LACK OF DIVERSITY A RISK FOR STATE'S PENSION INVESTMENTS
March 10, 2009
In these difficult economic times, it's increasingly important to increase state employees' retirement security and avoid future reductions in benefits, says Kelly McCutchen, the executive vice president of the Georgia Public Policy Foundation. Yet a new study finds that the long-term investment returns of Georgia's state employees' pension funds trail the performance of nearly every large public fund in the nation.
With a January market value exceeding $54 billion, Georgia's pension funds could be foregoing more than $1 billion in investment returns each year, according to a new study by the Commission for a New Georgia.
The Commission compared the investment performance of Georgia's pension funds to the investment performance of other public funds of $1 billion or greater in size. It found:
- Over a 10-year period, Georgia's investments underperformed 95 percent of the large public funds in the nation.
- The state's 10-year overall investment return was 4.33 percent compared to a 6.26 percent return for the median public fund. (A return of 6.76 percent or higher put funds in the top 25 percent, while a return of 5.69 percent was the cutoff for the bottom 25 percent.)
The primary factor in this underperformance was not the performance of the state's investment managers, but Georgia's restrictions on asset allocation, the Commission concluded. Surprisingly, Georgia is the only state in the nation that does not allow investment in private equity. The Commission recommends loosening some of these constraints in order to improve investment returns and increasing diversification and reducing risk. Specifically, the Commission recommends Georgia expand its asset allocation guidelines to include alternative investments such as private equity.
- Georgia allow up to 15 percent of its pension portfolio to be allocated to alternatives.
- Legislative proposals have generally recommended a more conservative rate of 5 percent.
- The average for large pension funds is 4.4 percent; the average for university endowments, 36 percent.
- In Georgia, alternative asset allocations examples include the University of Georgia Foundation at 14 percent, the Emory University Endowment Fund at 33 percent and the Georgia Tech Foundation at 40 percent.
Source: Kelly McCutchen, "Lack of Diversity a Risk for State's Pension Investments," Georgia Public Policy Foundation, March 6, 2009.
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