Halloween fright: Experts say PERA probably can’t earn projected returns

November’s Colorado PERA board meeting should be a doozy, as board members wrestle with whether to keep PERA’s projected investment return figure at its current, ambitious 7.5 percent.

The future solvency of Colorado PERA’s retirement funds is predicated on earning an average return on investments of 7.5 percent over the next 40 years. Every year that PERA falls short of that goal makes subsequent years more challenging.

So it didn’t come as welcome news when two respected Wall Street insiders told the PERA board during a workshop last week that the 7.5 percent figure needs to come down by as much as two percentage points.

“I don’t think you’ll get returns that high in the future,” said Byron Wien, vice chairman of Blackstone, one of the world’s largest investment firms. “You need to trim it back. You may need to cut it by as much as 2 (percentage points). You may not want to go (that far) in one fell swoop, but I would drop it (soon) by a full percentage point. I understand that puts a strain on your state budget, but that’s how I see the world right now.”

Wien cited low productivity growth, global competitiveness, and the influence of technology as reasons for his relative pessimism. On the bright side, he said he didn’t foresee a recession or economic cataclysm on the near horizon.

Wien’s recommendations were echoed by Shoqat Bunglawala, a senior executive with Goldman Sachs. In fact, while reluctant to forecast in specifics too may years out, Bunglawala said equity (stock returns) of between 5.5 percent and 6 percent seem more likely than 7 percent over the next 20 years.

Wien stressed that he only looks three to five years out, and tends to revise even those relatively short-term projections regularly. “That may be too incremental for you but I can’t forecast responsibly 40 years ahead.”

And that’s the out PERA may try to give itself. Sure, things might be a bit rocky over the next few years, but taking a longer view, 7.5 percent seems reasonable. After all, didn’t pension funds earn north of 8 percent over the past 30 years?

Never mind that few experts believe that those kinds of returns are even remotely possible over the next 30 years.

But it’s hard for PERA to contemplate even that 1 percent cut Wien recommended, because the results could prove catastrophic.

You might recall that few months ago, when PERA’s annual report was released, we wrote the following:

The state division, for example, has a 54 percent probability of being fully funded 40 years from now. To meet that goal, PERA would have to earn at least a 7.62% average annual return for the next 40 years.

But there’s also a 23 percent chance that PERA will become insolvent at some point after 2036 – as little as 21 years from now. That dire outcome would occur should PERA’s state division earn an average annual return of 6.51 percent or lower.

Projections are similar for the school division. There’s a 52 percent chance the division will be fully funded in 40 years, but to do so it will have to earn an average annual return of at least 7.73 percent.

On the gloomy side, there’s a 20 percent chance the school division will be insolvent some time after 2036. That would happen if average annual returns dipped below 6.28 percent.

And now you’ve got a world renowned expert telling PERA that lowering its investment return to 6.5 percent would be a good first step.

As my grandmother used to say, succinctly and eloquently: Oy.

2 Comments

  • Dennis P. Lima

    01.11.2016 at 14:02 Reply

    Experts on Wall Street are a dime a dozen. One says the market is going up, one says it’s going down.

    The long term return on equities, 30, 40 years or more is better than 8%. For small and mid-cap stocks its even higher.

    7.5% for truly long term returns is not unreasonable.

  • 4ever49

    02.11.2016 at 09:20 Reply

    Not to worry. The fix is already in.

    Take a look at your local city, county, school board, etc. CAFR (certified annual financial report) and look for GASB Statement 68.

    There you will find a new and substantial liability imposed on local property tax payers (without their consent) that guarantees the shortfall in public pensions. In other words, those that have defined contribution retirement plans are now going to further guarantee those with defined benefit plans.

    A true rip-off.

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