Massachusett's Pension Fund Down 9%

The $26 billion pension fund lost a total of $2.1 billion for the year, representing the third straight year of declines and by far the worst yet.   Since reaching an all-time high in August of 2000, the fund has lost $6.5 billion to date, an average loss of 5.2% annually.   This dismal record has put the Bay State’s three-year performance down to the 61st percentile among public funds of similar size, according to a Boston Globe report.

Comparatively, the Trust Universe Comparison Service reports the median decline among all state pensions funds was 4.3% over three years.

Risky Business

Massachusetts’ freshman state treasurer, Timothy Cahill, attending his first meeting of the state pension board is faced with a heavy burden in turning the fund’s performance around.   Looking to put an accent mark on his tenure, he told the Globe that he would push for changes in the fund’s management and investment style over the next six months. In fact, overseeing the pension fund was noted as top priority, ”I think it’s very, very important that we start earning some positive returns, without taking too much risk,” Cahill told the Globe.

The fund’s risk may have gotten it into its recent troubles.   According to Wilshire Associates, Massachusetts’ pension consultant, the fund may be taking on too much risk.   The portfolio’s annual benchmark is currently set at an 8.25% return, as mandated by the Legislature. But after the trifecta of annual losses, the median 10-year return for public funds has fallen to 8.1%.

Given that stocks are seen as the most aggressive investments in a portfolio, Wilshire cautions that attempting to better 8% would require taking greater risk.   Currently, the state fund has a majority (60%) of its assets in stocks.   While the equity-heavy portfolio contributed to big gains during the market boom of the late 1990’s it has been a tough pill to swallow during the decline.   Bonds, real estate, and timber were bright spots for the fund last year, while its US stock portfolio posted a steep 20.3% loss.

Pension benchmarks have been dropping across the nation, with the Securities and Exchange Commission saying that it would question any corporate plan with a target above 9%. Some Wall Street executives suggest 7% is more reasonable.   Massachusetts current benchmark of 8.25% would require an act of the state legislature to be lowered, something Cahill has not yet said he is pushing for.