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SERS moves $2.1B to lower-cost investments, but funding gap grows

The Pennsylvania State Employee’s Retirement System voted last week to move $2.1 billion into passive investments, garnering praise from officials who had pushed for the fund to reduce fees paid to money managers. But the system also bumped down its assumed rate of return, increasing its unfunded liability by about $1 billion.

About 127,000 retired state employees receive benefits from SERS, but only about 102,000 are currently paying into the system. The fund had an unfunded liability – the difference between the amount of money available and the amount it will need to pay out – of about $19.5 billion as of the end of last year.

The gap grew after SERS’s monthly meeting last week, when the fund’s board lowered its assumed rate of return from 7.5 to 7.25 percent compounded annually. The change, combined with a lower assumed inflation rate, will add about $1 billion to the system’s unfunded liability, said Pam Hile, a spokeswoman for the fund.

As a result, the projected amount employers will pay into the fund will go up 1.2 percent, from 32.04 percent of payroll to 33.24 percent.

“Adjusting the assumed rate of return is something this board considers very carefully and reviews each year,” SERS board chairman David Fillman said in a news release. “The board feels a quarter percentage point reduction in the long-term rate is right for this fund at this time and reflects a reasonable long-term target to be achieved over the next 20-30 year period.”

SERS is not alone in lowering its expectations for investment returns. Other pension funds across the country, including Pennsylvania’s Public School Employees’ Retirement System,  have also tempered their predictions recently in light of current market conditions. 

Still, reducing fees paid to money managers could slightly reduce the gap between the money the state collects for its pension funds and the money it has available to pay retirees, Pennsylvania Treasurer Joe Torsella and Gov. Tom Wolf said last month.

The $2.1 billion move to passive strategies is expected to save the fund about $7 million annually.

Torsella, who sits on the SERS and PSERS boards, praised the move, as well as SERS’s decision to adopt a “more realistic return assumption.”

“Since taking office a little over 100 days ago, I have worked to build a better future for Pennsylvanians by putting their interests first. This announcement is a step in that direction for SERS, by saving taxpayer dollars through responsible investment strategies,” Torsella said in a statement.

About 40 percent of SERS’s $26.3 billion in assets is already passively managed, including 70 percent of its public equity portfolio, Hile said last month. The additional $2.1 billion will join that amount “over time,” SERS said in its news release.

In addition to moving some funds to passive strategies as appropriate, Wolf and Torsella have also suggested SERS and PSERS adopt fee caps and take steps to reduce administrative costs, billing the moves as common-sense actions the state can take as it moves toward a more comprehensive reform of its ailing pension system.

In addition to the fund changes, SERS also voted to hire a law firm to “review SERS-related information that arose in a recent federal court case.”

Philly.com reports that the firm is looking into whether SERS officers have broken any laws in the way they choose to hire money mangers and invest public money. The probe is the result of information that came to light during money manager Richard Ireland’s bribery trial earlier this year.

Jennifer Wentz
Jennifer Wentz covers Lancaster County, York County, financial services, taxation and legal services. Have a tip or question for her? Email her at jwentz@cpbj.com.

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