The returns for Connecticut's three largest public pension plans trail median returns by their peers over multiple financial reporting periods, according to a report by Hewitt EnnisKnupp, general consultant to the Connecticut Retirement Plans & Trust Funds, Hartford.
The $13.5 billion Teachers' Retirement Fund, the $8.5 billion State Employees' Retirement Fund and the $1.7 billion Municipal Employees Retirement Fund had rates of return that fell below the median of public pension funds with $1 billion or more in assets for the one-, three-, five- and seven-year periods ended March 31.
In each reporting period, the returns for the teachers' and state employees' pension funds were in the bottom 30% of respective categories vs. peers. In all but one reporting period, the returns for the municipal employees were in the bottom 30% vs. peers.
One reason for the pension funds' performance, the report said, is that each of the three had asset allocations that were overweight in international equities and/or underweight in domestic fixed-income compared to the peer medians.
For example, the teachers' fund had an asset allocation of 30.66% for international equity as of March 31 compared to a peer group median of 17.76%, the report said. The teachers' fund's allocation to U.S. fixed income was 15.79% vs. the peer group median of 25.51%.
The three Connecticut pension funds are among the 14 pension funds and trust funds that comprise the Connecticut Retirement Plans and Trust Funds. As of June 30, these three funds accounted for nearly 99% of the assets in the $24 billion state retirement system.
The Hewitt EnnisKnupp report, which reviewed data through March 31, was presented Wednesday to the state investment advisory council, which advises State Treasurer Denise Nappier on investment policies. Ms. Nappier is the principal fiduciary for the pension and trust system.
“I am very concerned about our funds” compared to the peer funds, Joseph D. Roxe, chairman of the investment advisory council, said at the council meeting, citing the “extended period time” for which the funds' performance was “subpar.”
Lee Ann Palladino, chief investment officer for Connecticut Retirement Plans & Trust Funds, and Kevin Vandolder, a partner at Hewitt EnnisKnupp, responded during the meeting that they are reviewing the pension funds' performance, strategies and investment managers.
In an interview after the council meeting, Ms. Palladino said the pension system and its consultant are following a “methodical process” to analyze each of the investment classes in the pension system to “fine tune in terms of risk and return” as well as to “review management structure.” She said an analysis will be completed “in the near future.”
Ms. Palladino and Mr. Vandolder noted in the interview that the Hewitt EnnisKnupp report said a peer review comparison has certain caveats that can make comparisons difficult. According to the report, the demographics of plan participants, the risk profile of plans, the level of passive management, the amount of investment risk, the different state laws governing public pension plans and the liquidity needs are factors that can affect funds' returns and comparisons of those returns.
“Different public plans have different liability streams,” Mr. Vandolder said in the interview.
Any recommendations and changes will be done in the context of a revised investment policy statement by the Connecticut Retirement Plans & Trust Funds, which the investment advisory council approved unanimously on Wednesday. The investment policy statement was prepared before Hewitt EnnisKnupp completed its peer review report.