund returning 13.9% last year, with an average return of 9.7% since its inception in 1975, the fund is considering pulling back its projections as the stock market’s nine-year bull run could get bearish in the coming months. While January’s selloff saw a quick rebound, economists are still weary of an eventual correction, and the fund is prepping for the possible worst-case scenario.
“We think the level of the stock market is about right,” Paul Matson, executive director of the pension fund, told AZCentral. “We think [stock prices]will continue to grow, but not at the same rate as in the past few years.”
The increased contributions could help the fund keep up with ever-increasing liabilities. According to the Phoenix Budget and Research Department, the Phoenix-based fund could see nearly $3.5 billion per year in fiscal 2021. According to AZCentral, the reduced investment expectations prompt accounting procedures that force the fund to boost its estimated future liabilities. This can result in the higher contributions for future pensioners.
In addition, the state constitution also requires the funding assumptions and methods for public pension plans be followed in-line with actuarial standards.
According to its 2017 CAFR, the fund currently allocates 58% of its portfolio to domestic and foreign equities, 25% in bonds and direct loans, 10% in real estate, 5% in a multi-asset class, and the remaining 2% in commodities.