Pennsylvania SERS to Cut Return Rates, Hedge Fund Allocations

Verdicts come amid political criticism, current market environment.

The Pennsylvania State Employees’ Retirement System is trimming its long-term assumed rate of return as well as its hedge fund allocations amid choppy markets and political pressure.

The $29 billion fund’s board agreed to reduce the rate to 7.125%, from 7.25% at last week’s meeting. Executive Director Terrill Sanchez said the present market environment was the deciding factor for the 0.125 percentage point reduction, which she called “appropriate.” The target change will happen at year-end.

Pennsylvania’s state plan also voted to temporarily invest less in hedge funds, shifting some of that money into bonds as it determines its next allocation moves. The targets for bonds and hedge funds, which fall into the retirement system’s “multi-strategy” category, hovered at about 11% and 10% of the portfolio, respectively.

State politicians such as Treasurer Joe Torsella and Gov. Tom Wolf have been vocal about the organization cutting assumptions and dumping hedges from its asset mix. Torsella, a Democrat who served on the Public Pension Management and Asset Investment Review Commission last year, has welcomed a rate cut.

Wolf, a fellow Pennsylvania Democrat, and some Republicans have also criticized the fund’s heavy usage of high-fee investment managers, opting that the plan go passive and allocate to more low-fee index funds.

“By modestly reducing the assumed rate of return and reducing allocation to costly alternative hedge funds, SERS can reduce risk to the fund and improve security for beneficiaries,” Torsella told CIO. “I would be concerned with any investment fund that fails to acknowledge the continuing trend of lower and more realistic expected investment returns, or the substantial risks associated with investment strategies that strive to capture unrealistic earnings.”

How has the program been doing? According to accounting firm Korn Ferry’s just-released actuarial report, in this year’s first quarter, it earned 8.2% over the period ended March 31. Global public equity was the big winner, as a 12.9% harvest offset much of the fund’s 4.6% loss at 2018’s end. Hedge funds (7.1%), real estate (4.3%), bonds (3.7%), private equity (0.6%), and cash (0.4%) also worked out, as no asset classes were in the red.  

The Pennsylvania State Retirement System is 61.7% funded.

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