The Pennsylvania State Employees’ Retirement System (PennSERS) reported that it earned a 15.1% return on investments net of fees for 2017, increasing its assets by $3.9 billion to reach a total of $29.3 billion, while paying out approximately $3.3 billion in benefits for the year.
The 15.1% return is more than twice the system’s assumed rate of return of 7.25%, and as a result, PennSERS projects approximately $30 million in employer contribution savings for fiscal year 2018-2019, and $530 million over the next five years.
“The SERS investment team manages a diversified fund which generated a meaningful risk-adjusted return by positioning the fund to benefit from strong equity markets,” said SERS CIO Bryan Lewis in release. “In addition to managing the risks of the portfolio, we have also been working hard to negotiate lower fee structures and pursuing co-investments and similar opportunities to achieve better fee arrangements.”
PennSERS has reported nearly double-digit annualized returns since the end of the financial crisis of 2008, earning 9.8% net of fees from April 1, 2009, through the end of 2017. SERS also said that during that same period, it lowered its annual investment manager expenses by more than $100 million, and paid only 0.47% of the total fund in investment manager expenses.
During 2017, PennSERS also restructured its hedge-fund program, and implemented a multi-strategy asset class.
“The multi-strategy asset class provides the board with greater diversity of investment opportunities,” said Lewis. “That flexibility allows the board and staff to be more strategic as the needs of the portfolio change over time, increasing our chances for higher risk-adjusted returns.”
PennSERS also said it expanded its emerging investment manager program to identify investment managers in public equity markets with the greatest opportunity to generate returns above index. And it reallocated $1 billion of cash and investing in public markets.
The system’s funded ratio increased to 59.6% for the year, from 58.1% at the end of 2016, while the employer contribution rate fell to 32.3% of payroll from 33.24% the previous year. As of the end of 2017, the asset allocation of the fund was 53.2% in global public equity, 14.5% in fixed income, 13.6% in private equity, 7.4% in real estate, 7.3% in multi-strategy, 3.3% in cash, and 0.7% in legacy hedge funds.