Wisconsin State Pension Defers $26 Million in Incentives After 13% Loss

The State of Wisconsin Investment Board announced on Thursday that it is deferring approximately $26 million in staff incentive compensation payments for 234 employees until the second half of this year.

The decision came after the SWIB’s $114 billion Core Fund reported a 12.92% investment loss for 2022. According to board policy, the SWIB’s trustees are required to consider deferring incentive compensation payments if the Core Fund, which is the larger of the two Wisconsin Retirement System trust funds, reports an investment loss of 10% for the year.

According to the SWIB announcement, the incentive compensation amounts to less than 5% of its costs for managing the WRS, which it refers to as the “pay-for-performance” part of employee compensation. The incentives are awarded based on an employee’s contributions to the overall success of the organization and trust fund performance after all costs are deducted, and they are based on delivering value above industry benchmarks set by the trustees with the help of an outside consultant.

The board announced that compensation to SWIB employees provides “a considerable cost savings advantage” for the retirement system over the fees charged by external investment managers. It cited an independent cost consultant that calculated both that SWIB’s costs for 2021 were $91 million lower than the average for U.S. public pension funds and that it has saved more than $900 million in costs compared to its peers over the last 10 years.

The SWIB also announced that the payments will be deferred until December; however, a portion will be eligible for payment in August if certain performance thresholds are met. The SWIB added that, “despite the challenges of 2022, which saw every public market asset class generate negative returns,” strong investment returns for the Core Fund during three of the past four years will produce a 1.6% positive annuity adjustment for beneficiaries this spring.

“The Board’s decision to defer incentive compensation aligns staff outcomes with the results for WRS participants,” SWIB Board of Trustees Chair Barbara Nick said in a statement. “The volatile negative return environment of the 2022 financial markets impacted our beneficiaries. However, Trustees also wanted to acknowledge the results generated by staff over the past several years that grew and protected the trust funds.”

In addition to deferment, the SWIB also adjusted its asset allocation and revealed nearly $780 million in private equity investments made during the third quarter of 2022. According to public documents, the retirement system’s board adopted a recommendation by consultant NEPC to increase the private equity/debt target allocation for the Core Fund to 15% from 12% and to increase its real estate allocation target to 8% from 7%, while cutting its public equity allocation to 48% from 52%.