Pennsylvania PSERS Earns 9.27% in FY 2018; Exceeds Investment Return Assumption of 7.25%
Fund adds $4.7 billion in net investment income
HARRISBURG, PA – The Public School Employees’ Retirement System (PSERS) today announced the Fund posted a positive return of 9.27% for the fiscal year ended June 30, 2018 (FY 2018) and earned $4.7 billion in investment income net of fees.
PSERS Chief Investment Officer, James Grossman, Jr., explained, “Our fiscal year performance was driven by very strong performance in private equity, U.S. equity, non-U.S. equity, private real estate and private credit. While risk-on assets had strong returns, most asset classes had positive returns this past fiscal year as interest rates remained low and the U.S. economy received a boost from tax cuts. Active management had a strong year during this past fiscal year, adding over $650 million, net of all fees and costs, in incremental value over the Board’s passive policy benchmark. However, most of the returns were earned in the first half of FY 2018. The second half of FY 2018, and continuing into FY 2019, has been more challenging as interest rate hikes in the U.S. are starting to have an impact along with slowing global growth. Recently, in accordance with the Board’s updated asset allocation, we’ve been further reducing the risk exposure of the Fund.”
After the Great Recession, in 2009 PSERS made the decision to increase the Fund’s diversification among certain asset classes not tied to the equity markets to limit the impact of equity market volatility. In the nine fiscal years since the Great Recession of 2008/2009, PSERS earned an annualized net of fee return of 9.28% which exceeded the Fund's 7.25% annual return assumption while taking significantly less investment risk.
In addition to the 9.27% FY 2018 return, the PSERS Board also reported positive investment returns of 6.84% for the three-year, 7.62% for the five-year, and 7.88% for the 25-year periods ended June 30, 2018.
PSERS 10-year return of 5.03% remains impacted by the 2008/2009 returns during the Great Recession. As noted previously PSERS earned 9.28% net of fees since the Great Recession and as a result, PSERS 10 year return is already beginning to improve and is projected to rebound sharply over the next three quarters.
In other business, PSERS’ Chief Financial Officer, Brian Carl, presented PSERS’ FY 2018 financial statements and noted the following key highlights:
* PSERS’ total net position increased by $3.2 billion from $53.5 billion at June 30, 2017 to $56.7 billion at June 30, 2018 due in large part to strong investment returns and member and employer contributions exceeding deductions for benefit and administrative expenses.
* Member pension and health care benefit payments exceeded $7.1 billion.
* On a market value basis, PSERS’ unfunded liability declined by $1.4 billion in FY 2018 as PSERS’ total net position grew faster than its total pension liability.
* After declining for many years, the funded ratio, on a market value basis, improved for the second year in row from 51.84% at June 30, 2017 to 54.00% at June 30, 2018.
* For the second consecutive year PSERS received full actuarial funding from school employers and the Commonwealth after 15 previous years of underfunding. This is an essential step to bring PSERS back to fully funded status.
Mr. Carl emphasized the financial importance of PSERS receiving 100% of the actuarially required employer contributions from school employers and from the Commonwealth, which directly reimburses school employers for no less than 50% of the employer contribution rate. Full actuarial funding from school employers, along with members’ contributions and investment income, are all necessary sources of funds that will pay down the unfunded liability of the System and bring PSERS back to fully funded status.
Also during Friday’s Board meeting, the Board passed a resolution creating an ad hoc Agency Committee on Fee Transparency consisting of five Board members and supported by key PSERS investment professionals. This Committee will review and assess PSERS current policies, practices and standards regarding the reporting of investment management performance and fees, charges, expenses and profit-sharing arrangements. The Committee expects to meet later this year and propose recommendations to the Board at a future Board meeting with the goal of making PSERS a national public pension fund leader in fee and performance disclosure and transparency.
The Board also recommended the Agency Committee on Fee Transparency collaborate with other public pension funds and national pension organizations to work toward a nationwide goal of establishing uniform reporting guidelines for ensuring improved transparency in public pension reporting of fees and reporting private market and real estate profit sharing (carried interest) across the country. Continuing the Fund’s effort to increase transparency, PSERS investment professionals gave a presentation on profit sharing (carried interest) to the Board. The data included the estimated total of profit sharing (carried interest) paid out since the inception of PSERS’ investment in private markets and real estate in the 1980s. A copy of the presentation can be found on the investment page of PSERS’ website www.psers.pa.gov.
About the Pennsylvania Public School Employees’ Retirement System
PSERS is the 15th largest state-sponsored defined benefit public pension fund in the nation. As of June 30, 2018, PSERS had net assets of approximately $56.7 billion and a membership of approximately 256,000 active school employees and over 230,000 retirees.
For More Information Contact:
Evelyn Tatkovski Williams
PA Public School Employees’ Retirement System (PSERS)