A volatile fourth quarter of 2018 erased the year’s gains for the Pennsylvania State Employees’ Retirement System (Penn SERS) as its portfolio ended the calendar year down 4.6%, compared with a 2017 calendar year return of 15.1%.
It was the fund’s worst calendar year investment performance, and the system’s first annual loss, since 2008, when the financial crisis sent the portfolio tumbling 28.7%. The retirement system ended 2018 with 20-, 25-, and 30-year returns of 6.0%, 7.7%, and 8.4% net of fees, respectively. The retirement system’s unfunded actuarial liability was $22.8 billion, giving it a funded ratio of only 56%.
The 56% funded level means the system is considered to be in “critical status” as defined under the Pension Protection Act of 2006. However, Penn SERS said that its current projections indicate that in a little over a decade, the funded ratio will reach 80%, which is generally accepted by pension experts as healthy.
Private equity was the top-performing asset class in the portfolio during the year returning 11.4%. However, it was the only asset class to earn positive gains except for cash, which earned 2.1% for the year. Legacy hedge funds were the worst-performing asset class, losing 13.7%, followed by global public equity, which lost 10.4%, and real estate, which was down 2.3%.
The 4.6% loss for the calendar year is indicative of the rough second half of 2018 for investments, as Penn SERS’ portfolio had earned an 8.6% return for fiscal year 2018, which ended June 30.
The fund said that last year’s volatility led to an unanticipated delay in the pace of employer contribution reductions. It said that employers will contribute 33.5% of payroll in fiscal year 2019-20, which is estimated to generate $2.1 billion. SERS employer contribution rate is now expected to peak at about 34.9% in fiscal year 2022-2023, but remain above 20% until fiscal year 2040-2041.
A state pension reform law that was enacted in 2017 includes a “savings plow-back” provision that requires any annual savings achieved through SERS’ benefit changes to flow back into the system rather than to the state’s non-pension budget obligations. SERS said it expects plow-back contributions in 13 of the next 23 fiscal years, which it said should accelerate the system’s return to fully funded status.