Rising Interest Rates Galvanize Change in Alaska Board’s Farmland Portfolio

The Alaska Retirement Management Board (ARMB) is considering significant changes to its $852 million farmland portfolio following interest rate changes and their potential effects on row crops.

Farmland is typically categorized into two main crops, row and permanent. Row crops are cultivated seasonally, with the potential to change the type of crop planted, whereas permanent crops are planted once and maintained over a long period of time, with no potential to quickly change the crop type.

While the benefit for row crops is the ability to switch crops, there are limited options for switching since row crops are dominated by five commodity crops: hay, soy, corn, cotton, and wheat.

Yield expectations for row crops are typically projected around 3-5% compared with 7-9% for permanent crops, of which the $32.5 billion ARMB’s farmland portfolio is divided between permanent crops ($136 million), and row crops ($716 million).

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While “row crop returns have been excellent,” according to a report from the ARMB, “row crops are unlikely to have outsized performance going forward.” Row crop price appreciation has closely tracked interest rates, but with interest rates rising or staying flat, row crop price appreciation will be challenged, the report continued.

Additionally, permanent crops have consistently beaten or kept pace with row crops since the ARMB started investing in the asset class in 2004.

Both row and permanent crops have low betas with the S&P 500 Equity Index and the Bloomberg Barclays Aggregate Bond Index.

As a result of the study, the board received a recommendation from Nicholas Orr, investment officer for real assets, to reconfigure the target allocation from 80% row crops / 20% permanent crops to 60% row crops / 40% permanent crops.

Tags: Alaska Retirement Management Board, Farmland, Interest Rates, Pension

A new pension reform is now in effect for most new state workers in Pennsylvania, creating two retirement options in order to cut taxpayer risk while helping shore up funding for state pension plans.

The law, known as Act 5 of 2017, puts newly hired state employees in either a hybrid plan or a full-blown 401(k) account. The hybrid plan would keep half a retiree’s money in a traditional, taxpayer-backed defined benefit fund, and the other half into a private 401(k) plan tied to the stock market. The overhaul kicks in for teachers on July 1.

While the new set-up lowers taxpayer risks, and projects to save from $43.3 million to $140 million annually over 30 years, it also lowers the retirement benefits for those enrolled in these plans.

This means new workers in the State Employees Retirement System (SERS) will lose between $6,425 and $34,048 in benefits. Teachers and school staff in the Public School Employees Retirement Systems (PSERS) will see reductions between $7,327 and $33,173.

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Both figures are estimated for a 65-year-old retiring with 35 years of service and an aggregate final salary of $60,000, according to news outlet The Morning Call.

Additionally, both plan members will be charged by the companies managing their 401(k)s. Great-West Life & Annuity Insurance of Denver will handle the state workers, and Voya Financial will run the accounts of the school workers plan.

Pennsylvania lawmakers, corrections officers, and police, however, are excluded from participating in Act 5. Lawmakers can choose to freeze their old defined benefit plans and then open one of the new ones, essentially beginning a second retirement account. The deadline for those eligible is March 31.

The two retirement systems have a collective pension debt of $72 billion. The state of Pennsylvania is 53% funded.

SERS and PSERS have $30 billion and $56.7 billion in assets under management, respectively.

Representatives from both systems were unavailable for comment.

Tags: Act 5, Pennsylvania PERS, Pennsylvania Public School Employees Retirement System (PSERS), Pension, Pension Reform