After a record-breaking 21 percent return on investment in 2011, Connecticut’s pension plans took a dive this year ending with a negative 0.9 percent return.
During fiscal year 2010 Connecticut Retirement Plans and Trust Fund assets declined from $25.5 billion to $24 billion, but state Treasurer Denise Nappier says it’s not unexpected.
“It comes as no surprise that the 2012 fiscal year end performance results are not as we had hoped, but more along the lines of what we expected,“ Nappier said Thursday. “The Great Recession clearly was not a hit-and-run event—it has been an unprecedented financial crisis.”
The state had anticipated at least an 8.5 percent for the teachers’ fund and 8.25 percent for the other employees. The Treasurer’s office said those anticipated return rates are over a period of several years even though the state uses those assumptions to determine the actuarially required contribution on an annual basis.
Admittedly, “the fiscal year 2012 performance results pale when compared to the 2011 fiscal year return of nearly 21 percent—which was the highest in twenty-three years,“ Nappier said. “Such a significant swing in performance results only underscores the wild global financial ride that hasn’t quite come to a full stop yet.“
The strongest performance was garnered in fixed income – which represents approximately 29 percent of the Connecticut Retirement Plans and Trust Fund assets. Inflation-linked bonds and core fixed income posted returns of 11.91 and 7.63 percent, respectively. The balance of the portfolio is invested in asset classes that struggled through particularly volatile markets during the fiscal year, such as developed and emerging equities.
“As investors in a global economy, we must be mindful that events in Europe and beyond have had and will continue to have far-reaching consequences,“ Nappier said.
Nappier’s office said generally the assets of the pension and retirement funds are looked at over a longer time frame. The performance of the funds on a three year basis generated a 10.54 percent return on investment.
The three-year investment performance is expected to help to reduce the unfunded liability of the state’s two major pension funds for state employees and teachers. In addition, the funding of the state employees’ plan was also bolstered by changes in benefits negotiated between the union’s and Gov. Dannel P. Malloy’s office. The deal will allow the state to contribute $125 million more than the actuarially required amount, which is expected to improve the financial footing of the plan.
According to the Pew Center for the States, Connecticut fully funded its annual pension obligations just three times from 2005 to 2010. In 2010 the system was 53 percent funded and faced a $12 billion gap. But the report acknowledged the state is working to fix its funding ratio.
However, there’s little it can do about the markets.
Nappier warned market volatility may continue.
“We expect continued uncertainty in the markets. The volatility we have seen since 2008 may be par for the course in the short term,” Nappier said.
The Connecticut Retirement Plans and Trust Fund, includes six state pension plans and eight trust funds, the majority of which is comprised of the State Employees’ Retirement Fund (SERF), the Teachers’ Retirement Fund (TERF) and the Municipal Employees’ Retirement Fund (MERF), and provides pension fund benefits to approximately 190,000 state and municipal workers and retirees.
According to Nappier’s office the SERF, TERF and MERF returned -0.90, -0.96, and +0.47 percent, respectively in 2012. The performance compared favorably to the loss sustained in the MSCI Worldwide Index of about 4.4 percent for the same time period. (MSCI is an all world stock index with over 6000 securities from 24 countries in the developed world.)