Public Safety Personnel Retirement System
State of Arizona
September 23, 2016
Contact: Christian Palmer
PSPRS fund realizes 1 percent gross returns
Top 30 percent performance with less risk than 96 percent of peer funds
PHOENIX – Arizona’s Public Safety Personnel Retirement System earned slightly more than 1 percent return on its investment portfolio, capping off a 2016 fiscal year marked by stagnant bond markets and foreign stock value losses.
The $8.3 billion public safety portfolio continued to climb in terms of performance relative to 55 public pensions of comparable size. The earnings in 2016 place PSPRS near the top third of peer pension systems. PSPRS also continues to improve upon its ranking compared to peers as measured by previous performance over three, five and 10-year periods.
The system’s 1.06 percent gross-of-fees returns fell below the assumed earnings rate of 7.4 percent, but still showcased a strong 12.4 percent return for private equity investments. In recent years, PSPRS increased its private equity holdings – and decreased stock market exposure – as part of its strategy to minimize risk through a broad diversification across asset classes.
“One percent returns are far from ideal for a trust struggling to improve its overall funding levels,” PSPRS Chief Investment Officer Ryan Parham, a 2016 nominee for Institutional Investor Magazine’s CIO of the Year Award. “But members should still be encouraged that PSPRS outperformed roughly two-thirds of our peers while taking far less risk than most of them. This protects our funding levels in the long-term.”
For the second straight year, PSPRS investment returns were hampered by struggling international markets, weakened bond returns, and geopolitical events like Brexit. In response to previous economic crises, PSPRS continually takes measures to reduce portfolio risk and increase efficiency.
“The PSPRS portfolio is designed to operate in the type of uncertain economic environment that the world is in today,” said PSPRS Deputy Chief Investment Officer Mark Steed. “We’re generally pleased the portfolio performed as expected but we’ll continue to seek investments that deliver long-term growth and minimize negative domino effects within the trust during difficult years.”
According to the findings of PSPRS’ independent investment consultant, NEPC, with a portfolio spread across 11 asset classes, PSPRS has emerged as one of the nation’s elite performers for risk-adjusted investment returns and low volatility.
On a net of fee basis, PSPRS generated a 0.63 percent investment return during the 2016 fiscal year, placing PSPRS among the top 30 percent of performers in a universe of 55 peer public pensions. While the fiscal year proved difficult for nearly all public pension plans, the PSPRS return was noteworthy given that PSPRS invested with less risk than 96 percent of peers. According to NEPC, no U.S. public pension plans achieved investment returns that met or exceeded assumed earnings rates.
The 2016 fiscal year investment returns are not sufficient to warrant a permanent benefit increase (PBI) to PSPRS-managed plan retirees. Under state law, returns must exceed 9 percent in order to trigger pension benefit increases. However, beginning next fiscal year, the PBI system for the police and fire plan will be replaced with automatic increases based on adjustments made to the Consumer Price Index by the U.S. Department of Labor. These benefit increases will be capped at 2 percent each year.
The PSPRS trust combined with the Corrections Officers Retirement Plan (CORP) and the Elected Officials Retirement Plan (EORP) is valued at roughly $8.3 billion and provides retirement, disability and survivor benefits to approximately 50,000 retired and active members.
During fiscal year 2016, PSPRS-managed plans distributed more than $1 billion in benefits to member retirees, families and survivors.