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NJ Pension System Unlikely to Meet FY2019 7.5% Assumed Rate of Return

Investments generated just under 2 percent for first eight months of current fiscal year, according to new figures released by New Jersey State Investment Council

Corey Amon
Corey Amon, new director of the state Division of Investment

Without a big rally by the end of the fiscal year, New Jersey’s public-employee pension system doesn’t stand a chance of making its 7.5 percent assumed rate of return.

How far off track are the returns? For the first eight months of fiscal 2019 (which runs through the end of June), the pension system’s investments have generated just under 2 percent, according to the latest figures released yesterday at the New Jersey State Investment Council’s public meeting in Trenton.

The investment-performance figures are a little better for the calendar year, with the returns running a little above 6 percent. Meanwhile, long-term investment performance is still strong, with returns over the past 10 years coming in above 10 percent, easily beating the pension system’s annual assumed rate of return.

New Jersey’s $74.9 billion pension system covers nearly 800,000 current and retired government workers. Worker pensions are funded primarily through contributions from employees and government employers, but revenue derived from long-term investment gains also plays a role. And given New Jersey’s long history of underfunding its employer obligation — which has helped make the state pension system one of the worst funded in the country — there’s even more pressure on investment managers to generate strong returns.

Uneven performance

During his presentation to SIC members yesterday, Corey Amon, director of the state Division of Investment, highlighted the role of the ongoing volatility in the capital markets during fiscal 2019, which began last July. Real estate and venture-capital investments were among those that have done the best, while equity-oriented hedge funds and non-U.S. equities were among the poor performers.

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In all, the pension system’s investments were generating 1.68 percent heading into the final months of fiscal 2019. That marks a sharp drop-off from fiscal 2018, which ended with returns topping 9 percent. Over the 10-year and 25-year windows, returns have totaled 10.23 percent and 7.9 percent, respectively.

New Jersey uses an assumed rate of return of 7.5 percent under a policy change enacted by the Murphy administration last year. Falling short of the assumed rate of return in any given year doesn’t mean retirees will be shorted their benefits. By the same token, beating the rate doesn’t mean retirees will get a bonus. But the annual investment returns are a factor in the ongoing assessments of the pension system’s long-term obligations, and thus play a role in the actuarial estimates used to determine the state’s annual pension contribution. (Employee contribution rates are generally fixed by law.)

System still underfunded

This year, the Murphy administration is planning to contribute $3.2 billion to the pension system, which represents 60 percent of the amount that actuaries have estimated would be needed to return the pension funds to good health. Meanwhile, Murphy’s budget proposal for fiscal 2020 calls for the contribution to increase to $3.8 billion, which represents 70 percent of the amount called for by actuaries. Under the current contribution ramp-up schedule that Murphy is following, the state wouldn’t make the full actuarial-required pension payment until the 2023 fiscal year.

A report published in 2016 by the American Legislative Exchange Council determined the average assumed rate of return for some 280 state public-employee pension funds was 7.37 percent. During the eight-year tenure of former Gov. Chris Christie, a Republican, the New Jersey pension system's assumed rate of return was lowered several times as he tried to foster a more conservative approach. The assumption rate was 7 percent when Christie left office in early 2018.

But Murphy, a Democrat, took action almost immediately after he took office last year to boost the rate to 7.5 percent, at least temporarily. If he sticks to a policy goal announced last year, the rate will move to 7.3 percent for the 2021 and 2022 fiscal years, and then back down to 7 percent in fiscal 2023.

Meanwhile, yesterday’s SIC meeting marked the first for Amon in the role of director of the Division of Investment after serving in an acting capacity since July 2018. Before that, he was deputy director of the DOI, a division of the Department of Treasury, starting in 2014.

“I look forward to continuing to work with the division's investment professionals on behalf of over 800,000 participants in the state's pension plans," he said yesterday.

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