A few random bits of PERS related news.
Just as a reminder, PERS is Mississippi’s Public Employees Retirement System. It’s a defined benefits pension plan. Unlike 401(k) plans and IRA’s that most private sector employees in my generation and younger are familiar with, pensions have a defined amount that has to be paid out upon retirement.
Theoretically, pension owners don’t have to worry about the stock market tanking and cutting their retirement accounts in half–something I’ve already experienced twice in my career. But the pension funds themselves now count on stock market returns to meet funding levels. So the stock market tanking can spell doom for the state budget, pension participants and taxpayers who will have to foot the bill for the shortfalls.
Mississippi’s PERS is premised on an assumed investment return of 7.5%. Many investment professional (and wingnut bloggers) believe that this assumption is way too high and unlikely to be met. Another huge problem for PERS is that more participants are retiring and drawing money out than being added and paying money in. State budget cuts and an aging population both contribute to this structural problem.
I believe PERS funding shortfalls will cause the biggest government crisis in Mississippi in my lifetime.
The crisis could arrive any day now if something happens that causes the market to drop say, 30%. Ponder that every time President Trump says or does something nutty.
Or if the stock market bumps along, the can will be kicked down the road for years. But the day of reckoning is coming. We just don’t know when.
This recent Zero Hedge post shows that Mississippi is holding its place as 8th worst funded PERS ratio.
The Pension Pulse blog had this post regarding the Big Squeeze report from from American Federation of Teachers. The report argues that excessive fees charged to pension funds is a significant factor in underfunded pensions. Specifically, the report criticizes fees charged related to alternative investments. Mississippi was not included in their analysis.
But Mississippi’s PERS is following the trend of increasing investment allocations to alternative investments in order to chase returns. Here is the investment report for the period ending March 31, 2017: PERS investment report 03.31.17.
Private equity now accounts for 6.88% of PERS’s investment allocation. This percentage has been gradually increasing for a while–the target allocation for private equity is 8%.
I don’t know enough about private equity investments to have an opinion about it as an investment in PERS. But it’s a fact that one thing PERS can do to maximize its investment returns is to make sure it’s paying the lowest management fees possible. I suspect it’s not. I can almost guarantee it. Anyone want to bet me that the government isn’t overpaying for investment management services and fees?
Getting a handle on investment fees and expenses and making sure they are as low as possible should be priority 1 for the next executive director of PERS. Priority 2 should be an open communications strategy that does not sugarcoat the looming PERS crisis.