Milwaukee Could Learn a Thing or Two from Wisconsin’s Healthy Pension

Research from Wisconsin Policy Forum dissects the disparities between the state’s three largest pensions and lessons to be learned from its best.

The Wisconsin Policy Forum issued a research report determining that Milwaukee’s two retirement systems could learn a few lessons from the statewide Wisconsin Retirement System (WRS), which is amongst the best funded pension plans in the United States.

Milwaukee’s respective city and county pension plans have been mandating increasingly higher taxpayer-financed contributions, amounting to $92.7 million for the county plan and $83.2 million for the city plan.

One remedy the report, called Bridging the Gaps, suggests is to assimilate the WRS’s “shared-risk” model, which helps spread the potential risks and rewards of investing between government employers and pension recipients through increases or decreases. WRS was 96.5% funded as of December 31, 2018.

“Instead of automatic annual cost-of-living adjustments (COLAs), the WRS provides higher payments to beneficiaries only if the fund outperforms its target rate of return that applies to those recipients. The reverse is also true—in the case of many employees, previous benefit increases can be taken back due to poor investment performance,” the report said.

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Data presented in the report showed that WRS’s COLAs paid to retirees are relatively volatile compared to the COLAs provided by the Milwaukee plans, and fell during and after the Great Recession instead of rising as they did for both Milwaukee plans.

The WRS’s assumptions on its investment returns were relatively high, leading to higher employer and employee contributions in case returns didn’t match  expectations. At the end of 2018, WRS lowered its investment return assumption to 7%, below the national median of 7.25%, and below the 7.5% used by both Milwaukee plans.

The city plan’s liabilities grew by about $245 million in 2017 and $475.8 million in 2018 due to changes in the underlying assumptions used to calculate it, according to the report. To reconcile for the heightened liabilities, the city pension will have to increase its contributions to nearly double that of today’s numbers.

“In addition, the WRS is actually being more cautious than the numbers above might imply. Once workers in the WRS retire, the state only needs to earn a 5% rate of return on the assets associated with those retirees to make the minimum necessary payments to them. If the state’s returns exceed the 5% target, then the extra returns on those assets can be used to make additional payments to the retirees, as discussed above,” the report said.

Additionally, the WRS makes the case that sharing the cost of employer contributions with workers increase payments to the fund “dramatically.”

The  report concluded that to help Milwaukee’s two pension plans increase their solvency, they should issue pension obligation bonds, implement risk sharing, make changes to contribution policies, extend the amortization period, and reduce the defined pension benefit.

Another option posed was to simply close the doors on Milwaukee’s plans and transfer its members to the WRS. WRS leaders, according to the report, have repeatedly expressed willingness to consider that option, but only for new employees and future years of service for active employees.

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Study Bolsters Case for Endowments’ Sustainable Investing

Growing body of evidence finds ESG investing can match or beat traditional investing.

Despite limited available data on the financial performance of sustainable investing among university endowments, a growing body of evidence shows that socially responsible investing strategies have performed as well or better than traditional approaches, according to a report from the Intentional Endowments Network (IEN).

The report cites endowments that have implemented sustainable investment strategies while also meeting or surpassing their financial performance targets. This includes case studies of endowments at North Carolina State University, the University of New Hampshire, Arizona State University, and the College of the Atlantic, among others.

IEN said the case studies are not intended to be a comprehensive review, nor do they provide the definitive last word on sustainable investing. The study is, however, intended to show endowment fiduciaries that they can implement ethical investing strategies without sacrificing returns.

“This growing body of knowledge challenges the persistent assumption that sustainable investing necessarily means accepting lower returns,” the report said. “Institutional investors are seeing that the opposite is more likely true—that a smart approach to considering ESG [environmental, social, and governance] factors can help reduce risk, avoid losses, uncover opportunities for strong performance, and improve overall financial returns.”

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North Carolina State University’s $1.4 billion endowment received a gift commitment of $50 million in 2012 with the stipulation that it must be invested in a “socially responsible fashion.” The NC State investment team established an ESG investing strategy in a parallel fund called the Sustainable Responsible Impact Fund (SRI Fund) through the NC State Foundation, which manages the endowment.

The strategy began in 2013 with $10 million invested in mostly negative screening strategies, and, as of June 30, all of the commitment had been received and is currently valued at $54.1 million. The fund is diversified across all asset classes with approximately 63% in ESG investing strategies, 30% in negative screening, and 4.3% in impact strategies, with the remainder in cash.

As of the end of  June, NC State’s SRI Fund produced one-, three-, and five-year annualized returns of 8%, 12.8%, and 8.6% respectively, which outperformed the fund’s benchmark by 1.3%, 3.9% and 3.2% respectively over the same time periods. Meanwhile, the university’s larger endowment returned one-, three-, and five-year annualized returns of 7.3%, 10.3%, and 7.6% respectively.

The University of New Hampshire Foundation, which oversees the $247 million endowment of the University of New Hampshire, established an ESG pool in 2015 that is now worth $42 million and accounts for 17% of the endowment’s total assets under management. Erik Gross, treasurer of the foundation, said the pool’s performance over the past two years has been “strong across the board,” with the exception of a single fund in its inflation-hedging real assets segment.

Gross said the investment committee has sought to mimic the asset allocation of the endowment’s main pool, although the ESG pool is somewhat more heavily weighted in equities, with a much smaller hedge fund segment and no private equity allocations. Gross said the ESG pool has “materially outperformed the main pool” over the past two years. “The foundation is encouraged by these results, and especially relative to benchmarks, and expects the corpus of the ESG pool to grow significantly through the addition of new endowed funds in the upcoming campaign,” he added.

The ASU Foundation, which manages Arizona State University’s $922.1 million endowment, established a $100 million sustainable, responsible, and impact investment pool in July. While the long-term investment strategy is being developed, the first phase was to steadily deploy capital into ESG-optimized public market investments. Although the track record for the pool is very short—only six months—the ESG-oriented strategies have outperformed the non-ESG versions during that time. In US equities, the ESG version outperformed the non-ESG version 11.8% vs. 10.9%, and for international developed markets, it outperformed 5.6% vs. 5.2%; and 2.7% vs. 1.8% in emerging markets.

“While six months is too short a window to draw significant conclusions on performance,” ASU Enterprise Partners CIO Jeff Mindlin said in the report, “we’re encouraged by the growing sophistication and availability of products in this space that allow us to build a portfolio that doesn’t need to sacrifice returns in order to align with our mission.”

And the College of the Atlantic’s endowment, which is relatively small at $46.5 million, has a longer track record of sustainable investing than most endowments as it was one of the first colleges to divest from fossil fuels, doing so in 2013. The college said that, since 2013, the endowment has earned annualized returns of more than 8.8%, which ranks it in the top quartile of all peer endowments in the Cambridge Associates Endowment and Foundation universe, and in the top 1% of similarly-sized peer endowments.

“The studies and examples in this report show that sustainable investing strategies can yield strong financial performance,” the report said. “The choice to incorporate ESG considerations can contribute to global progress without harming individual performance.”

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