News: Quick Takes

State pension returns flat during first three months of 2018

Returns on state pension fund investments were flat for the first quarter of 2018. That triggered a warning by state Treasurer Dale Folwell about long-term pension stability.

Folwell blamed the 0.2 percent gain for the three months ending March 31 largely on a volatile stock market. His department manages the nearly $100 billion N.C. Retirement Systems.

“Our investment team has done a great job during a difficult first quarter,” Folwell said in a news release. “However, the fact remains that we spent more than $1.5 billion gross in benefits payments while producing little in investment gains. Those types of outflows without earnings are unsustainable in the long term.”

Folwell said pension plan investments had a strong 2017. Echoing comments he made to reporters on his monthly Ask Me Anything teleconference Tuesday, May 1, Folwell said gains have not met assumed rates of return on average over the past 20 years.

On Tuesday he told reporters the pension plan is paying out $500 million in monthly benefits. The Retirement Systems manages benefits for 900,000 teachers, firefighters, police officers, state and local government employees, and other public workers. It is one of the five best-funded plans in the nation.

But it remains underfunded, and Folwell has been pushing to reduce long-term shortfalls. Recently the boards of trustees for the Teachers’ and State Employees’ Retirement Systems and the Local Governmental Employees’ Retirement Systems lowered the plan’s assumed rate of return from 7.2 percent to 7.0 percent.

The lower rate more accurately reflects actual gains. Lawmakers then can decide how much state money is needed to keep the plan fully funded.

The Treasurer’s Department released details Thursday, May 3, showing the General Assembly would need to spend about $276 million more the next four years to make up for the lower return on investment.

TSERS would need $18.7 million in fiscal year 2019, $38.5 million in 2020, $82.5 million in 2021, and $129.2 million in 2022. Spending on LGERS would need to go up $0.5 million in fiscal year 2021, and $6.3 million in 2022.

Since taking office Folwell has slashed $76 million in fees to outside investment managers. He projects a $300 million savings over four years — three times the pledge he made during his campaign.

“Every week or probably every … two weeks I’m signing an amendment to lower a fee. Those fee reductions keep coming in as we’ve changed the culture of the treasurer’s office. There’s a high focus on that,” Folwell said Tuesday.

“We are consolidating some managers, and giving some managers more money [to] take advantage of our buying power,” Folwell said. He also will bring even more pension management in-house instead of contracting with outside firms.

Below are the first quarter 2018 returns, after all fees and expenses:

  • Public equity, about 40 percent of the total fund, was flat at 0 percent.
  • Private equity rose 4.3 percent.
  • Non-Core Real Estate and Opportunistic Fixed Income gained 5.6 percent and 2.4 percent respectively.
  • The multi-strategy portfolio returned -0.7 percent for the three-month period.
  • Inflation-sensitive and diversifier investments increased by 1.8 percent.
  • Investment-Grade Fixed Income was down – 1.7 percent.