Dallas Pensions’ Low Returns, Funded Ratios Blamed on Private Equity Performance, Allocation

Private equity under-allocation and underperformance are dragging down both the Dallas Police and Fire Pension System and the Employees’ Retirement Fund of the City of Dallas far below their peers, according to an analysis commissioned by the city of Dallas.

Investment adviser Commerce Street Investment Management compiled and in June presented its report to the city’s ad hoc committee on pensions, assessing the pension funds’ structure and portfolio allocation; reviewing the portfolios’ performance and rate of return; and evaluating the effectiveness of the pension funds’ asset allocation strategy.

The analysis also compared the investment returns of the two pension funds with similar-size funds in Texas, which include, among others, the Houston Firefighters’ Relief and Retirement Fund, the Houston Police Officers’ Pension System, the Houston Municipal Employees Pension System, the Austin Police Retirement System, the Austin Firefighters Retirement Fund, the Fort Worth Employees’ Retirement Fund, and the Texas County and District Retirement System.

According to the report, both Dallas pensions are significantly underfunded, with the Dallas Police and Fire Pension System’s funded ratio just 39%, while the Employees’ Retirement Fund has a funded ratio of 73%.

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“The City of Dallas will have to contribute significant funds to improve the funding status,” the firm wrote in the report.

The DPFP’s annualized returns over three, five and 10 years were well below those of its peers, earning 1.5%, 2.8% and 2.0%, respectively, while the Dallas ERF earned returns of 3.9%, 4.7% and 6.6%, respectively, over the same time periods. The DPFP’s 2.0% return over 10 years was not even close to the next-lowest 10-year return among its peers, the Austin ERS at 6.0%. Meanwhile, peer leader Houston MEPS earned annualized returns of 13.1%, 11.1% and 10.2%, respectively, over three, five and 10 years. The report showed average returns of 4.1%, 5.1% and 6.1%, respectively, over three, five and 10 years for public plans in Texas.

The report blamed the Dallas pension funds’ poor results in large part on having private equity allocations significantly lower than those of their peers. For example, Houston MEPS’ private equity allocation is 28.2%, and the average private equity allocation among the peer group is 21.3%, compared with the DPFP and Dallas ERF’s allocations of 12.2% and 10.5%, respectively,

The pension funds’ private equity returns were also far off their peers’ earnings, particularly the DPFP, which has seen its private equity portfolio gain only 4.8% over the past five years, compared with 17.6% for Houston MEPS and the peer average of 17.47%. Meanwhile, the ERF’s five-year private equity returns nearly tripled those of the DPFP at 14.865% but still come below the peer group average.

The Commerce Street report recommended that to improve the pension funds’ returns and funded ratios, the city should: analyze what top performing peers have done; collaborate to find new investment strategies; improve governance policies and procedures; and provide recommendations for raising the funds’ investment performance.