Did MSRPS’s 2018 Investment Underperform Its Peers Once Again?
On August 7, the Maryland State Retirement and Pension System (MSRPS) announced that its portfolio returned 8.06 percent for the fiscal year ending June 30, 2018. Although the return exceeded the 7.50 percent assumed actuarial return rate, the more important question is how the 8.06 percent figure compares with reported returns of other state pension funds.
To date, only a handful of state pension funds have already announced their annual returns for the FY 2018. Among the few large state pension funds that have revealed FY 2018 returns, however, MSRPS reported the worst performance.
The two largest public pension funds in the country—CalPERS and CalSTRS, both in California—each reported annual return of 8.6 percent and 8.96 percent, respectively. The New York City Retirement System reported an annual return of 8.7 percent and Massachusetts Pension Reserves Investment Management Board reported annual gross return of 10 percent. The Florida State Board of Administration reported a preliminary annual return of 8.99 percent.
These figures seem consistent with Moody’s expectation that most U.S. public pension systems will report annual returns of around 9 percent for 2018.
The comparison figure is even more dismal in long run. Michael Golden, a spokesman for MSRPS, said in an email that the system had a five-year return of 7.15 percent and a 10-year return of 5.55 percent. In other words, Maryland once again falls below its 7.50 percent annual target in the long run.
Meanwhile, CalPERS reported a five-year return of 8.1 percent and 10-year return of 5.6 percent. CalSTRS reported total fund performance of 9.1 percent for the five-year and 6.3 percent for the 10-year. The Florida SBA reported a five-year return of 7.27 percent and a 10-year return of 5.6 percent. Massachusetts’s PRIM reported a five-year return of 9.3 percent and a 10-year return of 6.3 percent.
Smaller state pension funds also outperformed MSRPS over the last five and 10 years. The Rhode Island Employees’ Retirement System pension fund reported a five-year annualized return of 7.2 percent and a 10-year return of 5.8 percent. The Maine Public Employees Retirement System reported a five and 10-year return of 8.2 percent and 6.3 percent, respectively.
So once again, MSRPS seems to have underperformed its peers. According to Jeff Hooke of Johns Hopkins University and my analysis in the 2018 State Pension Fund Investment Performance Report, MSRPS’s performance was roughly 1 percent below the 33 state pension funds median for the last 10 years, as of June 30, 2017. We calculated that the shortfall in lost income was approximately $5 billion.
The peer group was also about 1 percent below the 60 percent stocks/40 percent bonds index for the last 10 years, meaning that Maryland returned around 2 percent below the 60-40 index for the last 10 years.
According to Vanguard summary, 60-40 index returned 8.68 percent for the FY 2018. Over the last ten years, 60-40 index returned 8.09 percent. Based on this information, MSRPS underperformed 60-40 index by over two percent per year over the last ten years.
Therefore, Jeff Hooke and I stand by our recommendation that MSRPS should index the vast bulk of its portfolio with a blend of public stocks and bonds, rather than actively manage its assets.
This year, MSRPS took the usual risky approach and allocated over 40 percent of its portfolio in alternative assets, including private equity, hedge funds, and real assets. Although MSRPS has not yet published its investment management expenses for this year, we anticipate MSRPS’s 2018 Comprehensive Annual Financial Report to conduct a full analysis of the comparison of fee and return figures of state pension funds.
To get a better picture of Maryland’s $19.7 billion pension shortfall, please visit the Maryland Public Policy Institute’s recently launched Maryland Pension Map website.