As described in an article in Chief Investment Officer, public pensions and church pensions face similar difficulties and might benefit from similar investment models.
A white paper written by Rivera and Mercantile Managing Director Thomas Cassara suggests managing volatility and avoiding drastic underfunding.
According to Cassara, an ideal investment strategy for these plans needs to address two key objectives. One is to improve the funded status of the plan while managing the ups and downs of the funded status volatility. The other is to avoid having the plan become underfunded to the point where it falls into a “death spiral” from which the only way to recover would be to significantly increase contributions and/or reduce future benefits.
Cassara writes that the objectives can be reached through a portfolio that has an underlying fixed income investment strategy made up of higher-yielding investment-grade securities, as well as equity derivatives, such as put options and call options, that provide contractual exposure to the equity markets, but in a way in which risk can be managed.
For more information, see Public, Church Pension Plans Face Similar Challenges.
The Maryland State Pension System has made positive progress toward full funding of the State Pension System due to benefit reductions that followed recessionary investment losses.
The Executive Director of the Maryland State Pension System describes in the Popular Annual Financial Report for 2018,
I would like to emphasize that the pension reforms enacted by the legislature in 2011 continue to bear positive results on the System. In 2011, immediately following the enactment of the reforms, actuaries for the System and the legislature projected that the System’s funded status would increase from its fiscal 2011 level of 63.1 percent to 69.0 percent by fiscal 2018. In fact, as of June 30, 2018, the System’s actual funded status was 71.6 percent. With consistent contributions and an effective investment program, the MSRPS should continue to make consistent progress toward full funding. –R. Dean Kenderdine
Regarding investments, the State Pension System’s investment policy, the Comprehensive Annual Financial Report for 2018 states,
The System’s asset allocation is organized into five broad categories: Growth/Equity, Rate Sensitive, Credit, Real Assets, and Absolute Return. During the fiscal year, the asset allocation remained largely unchanged from the prior year, with only minor adjustments being made to improve the efficiency of the portfolio.
For more information, see Maryland State Pension System’s Popular Annual Financial Report for 2018 and the investment section of the Comprehensive Annual Financial Report.