US - The country's two largest pension funds brought in record returns in for the year ended 30 June 2011 with CalSTRS returning 23.1% and CalPERS, 20.7%, though officials at both pointed to concerns about the US economy going forward.
The return for the $154.3billion California State Teachers' Retirement System was the best yearly return in 25 years, while the return for the $237.5bn California Public Employees' Retirement System was the highest in 14 years.
Global equities was the best performing asset class for CalSTRS with returns of 31.9% for the year, though the portfolio only beat its benchmark by 50 basis points. Private equity was the second best performer with returns of 22.5% for the year, besting its benchmark by 180 basis points.
The pension fund targets a return of 7.75%. Despite the high returns, CalSTRS said the funding ratio will drop below the current 71% come spring because of the 25% loss posted in the 2008-2009 fiscal year.
Officials are urging legislature to increase contribution rates into the fund to help stem a decline in the funding status.
Chief executive Jack Ehnes said: "The administration and legislature must act to adopt a responsible funding strategy that will uphold the state's promise to teachers while protecting the general fund. Without legislative approval for increased contributions, even given this past year's impressive performance, CalSTRS would need a more than 20% investment return each year for the next four years to achieve full funding in 30 years, an impractical expectation."
Officials also said high unemployment, a sluggish housing sector and weak consumer spending will make it difficult to depend on investment returns alone to bring the pension fund to full funding.
Sentiments on the economy were echoed by officials at CalPERS who also released its returns yesterday.
"The underlying economic conditions responsible for the surge in equity value is largely the product of extraordinary fiscal and monetary stimulus by the government and at least one of these - the fiscal stimulus - is being withdrawn. (An) additional concern with respect to the banking crisis and instability in the Middle East provide a cloud over the horizon going forward," said Joseph Dear, CalPERS chief investment officer in a press call yesterday.
Equities returned 30.2% for CalPERS while private equity was up 25.3%. The third best performer was the inflation-linked portfolio which includes commodities, infrastructure, forestland and inflation-linked debt; it returned 13.6%.
Also during the conference call, CalPERS senior investment officer for the alternative investment management programme Real Desrochers reiterated officials' goals to pare down the private equity programme.
When asked how much CalPERS planned to sell in the secondary market and details on reducing private equity, he said officials are working on creating a more concentrated portfolio that is invested with the right managers.
A review of the private equity portfolio is scheduled for September.
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