Colorado’s largest pension fund is using an increasingly conservative investment strategy, but that didn’t prevent the fund from last year posting its best year since 2003.
A frothy stock market in 2006 helped the $40.6 billion Colorado Public Employees’ Retirement Association post a 15.7 percent return, according to the association’s annual report, which will be released today.
The fund ranked among the best-performing public pension funds in the nation last year, with PERA’s fourth-quarter performance ranking No. 1 of any state pension fund, according to the association.
Despite that solid performance, PERA still has a funding ratio of 74.1 percent, which means the fund is about $12.8 billion short of covering its accrued liabilities. The fund has improved its funding ratio during each of the past three years, improving from a 70.6 percent ratio in 2004.
Nationally, the average funding ratio for state pension funds is 88 percent of accrued liabilities, according to a recent study by Wilshire Associates, a global investment consultancy based in Santa Monica, Calif.
Poor investment returns earlier this decade and mounting obligations to workers have left many state pension funds with multibillion-dollar shortfalls.
Colorado PERA, which manages pensions for 400,000 current, former or retired workers statewide, received a boost in 2006 from strong stock returns in the U.S. and overseas, long-standing private-equity investments and real-estate holdings, said Jennifer Paquette, chief investment officer.
Paquette said the fund slightly increased its holding in international stocks, which performed well. She said private-equity investments that date back years also provided strong returns.
Paquette said that while other public pension funds are increasingly pouring money into hedge funds, PERA has in part gone in the opposite direction.
In 2002, fixed-income investments accounted for about 12.8 percent of PERA’s assets. By 2004, fixed-income investments had swelled to about 20.5 percent of the fund’s total assets. Last year, fixed-income represented about 23 percent of the fund, trailing only U.S. equities as the fund’s largest asset class.
Paquette said some observers earlier this decade had questioned the fund’s decision to pursue a more conservative approach.
“People were skeptical,” Paquette said. “They thought that it was not a strong strategy.”
Other state pension funds have increasingly invested in hedge funds, private equity and real estate, experts said. For example, California’s largest pension fund this month doubled to more than $10 billion its self-imposed cap on how much of the fund could be invested in hedge funds.
Paquette said Colorado PERA has long used private equity, real estate and other so-called alternative investments.
However, she said PERA’s board has not yet signed off on using hedge funds, which are private pools of money typically used by wealthy individuals or institutions.
While PERA has increased its use of fixed-income investments, other state funds have decreased their allotment, according to the Wilshire survey.
Since 2001, the average asset allocation for state pension funds to U.S. bonds and other fixed-income investments has decreased by 3.4 percent, according to the Wilshire survey.
Even so, PERA’s allocation to fixed- income investments trails the national average, which is 31.3 percent.
Michael Schlachter, managing director with Wilshire, said it is rare for state pension funds to increase their allocation in fixed-income instruments but that the move “puts (Colorado PERA) where everyone else is.”
“They are being more risk-controlled,” said Schlachter. “You don’t want to take on a lot of risk in an effort to dig your way out of being underfunded.”
Staff writer Will Shanley can be reached at 303-954-1260 or wshanley@denverpost.com.
