STATE'S PENSION FUND EARNED ALMOST 12% IN '07

MARCH 2008: Although the Commonwealth pension fund continued its run of double digit earnings for the fifth straight year in 2007, this January’s market dive raised concern among managers of pension funds everywhere. "Year 2007 was a good one for the State’s PRIT Fund," said Association President Ralph White. "January’s storm clouds were not completely unexpected, but we’ll recover," said the ever-optimistic White.

The warning signs came this past December when that month’s earnings for domestic equities (stocks) and international equities showed negative numbers. However, the fund, as a whole, earned 11.91% for calendar ’07, good for a five-year average of 16.41%.

Members will recall that the first three years of this century were all losing years; -1.21%, -5.31% and -8.94% respectively. Despite that unprecedented slump, the fund, Pension Reserves Investment Trust (PRIT) Fund, has an annualized earnings of 11.41% since 1985, its first full year.

White, who has been on the investment committee of the fund’s management board, the Pension Reserves Investment Management (PRIM) Board, since its inception, says the market was due for a "correction" but not as severe as what occurred this January when the stock market dropped as much as five percent at one point prior to the Feds twice lowering the interest rate by a total of 125 basis points, sparking at least a temporary market resurgence.

"The ripple effect from the sub-prime mortgage debacle, which began last summer, had an unexpected impact on the entire market," said White. "Fortunately, PRIM Chairman Tim Cahill, who had taken office in 2003, the year following PRIT’s 8.94% loss in ’02, initiated action to reduce the Fund’s equity holdings by twenty percent. Last year our hedge funds, a recent asset addition, earned 11%, somewhat offsetting domestic equity’s mediocre return of 4.4%. Timber, another addition, earned 22% annualized over the past three years. The changes in asset allocation have had a smoothing effect.

"Like any fund, we’ve all learned a lesson from the volatility of our roller coaster years. Although our highs were very high, our lows, few as they were, were too unsettling. There’s no reason why we can’t continue on our annualized earnings of 11%, even though our fund’s long-range funding benchmark is a prudent 8.25%."

Local Responsibility

 

The total value of the PRIT Fund as of January 1, 2008, was $53.7 billion. Over ninety percent of this amount is the state and teachers’ fund. However, in recent years almost half of the state’s municipal retirement systems have placed all their pension money in PRIT for management, and most of the remaining systems have placed a portion of their money in PRIT.

"Even though PRIM invests their (local) money, it’s still the local systems’ pension funds," says White. "Because a new state law required some of these systems to join PRIT, we have an even greater fiduciary responsibility. I believe, over the long-run, PRIM/PRIT will live up to that responsibility."

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