PA SERS Reports A Lot of Loss

The Board of the Pennsylvania State Employees’ Retirement System today reported a negative 7.5% performance for Q1 2009. It also reported lagging private equity and venture capital data through Q4 2008, including a year-end loss of 26 percent. Such investments comprise 23% of SERS’ assets under management.


The Board of the Pennsylvania State Employees’ Retirement System today received reports on the $22 billion Fund’s performance through the first quarter of this year, and reports on the performance of the Fund’s private equity/venture capital and real estate allocations in 2008.

Reporting of private equity/venture capital and real estate performance is always lagged by one quarter, due to the time required to complete updated valuations of these illiquid assets.  Thus the first-quarter overall Fund performance numbers actually reflect 2008 fourth-quarter performance for private equity/venture capital and real estate, officials noted.  The lagged first-quarter performance for those asset classes will be included in the Fund’s second quarter report.

The first-quarter performance report showed a total Fund return of minus 7.5%, reflective of the contraction of the global economy that continued in the first quarter, officials said, with domestic stocks down 10.7% and international stocks down 10.3% – both in line with benchmarks.

Fund performance remains positive, and above benchmarks, for the trailing three-, seven- and 10-year periods, with annualized returns of 2.6%, 3.9% and 3.8%, respectively.

In reporting on the Fund’s private equity/venture capital allocation, which comprises about 23% of the fund, officials said private equity suffered a 2008 annual decline of 26%, the vast majority of which –  a decline of 16.5%  – occurred in the fourth quarter.  For venture capital, the calendar year decline was minus 16.4 %, primarily due to a 13.1% decline in the fourth quarter.

Similarly, real estate, which comprises 11% of the Fund, was down 22.2 % for the year, with most of the decline – minus 14.8% – coming in the fourth quarter.

SERS Chief Investment Officer John Winchester noted that public markets are beginning to show signs of recovery thus far in the second quarter (the S&P 500 was up 2.96%  year-to-date through May 31) and said gains in those liquid, actively traded public equities should in time be reflected in a recovery in values of illiquid assets.

Still, said Winchester, “this economic recovery is in its very early stages and there could be further setbacks.  As a long-term investor, SERS’ strategy must be to safeguard assets to the degree possible, maintain liquidity necessary to meet our obligations and position the Fund to take advantage of the recovery when it comes.”

In other business, the Board received the 2008 actuarial valuation from SERS’ actuary, Hay Group.  The valuation (available on the SERS Web site under “Publications”) shows the SERS Fund’s actuarial funded status has declined from 97.1% as of December 31, 2007 to 89.0% as of December 31, 2008, primarily due to previously reported 2008 investment losses.  The decline is dampened by the five-year smoothing methodology under which only 20% of the 2008 losses are recognized in the current valuation, so further declines in funded status are expected in future years, Executive Director Leonard M. Knepp said.

As SERS has previously discussed during its budget hearings and on other occasions, the 2008 losses increase the system’s unfunded liability and mean future employer contribution rates are projected to increase sharply.

For the 2009-10 fiscal year, the employer contribution rate will remain at the 4% statutory floor, Knepp said, noting that will mark the tenth consecutive year in which SERS’employer rate has been 5% or lower. But rates will begin increasing in the 2010-11 state fiscal year, when the valuation projects a 5.9% rate, then climb to 28.3% for 2012-13 and peak at 31.4% for 2013-14.

“We recognize that increases of the magnitude now being projected would impose a great and perhaps unsustainable budgetary burden on our member employers,” said Knepp.  “The SERS Board and staff have been and will continue working with the General Assembly and the Rendell Administration to explore options for confronting this serious challenge.”