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Alternative Market Briefing

Pension's increased equity and alternative investment risk doesn't match the reward

Tuesday, May 07, 2019

Laxman Pai, Opalesque Asia:

The state and local pension funds have been increasing their allocations to riskier assets since 2001 but the higher risk has not translated into higher returns.

According to a report from Fitch Ratings, riskier assets like private equity, real estate and hedge funds haven't provided a quick and simple solution to the institutional investors seeking to cover trillions in retirement benefits for aging workers.

Asset allocation to both equities and alternative investments rose to 77% in 2017 from 67% in 2001, the report pointed out.

In contrast, asset allocation to fixed income investments and cash fell to 23% in 2017 from 33% in 2001. However, median average returns for major state and local systems were 6.2% between 2008 and 2017 compared with 6.4% between 2001 and 2017.

The falling rate of return is particularly notable for seven states (New Hampshire, Arizona, Rhode Island, Connecticut, Maryland, Hawaii and New Jersey), which showed average underperformance of 2% and higher. This is a performance gap that over time could have a material impact on how some pension plans are funded according to Olu Sonola, Group Credit Officer of U.S. Public Finance at Fitch.

"Persistent shortfalls in investment performance eventually necessitate future increases in employer contributions, which could be especially problematic for states with already elevated pension liabilities," said Sonola.

Arizona's 86% allocation to equities an......................

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