LANSING, Mich. - A new law in Michigan is increasing the amount public pension plans can invest in stocks and giving funds the opportunity to invest in new asset classes.
State, county and municipal pension funds, overseeing $52.3 billion in assets, now will be able to invest up to 65% in the stock market. The previous equity ceiling was 60%. The plans also now will have wider capability to invest in real estate investment trusts, foreign securities and derivatives. Previously, they could only invest in these areas through a basket clause that restricted non-qualified investments to no more than a total of 5% of total assets.
Public Act 485 will "modernize the standards of prudent investing," said Lon Britton, secretary/treasurer of the Michigan Association of Public Employee Retirement Systems and chairman of the Pontiac Policemen and Firemen Fund board.
Funds will be also allowed for the first time to invest in derivatives or "the dirty 'd' word," said Mr. Britton. The law specifies up to 15% of total assets can be invested in derivatives that: hedge positions of a non-derivative component of a portfolio; replicate the risk/return profile of an asset or asset class; rebalance the country or asset class exposure of a portfolio' or are over-the-counter derivatives.
As much as 5% of total assets can go into REITs or limited partnerships. Up to 20% will be permitted to be invested in foreign securities, but no more than 5% can be with any one issuer.
State Rep. Kim Rhead who sponsored the bill, said, "The real motivation was to expand investment opportunities for some real possibilities for high returns."
Mr. Rhead worked on the bill with MAPERS, which solicited ideas and suggestions from public retirement systems for the past two years. The bill passed both houses of the Legislature with very little opposition, said Mr. Rhead.
The act, signed into law last month, is still being studied by many public plans statewide to decide whether to take advantage of the new investment freedoms.
"We will want to take a look at the law and see if we want to vary from our current asset liability study," said Robb Hubbs of the $300 million Ann Arbor Retirement System.
The $45 million Garden City Employees Retirement System just recently increased its percentage in small- and midcapitalization equities. "We would like to get a feel for how these investments are going first," said Ronald D. Showalter, city clerk and treasurer.
Joseph Glanton, assistant administrative supervisor of Detroit General Retirement System, expects changes in asset allocation to take place although the system already had some leeway under the old law because of its asset size, which exceeds $5 billion. "Something once considered exotic has now become more commonplace," he said.
