FUNDeD STATUS OF OReGON PeRS As of Dec. 31, 2011 n Overfunded
(unfunded) accrued liability ratio
0 ◆ 60%
But those return calculations assume that the funds’ investments are fairly and accurately valued. Should the assets end up being worth less than their value on the plans’ books, the plans will be short of money they were counting on to pay benefits — meaning either more benefit cuts or more cash pumped in by local governments.
Catastrophe investments can produce ample returns so long as the skies remain clear and the ground solid, but the potential downside is sobering: A $300 million catastrophe bond was among the casualties of the March 2011 Japanese earthquake. n
A recent study found that buyout funds have outperformed the Standard & Poor’s 500 stock index for most of the past three decades. Each dollar invested in the average private equity fund, the study estimated, returned at least 20 percent more than a dollar invested in the S&P.
Oregon’s PERS isn’t likely to turn its back on alternative financing anytime soon. As of
June this year it had committed $250.4 million to private equity. And in December 2011, PERS invested $100 million in a “catastrophe fund” that invests in insurers’ risk from hurricanes, earthquakes and other natural disasters.
Those returns have helped PERS recover somewhat from the financial panic of 2008–09, though the fund is still below its pre-crash level. PERS says the system’s benefit obligations were 86.7 percent funded as of the end of 2010; a study by the Pew Center on the States found that only seven state plans were better funded.
As of the end of the 2011 fiscal year, PERS had $12.8 billion, or 20.9 percent, of its assets in private equity. Another $5.7 billion, or 9.3 percent, was invested in real estate ventures. (By contrast, the average asset mix among the 200 largest public pension funds last year included just 10.5 percent in private equity and 7.2 percent in real estate).
ccording to PERS data, since its initial 1981 investment the fund has gotten back more than one-and-a-half times the $26.8 billion it has plowed into private equity. As of fiscal year 2011, private equity had a 5-year average annual return of 9.4 percent, the highest in the fund.
A $194.1 million investment with leveraged buyout firm Kohlberg Kravis Roberts in 1981 made PERS one of the first public pension funds in the nation to experiment with private equity. As the 1990s began, PERS began spreading its private equity dollars more widely and increased the total amount invested.
In the 1980s, PERS began investing in private equity and hedge funds. Hedge funds employ a broad range of investment strategies, including trading in options, commodity futures, foreign-currency swaps, and other exotic securities. Private equity firms focus on one of two strategies: Venture capitalists invest in young, cutting-edge companies, while buyout firms seek to take control of publicly traded but underperforming companies, retool them and then resell them at a profit (often after extracting cash profits in the form of dividends).
Private equity has another feature that perhaps ought to give pension funds pause: While its returns still beat the stock market, they’ve been trending lower over time. Also, several researchers have identified a seeming paradox: The more money that investors pour into private equity funds, the lower their returns are. One theory is that when funds were few and small, they could more easily find promising startups and undervalued companies; now the low-hanging fruit is gone, and funds are competing intensely against one another to find the best deals.
allowed PERS to buy stocks. Today, Oregon’s only statutory restriction on public pension investments is that no more than half of the pension fund can be invested in stocks.
Source: Oregon PERS Comprehensive Annual Financial Reports for fiscal years 2001–11
Fall 2012 | 19
Published on Apr 24, 2014
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