Thanks to steady growth in the global stock market, the California State Teachers’ Retirement System (CalSTRS) closed the 2012/13 fiscal year with an investment return of 13.8%. But long-term funding remains a challenge for CalSTRS, the largest teachers pension fund and second largest public pension fund in the United States.
The investment return achieved by the fund for the fiscal year running from July 1, 2012 to June 30, 2013, beat the actuarial assumed rate of 7.5%. For that fiscal year, the market value of the fund’s portfolio hit US$165.8 billion (C$172.2 billion).
Portfolio performance has been erratic for CalSTRS over the past few years. Although current returns are healthy, during the previous fiscal year, the fund yielded only 1.8%. This was preceded by a strong year, with returns reaching 23.1%.
This uneven performance shows that the fund needs more than good investment returns in order to secure long-term sustainability, says Jack Ehnes, CalSTRS’ CEO.
The fund, which took a severe beating during the 2008 meltdown, had a solvency rate of 67% and a funding gap of $70 billion at the end of June last year.
“This year reminds us that a pension fund measures its health over the long term and no single year can take us from underfunding to funding adequacy,” says Ehnes, explaining that additional measures are needed for the fund’s security in the long run.
“It’s clear that the legislature and governor must implement a long-term funding plan that includes gradual, predictable and fair contribution increases for all parties involved,” Ehnes adds. “Every day that goes by without a funding solution in place costs an additional $22 million.”
Unlike most public pension plans, the CalSTRS Teachers’ Retirement Board does not have the authority to set contribution rates. Any changes need legislation implemented by the legislature and governor.
CalSTRS started calling for a review of contribution rates in 2006. It’s now working with the legislature and its stakeholders to develop the funding strategy of the plan.
“Despite solid investment returns in three of the last four years, Standard & Poor’s recently cited the lack of a long-term funding plan as the reason to hold back on a ratings upgrade,” says Christopher J. Ailman, CalSTRS’ chief investment officer.
“If nothing’s done, there may be a downgrade in our future,” Ailman warns. “That speaks volumes to the financial world in which we operate and draws a line in the sand for those who think we can invest our way to good financial health.”
As of June 30 last year, 53.3% of the fund’s portfolio was invested in U.S. and non-U.S. stocks. More than 16% was allocated to fixed income, 13.2% to private equity, 13.8% to real estate, 1.1% to inflation sensitive and overlay assets, and 1.6% to cash.
CalSTRS administers a hybrid retirement system. It consists of traditional DB, cash balance and voluntary DC plans.
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