Maryland's $55B pension fund recoups pandemic losses but falls short of annual goal

Originally published in the Baltimore Business Journal

MPPI in the News Holden Wilen | Baltimore Business Journal Aug 17, 2020

Maryland's $54.8 billion pension fund recouped its losses from the stock market's downturn in March and ended the fiscal year with a positive return, on par with how other funds across the country have performed. 


The Maryland State Retirement and Pension System announced Monday that the fund returned 3.57%, net of fees, for the fiscal year ending June 30. The fund finished the year with $563 million more in assets compared with the prior year. 


Pension funds across the U.S. were hit hard by market declines as the Covid-19 pandemic spread across the U.S. and resulted in a recession. However, double-digit stock gains in the three months ending June 30 pushed public pension returns to a median 11.1% for the quarter, according to Wilshire Trust Universe Comparison Service. The median return for the fiscal year was 3.36%. 


The Maryland pension fund had $54.8 billion in assets at the end of February and saw its assets fall 6.75% through the end of March to $51.1 billion. With its recovery during the following three months, the pension fund's return fell short of its 7.4% annual goal but exceeded its policy benchmark of 3.14%. 


Andrew C. Palmer, chief investment officer, said the fund "was fortunate to have an allocation to long duration bonds and limited exposure to sectors that struggled such as energy, commodities and retail. 


"Active managers had an unusually large range of under and outperformance, but overall were additive to the return," he said. 


State Treasurer Nancy Kopp, chair of the retirement and pension system's board of trustees, said in a statement the fund benefitted from having a "well-designed portfolio of investments" designed "to mitigate against events like the Covid-19 pandemic." 


"It’s important to remember that we are long-term investors who make decisions based on an investment horizon that stretches across decades," Kopp said. "Over the last 10 years, earnings have averaged 7.6%, above the plan’s expected rate of return and consistent with the Board’s investment policy." 

Among the fund's various investments, private equity performed best and exceeded its benchmark by 4.4%. Stocks, which make up about 36% of the fund's assets, returned 2% and exceeded their benchmark by 1.64 percentage points. 


In recent years, as Maryland's pension fund lagged behind others during a bull market for stocks, officials said the state's fund would be better equipped to handle downturns than others and experience less volatility.  


Pension funds in neighboring jurisdictions like Virginia, Pennsylvania and Washington, D.C., have not yet reported their fiscal year-end results, so a comparison of their recoveries is not yet possible. Based on data for the quarter ending March 31, Maryland's pension fund did not suffer as much as others. 

The $76.9 billion Virginia Retirement System was down 4.9% year-to-date at March 31, compared to a 3.6% loss for the Maryland pension fund. The D.C. Retirement Board's $7.77 billion fund lost 9.4%. The Pennsylvania Public School Employees Retirement System's $55.8 billion fund lost 4.34%. 


One of the Maryland State Pension and Retirement System's biggest critics in recent years has been the Maryland Public Policy Institute. In a recent article authored by senior policy analyst Carol Park, the conservative-leaning think tank called for public pension reform as state and local governments deal with major revenue shortfalls. She said governments should not underfund their pensions to help close the revenue gaps. 


"More than ever, following a consistent funding schedule is critical to ensure that existing pension debts don’t balloon out of control," Park wrote. "Another option would be to require employees to have more skin in the game and contribute more towards their retirement security." 


Pension funds should consider switching to offering their employees 401(k)-style defined contribution benefits instead of defined benefit pensions, Park wrote. She said public sector employers have been reluctant to make the change because "it takes a lot of political will to bring about such reforms."


Park also said pension funds should not move their assets into riskier investments to try and recoup losses. Funds like Maryland's have shifted more of their assets to hedge funds, private equity, real estate and other commodities since the Great Recession in 2008 and 2009. However, Maryland's fund remained 72.9% funded — meaning its ability to cover the state's pension liabilities — as of June 30, 2019, significantly lower than its prior levels.

"Ultimately, relying on the false hope of higher returns through riskier pension investments is not a viable strategy for the pandemic recovery," Park wrote. "To help pension funds survive the Covid-19 pandemic, lawmakers around the U.S. should not wait to initiate comprehensive pension reforms that are needed to reduce existing pension debts and future pension costs." 

Michael Golden, a spokesman for the Retirement and Pension System, said the fund currently has enough money on hand "to pay benefits for decades to come" and noted the state has always paid the required contribution every year as determined by the actuary.