Teacher Retirement Fund Expects Investment Loss for FY 2020


Teacher Retirement Fund Expects Investment Loss for FY 2020
The Arkansas Teacher Retirement System Building at 1400 W. Third St. in Little Rock. (Google Maps)

The Arkansas Teacher Retirement System expects to see a loss of 1% on its investments for its fiscal year that ended June 30, marking the first decrease since 2009.

The downturn in the stock market tied to the COVID-19 pandemic is to blame for the loss, said Clint Rhoden, executive director of the pension fund. ATRS’ year-end numbers aren’t final yet.

ATRS, with nearly $18 billion in assets, also lost at least $774 million between Jan. 1 and March 27 that was invested in funds with Allianz Global Investors U.S. LLC.

In July, ATRS sued Allianz and related entities in U.S. District Court for the Southern District of New York to recover the losses, alleging Allianz was negligent and breached its fiduciary and contractual duties.

A spokesperson for Allianz denied the allegations of wrongdoing to Arkansas Business, and said the company “intends to defend itself vigorously against these allegations.”

Rhoden declined to comment on the case because of the pending litigation.

Rhoden said there’s no panic when ATRS has a down year for investments. “We don’t sell off,” he told Arkansas Business last week.

The pension fund’s goal is to earn 7.5% per year on its investments. For its fiscal year that ended in June 2019,

ATRS reported a 5.25% return, and in FY 2018, the return was 11.46%.

“Our portfolio is designed for long-term returns, extremely long-term,” Rhoden said. “And we have a plan in place, and we follow it consistently.”

The returns on the investments are up about 5% so far for the fiscal year that started July 1, he said.

The pension fund’s investment returns were about the same as those of the Arkansas Public Employees Retirement System in fiscal 2019. APERS reported a 5.31% return on its investment in FY 2019 and a 9.9% return the previous year.

APERS’ Executive Director Duncan Baird did not return calls from Arkansas Business.

Funding Goal

For the fiscal year that ended mid-2019, ATRS’ assets were $17.7 billion and expected liabilities reached $21.9 billion, an 81% funding ratio.

ATRS’ goal is to be fully funded. Rhoden said that with the losses for the year ending June 30, the funding ratio will remain at about 80%.

“We have a plan to get to 100% funded in about 28 years,” he said. “So anytime we reach a situation where it takes longer than 30 years to reach 100% funded, that’s a concern we have.”

One worry for the system is teachers are living longer than they were 10 years ago, Rhoden said.

“And when you have a system paying lifetime benefits, improved mortality rates are not a good thing,” he said. “It’s great for the teachers that are living longer, but for a system that has to pay those payments, it’s quite costly.”

What keeps Clint Rhoden up at night? Find out in this week's Executive Q&A.

All Arkansas public school teachers are required to be members of ATRS, and educators can contribute up to 6.5% of their annual income into the fund. All told, there are about 134,000 ATRS members.

The pension fund’s actuaries are tracking mortality predictions. “The whole game is trying to make better guesses each year and get a more accurate reflection of liabilities that we expect to have to pay 20, 30 years in the future,” Rhoden said.

Rod Graves, ATRS’ deputy director, said the pension fund has a diversified portfolio designed to withstand periods of market volatility. As part of the board’s long-term plan, Graves said ATRS had changed its asset portfolio.

The percentage of its traditional stock holdings has declined over the past 10 years, and it’s now about 50% stocks with the remaining investments in a portfolio that includes private equity and real estate.

“I think the board’s probably happy with the amount of diversification we currently have,” Rhoden said. “I do not anticipate a drastic change in our allocation.”

The Lawsuit

ATRS also was invested in Structured Alpha U.S. Equity 250 LLC, Structured Alpha Global Equity 350 LLC and Structured Alpha Global Equity 500 LLC, which all had an investment strategy designed to provide stable returns and protection during a market downturn, according to a news release from Bernstein Litowitz Berger & Grossmann LLP of New York, one of the law firms representing ATRS.

But once the funds started incurring losses in February, Allianz allegedly changed the funds’ portfolios to recoup the losses, but “that all but guaranteed substantial losses once that downturn came to pass,” the lawsuit said.

Allianz’ “extraordinary risky and irrational gamble resulted in massive losses for ATRS, wiping out in a matter of weeks hundreds of millions of dollars of school teachers’ pension savings that had been accumulated over lifetimes,” the suit said.

The spokesperson for Allianz said the premise of the lawsuit “is simply incorrect and without foundation, as the funds in the Structured Alpha portfolio did not diverge from their investment strategy.

“Our own analysis has revealed that the portfolio was at all times managed to its alpha targets and in accordance with its design,” the spokesperson said via email. “While the losses suffered in the portfolio are deeply disappointing, there is no basis for legal liability.”

The case is pending.


Arkansas Teacher Retirement System
(As of June 30)

 

Total Pension Liability

Plan Net Position

Net Pension Liability

Plan Net Position as % of Total Pension Liability

Net Investment Income

Investment Returns

2019

$21,912,986,823

$17,741,621,773

$4,171,365,050

80.96%

$898,384,867

5.25%

2018

$21,131,589,859

$17,492,627,740

$3,638,962,119

82.78%

$1,824,094,695

11.46%

2017

$20,488,672,118

$16,284,808,244

$4,203,863,874

79.48%

$2,289,818,591

16.09%

2016

$18,970,019,489

$14,558,576,730

$4,411,442,759

76.75%

$35,579,657

0.24%

2015

$18,292,611,144

$15,035,701,312

$3,256,909,832

82.20%

$632,166,951

4.34%

2014

$17,481,282,947

$14,856,276,668

$2,625,006,279

84.98%

$2,429,334,097

19.27%


Arkansas Public Employees Retirement System
(As of June 30)

 

Total Pension Liability

Plan Net Position

Net Pension Liability

Plan Net Position as % of Total Pension Liability

Net Investment Income

Investment Returns

2019

$11,245,856,457

$8,833,327,660

$2,412,528,797

78.55%

$450,493,098

5.31%

2018

$10,808,687,173

$8,602,752,132

$2,205,935,041

79.59%

$782,326,767

9.90%

2017

$10,612,937,270

$8,028,796,790

$2,584,140,480

75.65%

$862,824,701

11.89%

2016

$9,762,106,222

$7,370,758,150

$2,391,348,072

75.50%

-$4,177,314

-0.06%

2015

$9,391,975,712

$7,550,242,341

$1,841,733,371

80.39%

$169,621,019

2.28%

2014

$8,950,456,656

$7,531,544,420

$1,418,912,236

84.15%

$1,208,430,494

18.97%

Sources: The annual reports of the retirement systems