Iowa Public Employees' Retirement System, Des Moines, will not substantially increase its private equity allocation to decrease its unfunded liability, rejecting the approach as too risky, according to a joint report by CIO Donna Mueller and the system's investment board and benefits advisory committee.
According to the report, the system would need an 11% return on its investments every year through 2014 to address its unfunded actuarial liability, which was $2.18 billion as of June 30, up from $1.87 billion a year earlier. "The highest expected 10-year return for any asset class is 11% for private equity, the highest risk class," according to report. "Although IPERS has some funds in private equity, it would not be prudent to move all investments to this class." The system has 6% of its $17.3 billion in assets allocated to private equity as of Sept. 30. "Investments alone cannot reverse the trend of increased debt," Ms. Mueller said in the report.
The fund returned 13.78% for the 12 months ended June 30. By comparison, its custom benchmark returned 14.55% for the same year; its peer group, the Trust Universe Comparison Service of public pension funds with more than $1 billion in assets, earned 15.88%, according to the report. IPERS' 10-year average annual return was 10.27%, ahead of both its benchmark and peers.
The system asked the state Legislature to increase the contribution rate four percentage points over the next four years, or one point a year, starting July 1. The rate, set by law, is 9.45%, split 60% by employer and 40% by employee. It hasn't been raised for regular members - comprising 96% of the system - since 1979.
The system also rejected a cut in benefits as ineffective because benefits already earned cannot be curtailed; while future benefits can be reduced, "there would not be a positive funding impact for 15 to 20 years," noted the report.
"According to the 2004 actuarial valuation, assets will not support liabilities if changes are not made," the report said. It blamed the increasing underfunding on poor investment markets and benefit increases.