Pennsylvania SERS Loses 4.6% in First Half of 2020

The market downturn of the first quarter hit the Pennsylvania State Employees’ Retirement System (SERS) so hard that its portfolio lost 4.58% during the first half of 2020, despite a strong second quarter in which the fund returned over 8%.

The fund’s top-performing asset during the first half was Treasury Inflation-Protected Securities (TIPS), which returned 5.84% for the year to June 30, and 4.35% during the second quarter. Fixed income and cash were the only other asset classes that had positive gains during the first half, returning 1.67% and 0.55%, respectively.

The worst-performing asset class during the first half was international developed markets equity, which lost 11.16%, followed by emerging markets equity and private equity, which declined 7.04% and 5.59%, respectively.

Leading the rebound during the second quarter was US equity and emerging markets equity, which surged 22.75% and 20.74%, respectively, followed by international developed markets equity, which climbed 16.38%. Private equity and private credit were the two worst-performing asset classes during the quarter, falling 7.80% and 4.72%, respectively.

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“While the uncertainty around COVID-19 hit investment markets hard late in the first quarter, the strong second quarter returns are working to restore the fund toward its pre-COVID level,” Pennsylvania SERS CIO Seth Kelly said in a statement. “Early estimates show the trend of improvement continued through August.”

Meanwhile, the Pennsylvania SERS board approved its second annual stress test and risk assessment report prepared by its actuary Korn Ferry. SERS said the report reflects the results of the Dec. 31, 2019, actuarial valuation and the anticipated effects of the revisions in the actuarial assumptions—including the reduction of the assumed investment return rate to 7%t—that were approved by the board in July.

The SERS investment policy includes “capital preservation” investments that are intended to be highly liquid and have a low correlation to changes in the US equity markets. The investments are meant to provide a stable source for meeting the cash flow needs of the plan and to protect against the risk that equity investments would need to be liquidated at unfavorable values in order to pay member benefits during market downturns, such as the one that occurred in March.

The fund’s capital preservation investments include 2% cash, 4% TIPS, and 22% US public market fixed-income investments for a total target allocation of 28%. According to the results of the stress test, the 28% allocation is expected to be sufficient to cover 87 months, or a little over seven years, of projected member benefits net of contributions. Korn Ferry said the fund would need to have investment returns below -23% per year for three years to cause the capital preservation investments to be insufficient to cover 36 months of projected member benefits net of contributions.

“The capital preservation investments appear to be achieving the goal of providing security in both the ability to pay benefits when due and the ability to avoid liquidating equity investments at unfavorable values,” said the report.

The board also approved two private equity commitments of up to $75 million, which include up to $50 million to Thoma Bravo Fund XIV, L.P., as a follow-on investment, and up to $25 million to Thoma Bravo Discover Fund III, L.P. The commitments target investments in application and infrastructure software and technology-enabled services firms in North America.

“Thoma Bravo is a leading manager in the software industry,” said Kelly. “Their investment process and accompanying performance, coupled with the firm’s dedication to transparency makes them an excellent partner for SERS’ members retirement security.”

Related Stories:

Pennsylvania SERS Names Seth Kelly CIO

State Pensions Entered Pandemic in Worse Position than in 2008

Pennsylvania SERS Cuts Investment Return Rate Assumption to 7%

Tags: Korn Ferry, Pennsylvania Public School Employees Retirement System (PSERS), Pennsylvania State Employees Retirement System (SERS), Seth Kelly, stress tests, Thoma Bravo

US corporate pensions saw an investment loss of 0.74%, or $17 billion, during September—the first time in six months that their asset value has declined, according to actuarial and consulting firm Milliman.

The asset decline resulted in the average funded ratio for the 100 largest corporate defined benefit pension plans—as tracked by the Milliman 100 Pension Funding Index (PFI)—dropping to 84.5% from 85% at the end of August. The $17 billion funding decline, which lowered the funds’ aggregate market value to $1.653 trillion from $1.671 trillion, was comprised of an $8 billion increase in their deficit to $302 billion from $294 billion and a $9 billion decline in the projected benefit obligation to $1.955 trillion from $1.964 trillion.

The change in the PBO was the result of a three-basis point increase in the monthly discount rate to 2.57% from 2.54% in August. There have been two straight months of discount rate increases since July, when the rate hit its lowest point in the 20-year history of the Milliman 100 PFI.

“This was a dizzying few months for corporate pensions, with discount rates hitting historic lows while investment returns had equally noteworthy gains,” Zorast Wadia, author of the Milliman 100 PFI, said in a statement. “However, the result was a solid third quarter for the Milliman 100 plans, with the funded ratio improving.”

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Milliman also reported that during the third quarter that ended September 30, the funded status deficit for the 100 corporate pension plans improved by $18 billion. The discount rate increase and strong asset returns in August resulted in the largest monthly funded status gain for the year. And during the quarter, plan assets were up by $35 billion as the funded ratio of the Milliman 100 companies improved to 84.5% from 83.5% at the end of the second quarter.

For the 12 months to September, the cumulative asset return for the pensions was 8.15%, however, their funded status deficit has widened by $45 billion during that time because the discount rate has declined to 2.57% a year later at the end of September from 3.09% at the same time last year. During that time the funded ratio of the Milliman 100 companies has decreased to 84.5% from 86.0%.

Milliman forecast that if the 100 companies in its index were to earn the expected median asset return of 6.5%, and if the current discount rate of 2.57% were to remain unchanged through 2021, the funded status of the surveyed plans would increase to 85.3% by the end of 2020 and 89.1% by the end of 2021. This is under the assumption that 2020 and 2021 aggregate annual contributions will be $40 billion and $50 billion, respectively.

Under an optimistic forecast that incorporates interest rates rising to 2.72% by the end of 2020 and 3.32% by the end of 2021, with annual asset gains of 10.5%, Milliman said the funded ratio would increase to 88% by the end of 2020 and 103% by the end of 2021. However, under a pessimistic forecast with the discount rate declining to 2.42% at the end of 2020 and 1.82% by the end of 2021, with annual asset returns of only 2.5%, the funded ratio would decline to 83% by the end of 2020 and 76% by the end of 2021.