While the move into TIPS was the outcome, Mr. Holsapple said the underlying decision at Maine was to reject the view "that pension fund assets exist in a vacuum." Pension executives can come to totally different conclusions depending on whether they see fixed income as their "low-risk asset" or as an asset needed to fund a specific liability, he said.
That's not new thinking, but "not many of us have been putting our money where our mouth is," said Mr. Holsapple.
Consultants expect Mr. Holsapple to become less lonely in that intellectual space over the coming years.
Mr. Ennis said his company has been discussing with clients the option of using TIPS to match inflation-indexed liabilities for years now, and had broached the subject with Maine's board three years ago. At that time, the CIO position was vacant and there wasn't much interest in pursuing the idea.
But Ennis, Knupp found a kindred spirit in Mr. Holsapple, who left his position as state investment officer for the $5.1 billion Nebraska Investment Council, Lincoln, to become Maine's CIO in February 2002. "In the case of Maine, it was a matter of preaching to the choir," said Mr. Ennis.
At the conference, Mr. Holsapple said Maine's trustees met for two days last September to consider the implications of the changes they were considering.
Maine's board "spent a tremendous amount of time coming to terms with the fact that their performance is likely to differ, for better or worse, from the average public pension fund," said Mr. Ennis. In the end, they accepted that "maverick risk," he said.
Mr. Ennis said the implications of the asset-liability study that Ennis, Knupp conducted in conjunction with Mr. Holsapple were almost entirely focused on the fund's bond portfolio. Not only did the fund opt to switch to TIPS, but it also roughly doubled the duration of its fixed-income portfolio by moving into long-duration TIPS.
The fixed-income duration of the typical public pension fund might be around five years, but Maine's is now about 10, with no default risk and with inflation protection, Mr. Ennis said.
That change doesn't do anything to overcome the gap between liabilities and assets, said Mr. Ennis, but it ensures the gap won't widen because of interest-rate fluctuations.
According to a report on state retirement systems issued by Wilshire Associates Inc., Santa Monica, Calif., Maine is one of the many states whose liabilities far exceed its assets. In a ranking of funding levels for the pension plans of the 50 states and the District of Columbia as of the end of 2003, Maine came in 38th out of 51, with assets coming to 69% of liabilities.