Pension director defends target-rate trim

LITTLE ROCK — The executive director of the Arkansas Teacher Retirement System on Monday defended his recommendation for the system to cut its target rate of investment return from 7.5% to 7.25% a year, saying he couldn’t in good conscience recommend keeping the higher rate if the system’s actuary considered it unreasonable.

During their Nov. 15 meeting, the trustees voted to cut the target rate.

Judith Kermans of the actuary, Gabriel, Roeder, Smith & Co., told trustees Monday, “We agree that’s absolutely the right thing to do.”

It’s possible the 7.25% annual target rate of return will become unreasonable in the next five years, she said.

System Executive Director Clint Rhoden said the biggest risk with having a target rate of return higher than 7.25% is the actuary may not be able to consider it a reasonable target and would have to state that in a note in its annual actuarial report.

Unreasonable targets in a public pension plan’s annual actuarial report could have a negative effect on the state’s bond rating and make it more expensive for the state to borrow money, he said.

The Teacher Retirement System is state government’s largest such agency with more than $21 billion in investments and more than 100,000 working and retired members.

Board Chairman Danny Knight told his fellow trustees that it was difficult to understand why the system was cutting its target rate of return to 7.25% when the system’s average investment return has been larger than that over the past decade.

He acknowledged he didn’t know the system’s target rate of return could affect the state’s bond rating.

Trustee Jason Brady noted that the trustees for the Arkansas State Highway Employees Retirement System a few months ago cut that system’s target rate of return from 8% to 7.5% a year.

“That’s very much a national trend,” he said.

Teacher Retirement System trustee Bobby Lester said he voted to reduce the target rate based on information from the system’s investment consultant, Aon Hewitt Investment Consulting, which concluded an annual 7.2%

long-term expected rate of return is reasonable.

Trustee Lloyd Black said, “I don’t think we should beat up ourselves” over the trustees taking action based on recommendations from the system’s actuary, investment consultant and Rhoden. “This is the best course of action.”

Trustee Mike Hernandez added, “We are not going to have to change any [retirement] benefits” at this point as a result of reducing the target rate of return.

Rhoden said last month that the increase in the system’s liabilities as a result of reducing the target rate of return would be largely offset by the 31% return in fiscal 2021, so there is no expected cost cutting or increased contribution rates for employers and employees.

In 2017, the board of trustees voted to implement several measures to raise money and cut costs over seven years in response to the system reducing its target investment return from 8% to 7.5% a year.

The employer contribution rate, which was 14% of payroll in fiscal 2019, is now 14.75% and is scheduled to reach 15% in fiscal 2023.

The employee contribution rate, which was 6% in fiscal 2019, is now 6.75% and is scheduled to reach 7% in fiscal 2023.

In fiscal 2021, the system’s investments gained $ 4.5 billion in value to $21.1 billion, buoyed by rising stock markets, according to Aon Hewitt.

The actuary recognizes investment gains and losses for actuarial purposes over a four-year period.

As of June 30, the system’s liabilities totaled $23.9 billion and its actuarial value of assets totaled $19.3 billion, leaving $4.6 billion in unfunded liabilities, so the system is 81% funded, according to Gabriel. The projected payoff period for the unfunded liabilities is about 32 years, Gabriel said.

A year earlier, the liabilities totaled $22.3 billion and the actuarial value of assets totaled $18 million, leaving $4.3 billion in unfunded liabilities, so the system was 81% funded, Gabriel reported. The projected pay-off period was 27 years.

The nation’s public pension systems are on average 72% funded based on information from the National Association of State Retirement Administrators, said Brian Murphy of Gabriel.

Actuaries often compare projected payoff periods for unfunded liabilities to mortgages on homes.

Kermans said the projected payoff period for the system’s unfunded liabilities is expected to trend downward over the next several years because of the continued recognition of the large investment gain from fiscal 2021.

As of June 30, the system included 66,663 working members not on the deferred retirement plan with an average age of 44.2 years, average service of 10.5 years, and average salary of $42,901 a year, according to Gabriel.

The system also had 3,465 working deferred retirement members with an average salary of $65,732 a year.

The system also had 51,405 retired members receiving an average retirement benefit of $24,175 a year, Gabriel reported.

In other action on Monday, the trustees decided to waive interest charges to the Little Rock School District and a system member whose service was not reported by the district to the system between 1996 and 2010.

The system will waive nearly $103,984.45 in interest charges to the district. The district will pay employer contributions of $45,557.76 to the system by the end of the next fiscal year. The system will waive interest charges of $48,497.60 on the system member, who owes employee contributions of $21,168.07 to the system.

The trustees also authorized investments of:

• Up to $50 million in Landmark Real Estate Fund IX, managed by Landmark Partners based in Simsbury, Conn.

• Up to $ 30 million in the Franklin Park Venture Capital Opportunity Fund, managed by Franklin Park based in Bala Cynwyd, Pa.

• Up to $ 30 million in the Franklin Park International Fund XI, managed by Franklin Park.

• Up to $30 million in Riverside Value Fund I, a New York- based private equity turnaround fund that will invest in underperforming companies in the United States.

The trustees also voted to reelect Knight as their chairman and Black as their vice chairman.