SERA Meets with Bureau of Investment (BOI)
Mary Pollock and I had an opportunity to meet with BOI staff Jon M. Braeutigam, CIO and Deputy Treasurer; Robert Brackenbury, Director of Investments – Private Markets; and Greg Parker, Director of Investments – Public Markets and Director of Asset Allocation to discuss where the defined benefit pension fund stands today, where investment returns may be heading under current market conditions, and update us on other issues impacting the pension fund and the 401(k) (defined contribution) program.
The DB pension fund has done very well over the last 10 year period with a rate of return at 7.4 percent and ranks 10th among its peer group of other public pension funds with greater than $10 billion invested. This time period includes the 2008 recession period. The market value of the retirement systems was the highest in July of this year than it has been since Dec. of 2007. The one year rate of return is 6.2 percent. While this may seem low, it ranks 5th among its peers for this time period. Private equities (venture capital firms) led the types of investments with a 13.9 percent rate of return for the ten year period.
One issue discussed was the movie industry bonds. Legislation directed $19 million out of the General Fund budget to pay off the Pontiac movie studio bonds held by the pension fund. This will occur in October of this year.
We talked about transparency of fees in the 401(k) plans. We were assured that low fees were a primary concern when Treasury picks the funds to be included in the 401(k) plan.
September Investment Advisory Committee (IAC) Meeting
I attended this month’s IAC meeting. Some new faces at the table. In May Gov. Snyder appointed Reginald Sanders, of Portage, to the state’s Investment Advisory Committee. Sanders is director of investments for the W.K. Kellogg Foundation, and served as manager of pension investments at Eastman Kodak Co.
James Nicholson, of Detroit, has been appointed as chair of the Investment Advisory Committee replacing Nick Khouri who is the new State Treasurer. Eric Lundberg’s appointment continues until 2017. Also on the Board are the Directors of the Department of Licensing and Regulatory Affairs and Department of Technology, Management and Budget or their designees.
The funds strong recovery from the 2008-09 financial crisis was discussed . The past 3 and 5 year periods have been especially strong.
The combined retirement systems paid out around $1.9 billion over the past year ending June of this year. Private Equities have done especially well over the past 10 years with a rate of return at 13.9 percent. The total plan return was 7.4 percent over a ten year period ending June, 2015. The market value of the retirement system as of June, 2015 was $61.7 billion.
The next meeting is scheduled for December 1, 2015. You can find detailed information about pension fund investment in the Quarterly Investment Reviews on the Bureau of Investment web site.
Officials Not Concerned Over Missed Target On Retirement Fund Returns
According to an article in MIRS on 8-18-15, the state missed its annual return assumption of 8 percent after double-digit returns over the past couple of years. " According to data provided by Treasury’s Bureau of Investments, the state’s four retirement systems all hovered around the 6.2 percent rate of return for the fiscal year that began in July 2014 and ended in June. "
Treasury spokesperson Terry Stanton was quoted as saying, "It’s not a situation where being below target has an immediate effect on individuals or their pension funds or their ability to access pension funds."
Bob Kopasz , chair of the Michigan State Employee Retirees Association, was quoted as saying, "what happened this year, at 6 percent, is probably just a blip."
Michigan’s recent performance is not dissimilar from other large public retirement funds.
Clarity on Unfunded Liabilities
In last month’s Pension Report, I provided information on a Pew study on unfunded liabilities which included Michigan. While Pew contends the figures in their report were confirmed by the Michigan Office of Retirement Services, other state officials stated , "states have significant flexibility in setting actuarial contribution rates." According to a more recent article, "Michigan does, however, set its pension payments two years in advance. The state then recalculates its required annual contribution using updated data when it comes time to make the payment. In some years, Michigan’s pension payments were greater than the actuarially required amount. But more often, Michigan contributed less than the actuarial recommended amount — contributing less in eight of the past 10 years." To read this second article go to www.detroitnews.com
The Argument for DB over DC
According to an article in the Illinois State Journal Register, "the weighted average benefit paid to retired workers across all five state pension systems is about $3,833 per month, or $46,000 annually," in that state. Meanwhile, according to the Federal Reserve, the median defined-contribution account balance held by households headed by someone aged 55 to 64 is just $104,000, which means that if they live 15 years after retirement, their defined-contribution plan will provide a meager $6,933 per year.
Defined-benefit plans are preferred in the public sector because they provide greater retirement security for workers at a lower cost to taxpayers than defined-contribution plans.
Defined-benefit systems can provide significantly better benefits at lower costs than defined-contribution systems because the investment returns are greater while the administrative and fee costs are lower in the defined-benefit setting. (findings reached by, among others, the U.S. Department of Labor, the National Institute on Retirement Security and researchers at Boston College).
Michigan Seniors Worth Their Weight in Gold
"People over 50 contribute to the economy in a positive, outsize proportion to their share of the population. Despite being 36% of Michigan’s population in 2013 (expected to grow to 38% by 2040), the total economic contribution of the Longevity Economy accounted for 47% of Michigan’s GDP ($203 billion).This supported 52% of Michigan’s jobs (2.8 million), 45% of employee compensation ($112 billion), and 49% of state taxes ($20 billion)."
Read the full report at www.aarp.org
Maybe the Social Security Sky isn’t Falling
According to an article by Brian Stoffel of the Motley Fool, the messages of the demise of Social Security is overstated. According to him, the trust fund running out of money does not mean they program will no longer exist. He states, "when the fund runs out in 2033, assuming the program functions the way it does now, it won’t disappear — it will simply use the payroll tax revenues to immediately reimburse retirees." Maybe there’s hope for the new kids coming up. Read the whole article at www.usatoday.com
Michigan Approves Double-Digit Health Premium Hikes in the Private Market
"Some Michiganders who buy health insurance on the individual market will face double-digit rate hikes next year under rate changes approved by state regulators. Citing the high costs of specialty drugs as well as pent-up demand among the newly insured, the state’s largest insurer — Blue Cross Blue Shield of Michigan — received permission to raise its premium rates 11.4% for individual policies in 2016. And its Blue Care Network health maintenance organization will raise individual rates 9.7%. Both entities combined cover 310,000 people. Last year, the state approved a 9.7% hike, on average, for Blue Cross marketplace plans.
The Michigan Department of Insurance and Financial Services is responsible for reviewing, scrutinizing and approving rate changes sought by health insurers in the state for small employers and people buying insurance on their own. The department announced Tuesday that it had approved an average rate increase of 6.5% for individual market plans affecting more than 560,000 people.
The rate increase will be 1% for small group policies purchased by businesses with fewer than 51 employees. Those plans affect more than 345,000 people."
Read more at www.governing.com
Cost of Living Increases?
According to the Social Security Trustees Report, a cost of living increase for Social Security recipients will not be announced until October. However, in October state pensions will include our standard 3percent/$25 maximum increase.
Laughable Investment Terms
Market Correction: The day after you buy stocks.
Momentum Investing: the fine art of buying high and selling low.
Stock Analyst: Idiot who just downgraded your stock.
Editor’s note: June Morse may be contacted at email@example.com or 517-886-9323.
Return to top of page