In the black

Retirement funds add billions as market rises

Alaska’s retirement savings accounts, second in size in the state only to the Alaska Permanent Fund, had stellar returns in the just completed 2011 fiscal year, new state data shows.


The strong returns will help out the state’s underfunded retirement plans with the addition of $2.9 billion to the funds’ assets during the year.

The state recently calculated that it had an unfunded liability of $9.7 billion, meaning that it expected it would owe in pension and health benefits more than it expected its savings would amount to when those bills come due.

The retirement funds really needed the strong year, said Gary Bader, the state’s chief investment officer.

“We’ve certainly had our share of poor ones,” he said.

The Alaska Retirement Management Board’s funds, chiefly the Public Employee Retirement System and the Teacher Retirement System, closed the 2011 fiscal year on June 30 holding close to $20 billion dollars, state Department of Revenue data shows.

The department’s Treasury Division manages the retirement funds for the ARM Board.

Alaska’s unfunded liability problem won’t be solved quickly, even with the additional money, Bader warned.

The ARM board uses a process of actuarial “smoothing” which takes five years to include each year’s investment results into its calculations of unfunded liability.

During the 2011 fiscal year TRS investments earned 21.51 percent, while PERS had returns of 21.41 percent, according to recently released preliminary data.

Bader cautioned that the state’s investment advisor, Callan Associates, will calculate the final numbers, which may be slightly lower due to timing on when money moved in and out of the funds.

Bader said he expects the final number to be above 21 percent for the year, however.

That’s above the 20.6 percent returns that the Alaska Permanent Fund Corp. recently announced for its investments.

The retirement board has its assets in a broad range of investments, ranging from traditional bonds and stocks to newer hedge funds and holdings in timber and agriculture land.

That diversification is aimed at helping insulate the retirement funds from big declines, but Bader said they still had substantial amounts in the year’s best performing asset, which was U.S. stocks.

“We got great returns obviously out of equities (stocks) of all sorts, he said, but it was led by a gain of more than 33 percent on U.S. stocks, followed by 28 percent in global stocks.

Ironically, the ARM Board reduced its anticipated annual rate of investment earnings earlier this year from 8.25 percent to 8.0 percent, saying a more conservative approach was more realistic.

The lower expected return number indicated the board felt financial markets were going to return less than they had previously though.

In the first year in which results were reported after the change the total actual returns were more than two and half times the estimate.

“Just about everything was over the board’s actuarial estimate of 8 percent,” Bader said.

Not all of the retirement funds did equally, with some of the “participant-directed” funds differing significantly from the overall PERS and TRS amounts.

The state switched new employees from the traditional defined-benefit retirements to a 401(k)-style defined-contribution plan several years ago.

In those plans’ participant-directed investments, which were chosen by employees and not by state investment mangers, the PERS employees earned 23.1 percent while TRS employees earned. 22.6 percent.

Bader said those investments are likely from younger employees who are invested more aggressively, such as in high-returning stocks.

Typically, investment advisors recommend riskier investments for those who are still many years away from retirement. Those younger investors typically also have much smaller accounts, and only $260 million was in those plans at the end of the fiscal year.

Two other participant-directed plans, the Supplemental Annuity Plan and the Deferred Compensation Plan, had far lower investment returns of 15.9 and 18.0 percent, respectively.

Those two plans, many of which are held by longer-term employees, are more likely to be heavily invested in lower-risk investments such as bonds, which did less well than stocks in the last year, Bader said.

“One of the biggest holdings there is the Stable Value Fund, which is basically an intermediate bond fund,” Bader said.

That’s a conservative investment that is unlikely to lose much value, but is also unlikely to ever see the kind of returns posted by U.S. stocks in the last year.

Those older employees typically have bigger accounts as well. The Supplemental Annuity and Deferred Compensation plans together held $3.1 billion at the end of the year.


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