Pension Fund Investments Update
November 13, 2008
By Ellen Hoekstra, Capitol Services, Inc.
Many employees and retirees have watched the plunging stock market with dismay, particularly if their retirement money is in a 401k rather than in a defined benefit plan. For those MAGE members who are in the defined benefit pension plan under the State Employees Retirement System (SERS), the State Treasurer has offered an update on how their funds are doing.
The State Treasurer is the sole fiduciary for the State of Michigan Retirement Systems (SMRS), of which SERS is the second largest pension plan. The State Treasurer, Robert J. Kleine, is responsible for investing funds in four pension plans as well as 410 other State funds. As of the close of business on September 19, the SMRS held $55.5 billion in well-diversified portfolios that included significant assets outside the equity markets, such as bonds and real estate. SMRS is the 15th largest public pension fund in the United States and the 39th largest in the world, making SMRS an extremely desirable investor.
About half of SMRS investments are in the stock market. The downturn in the financial sector, which makes up about 15% of the S&P 500, caused the S&P 500 to decline 19.1% between January 1 and September 19 of this year. Thus, the retirement funds’ asset value declined by around 9.5% between these two dates. When the market rebounds, the SMRS will experience a corresponding increase in value.
Over the past 50 years, there have been eleven significant declines in the S&P 500, with an average loss of 23%. After the end of the decline, the stock market rose an average 35% over the subsequent 12 months.
Newspaper coverage of the impact of the market plunge on state pension funds has sometimes neglected to factor in the pension benefit payouts to retirees and beneficiaries. The SMRS pays out about $200 million per month more than it takes in form contributions with the funds. Investment returns, actuarially anticipated to be 8% per year, make up the difference.
The SMRS has performed well compared to other public pension funds around the country. At the end of the last quarter, the funds’ one-year rate of return was a negative 4%, slightly better than other public plans. The SMRS three and five year rates of return are 8.8% and 10.2% respectively, placing our state pension funds investment earnings in the top quarter of public pension plans in the U.S.
However – and probably most important – pension benefits for those employees and retirees in the defined benefit plan are constitutionally guaranteed. Under Article 9, Section 24 of the State of Michigan Constitution, the “accrued financial benefits of each pension plan and retirement system of the state…shall be a contractual obligation thereof which shall not be diminished or impaired thereby.” Thus, although the employer contribution may need to rise following a market drop, the pension benefits promised by state law must be delivered.
This article appeared in the October/November edition of the MAGE Newsletter "IMAGE" and is reproduced with permission.