NJ pension rides investment boom

Returns neared 30%, state says. That as state increased its payments to fund for retirees
Credit: (AP Photo/Richard Drew)
File photo: Sept. 22, 2021: Trader Robert Oswald, right, works on the floor of the New York Stock Exchange.

New Jersey’s public-worker pension fund appears to have taken full advantage of Wall Street’s recent hot streak by running up nearly 30% annual returns during the most recent fiscal year.

Though still subject to audit, the annual investment-return figures for the 2021 fiscal year are the highest annual returns that have been recorded by New Jersey’s pension fund managers over the past two decades, according to the Department of Treasury.

The returns also more than tripled the pension fund’s long-term assumption for annual investment returns, which is 7.3%. They also marked a major reversal from the prior fiscal year, when annual returns barely topped 1%.

“Needless to say, we’re pleased with the fiscal year 2021 returns,” said Shoaib Khan, the acting director of the state’s Division of Investment, as he detailed the unaudited return figures during a public meeting on Wednesday.

Right place, right time

“It’s nice to see that the fund was well-positioned to benefit from a constructive market environment,” he said.

The strong investment performance comes as the state has in recent years ramped up its employer pension contributions, part of a broader effort to climb out of a huge hole created when the state cut those payments short or skipped them entirely.

It also comes after Gov. Phil Murphy’s administration resisted calls to short state pension payments amid budget problems triggered last year at the onset of the coronavirus pandemic, allowing the pension fund to take full advantage of the huge upswing in investment returns.

Down to earth

New Jersey has recently committed to making its full annual actuarially required pension contributions. But long-term projections for future investment performance suggest returns will likely come back down to earth. That could put new pressure on New Jersey taxpayers to make up the difference if investment returns sag significantly coming out of the pandemic.

The $94.4 billion pension fund covers retirement for some 800,000 current and retired government workers. It is financed with contributions from workers, along with taxpayer-funded payments made by their respective state and local government employers and from revenue that flows in monthly from the New Jersey Lottery.

Last year, in the wake of a pandemic-fueled sell-off, state pension-fund investment returns sagged well below the fund’s assumed rate. Meanwhile, state Lottery proceeds also stalled as the economy was largely shut down to slow the rate of new COVID-19 infections.

The estimated market value of pension fund assets also dropped significantly last year, again because of the sell-off.

Sky-high returns

But the unaudited final figures for the 2021 fiscal year that were reviewed on Wednesday by the State Investment Council indicate annual returns soared to an estimated 28.63% over the 12-month period that closed on June 30, 2021.

The strong investment performance topped the benchmark for the pension fund by more than two percentage points. It also pushed the 10-year returns up to near 9%.   

Private equity led the way during the 2021 fiscal year, delivering estimated returns of 47.8%, according to Khan. Also among the top performers were public-equity investments, which generated returns in the range of 34% to 44%, and real assets, which produced nearly 30% returns, Khan said.

“We’re pleased to see exceptionally strong contributions by most asset classes,” he said.

Last year, Murphy, a first-term Democrat, stuck to a multiyear pension-funding ramp-up schedule as revenue losses triggered by the pandemic brought on a series of state budget cuts that impacted everything from property-tax relief programs to K-12 school aid.

While some lawmakers called for shorting pension payments to ease the state’s budget challenges, Murphy’s decision to continue the ramp-up plan ensured nearly $5 billion was pumped into the pension fund, counting Lottery contributions, through the course of the 2021 fiscal year. And as the investment returns eventually soared, those payments maximized the impact of the upswing on the pension fund.

For the 2022 fiscal year, the state has already made a $5.8 billion lump-sum contribution into the pension fund and has budgeted a record-high total annual payment of nearly $7 billion, counting the expected Lottery contributions.

New Jersey’s increased state pension payments were recognized in a recent report on state pension-funding trends published earlier this month by The Pew Charitable Trusts.

The same report also detailed some of the challenges that public pension plans will face as long-term investment returns are expected to average roughly 6% coming out of the pandemic — well below New Jersey’s assumed rate of return.

Pew’s pension experts urged state policymakers to consider a number of tools to manage expected future uncertainty, including “robust funding policies, plan designs that share gains and losses with workers and retirees and stress testing to measure the impact of risks on pension plan balance sheets and government budgets.”

We’re in this together
For a better-informed future. Support our nonprofit newsroom.
Donate to NJ Spotlight