Teacher Pension System Lost Money
The Pennsylvania Public Schools Employee Retirement System (PSERS), released its 2015 performance results last week, and they weren’t good. PSERS assumes a 7.5 percent rate each year to avoid appearing even more underfunded than its publically stated $44 BILLION in unfunded liabilities. For 2015, PSERS lost nearly 1.8 percent. When we’re dealing with billions of dollars, the difference between the pension plan’s expected returns and actual returns is a substantial amount of money.
Last year’s loss comes despite PSERS spending a small fortune on "active" fund managers who are supposed to anticipate future market conditions and invest resources accordingly. As noted by the Philadelphia Inquirer:
"PSERS’s extra losses reflected its unusually large bets on commodity fund managers. The system posted a 33 percent loss for funds invested in "Master Limited Partnerships" (typically oil and gas investments), an 18 percent loss for commodities investments, and an 8 percent loss in "risk parity" investments, which can look a lot like hedge fund strategies."
No fund manager can outperform the market every time, and this isn’t just the opinion of CAP. It a position widely held by well-respected academics and folks like Warren Buffet.
The previously mentioned Inquirer article notes that Montgomery County adopted a low-cost index fund investment approach two years ago. Last year, they substantially outperformed PSERS with a modest .3 percent return on investments. Montgomery County’s performance was not a fluke. In his book "Future Forsaken", John McGinnis compares PSERS performance (and the others SERS system) to an index fund approach. He found that the low-cost option outperformed the current actively management funds across a thirty-year time horizon.
On top of outperforming active managers, switching to lower cost index funds could save taxpayers $750 million per year. Given the facts, there is no reason for the state’s pension systems to maintain the status quo and every reason to explore alternatives to protect taxpayers and future retirees.