Trustees of the $26.2 billion Texas Employees Retirement System, Austin, approved lowering the system's assumed rate of return to 7% from 7.5% during a meeting Wednesday, spokeswoman Mary Jane Wardlow confirmed in an email.
Modeling assumptions from NEPC, the fund's investment consultant, showed that expected returns of the defined benefit plan would be 6.8% over the next 10 years and 7.4% over 30 years.
"Based on this information, the current asset allocation is not expected to be able to produce 7.5% over the next 30 years," ERS staff said in a report to the board. "The trust is experiencing negative cash flow as distributions outpace contributions at a rate of at least $1.4 billion annualized. Therefore, asset allocations that increase weights to illiquid asset classes may become problematic if contribution trends continue at the current rate or worse."
The system's assets under management as of March 31 were down 11.1% from the previous quarter, with $2.6 billion of withdrawals.
Net returns of the defined benefit plan portfolio for periods ended March 31 were -9.9% (benchmark, -9.6%); one year, -3.1% (-2.6%); three years, 4.2% (3.6%); five years, 4.4% (4.4%); and 10 years, 6.5% (6.3%). Multiyear returns are annualized.
Texas ERS's long-term asset allocation targets are public equity, 37%; private equity, 13%; global credit, 11%; fixed income (rates), 11%; private real estate, 9%; private infrastructure, 7%; hedge funds, 5%; opportunistic credit, 3%; public real estate, 3%; cash, 1%; and special situations, zero to 5%.
