WRS News Online

Message From Leadership

Robert  Conlin
Robert Conlin

WRS: Meeting Founding Expectations
by Robert Conlin, Department of Employee Trust Funds Secretary

When we hear about pensions in the press, the focus is often only on retirees. While this is certainly a defining feature of pensions, significantly less attention is paid to another critical aspect of pension plans, namely their significance in attracting a qualified workforce.

The founders of the Wisconsin Retirement System envisioned a statewide structure that would facilitate the attraction and retention of employees to public service, offer equitable benefit standards throughout public employment and ease the transfer of personnel between public employers. As 2016 begins, I think it’s fair to say that the WRS is meeting those expectations.

At the end of 2015, nearly 1,500 state and local governmental units throughout Wisconsin were participating in the WRS and had enrolled more than 250,000 current public employees in the WRS. These include very large employers, like the University of Wisconsin System and campuses and state agencies, and very small employers, like municipal housing authorities and sewerage districts. More than a dozen additional units of government are poised to extend WRS coverage to their employees in 2016. As noted in this issue’s Legislative Update, legislation is pending that would make it easier for public employers to join the WRS.

Wisconsin’s public employers understand the value of a well-funded public pension plan offering reasonable benefits in order to attract and retain a qualified workforce. Not surprisingly, most Americans tend to agree. According to a survey sponsored by the National Institute on Retirement Security (NIRS), 87% of Americans say pensions are a good tool to recruit public employees.

Moreover, when our public employees retire and begin drawing a pension, much of that money will be spent in those same communities where the benefits were earned. In 2015, the WRS paid approximately $4.5 billion in benefits to retirees and beneficiaries, more than 80% of whom live in Wisconsin. The majority of the benefits paid come from investment earnings generated by the State of Wisconsin Investment Board and not from taxes.

Not only does the WRS provide vital economic support to retired public workers, it helps ensure a vibrant public workforce is available to support communities across this great state.

 

Michael Williamson
Michael Williamson

Managing Risk to Protect the WRS
by Michael Williamson, State of Wisconsin Investment Board Executive Director

When you think of risk what comes to mind? Maybe you think about the risk you take when you get behind the wheel of your car to drive in the first snow storm of the year. We don’t know when that first storm will hit each year, but we know we have to prepare ourselves the best we can for when it does. We might put snow tires on our car and throw a blanket, shovel and salt in the car’s trunk. Our winter driving strategy might involve choosing an alternate and safer route to get where we need to go. Ultimately, we are trying to reduce the risk that we will end up hitting a rough spot, sliding off the road and not making it to our final destination.

Risk is something we all try to avoid, even though we know that it is a factor in just about everything we do in life. Some of us have a little bit higher threshold than others when it comes to the amount of risk we are willing to take. It is no different in the investment world. Dealing with investment risk is something that can keep even the most veteran investors up at night. How much is too much and is the reward worth the risk? When it comes to the Wisconsin Retirement System, risk takes on a very significant role in the investment strategy we implement. The WRS’s unique shared risk/reward design means investment returns directly impact annuity adjustments for retirees and contribution rates for active employees and employers. The struggle is finding the right balance between taking enough risk to make sure the WRS is providing the benefits promised to its participants and taking too much risk that could cause volatile swings in annuity adjustments and contribution rates.

Entering a Low Return Environment
Our 2015 returns, as well as the performance of the stock markets, indicate that we are in an environment where it will be possible to make money, but there will be significant investment challenges moving forward. Many economists believe this “low return environment” will result in investment returns over the next decade similar to those we have seen the past couple of years, rather than the higher ones we saw in the 1980s and late 1990s.

To overcome the challenges of a low return environment and meet their target returns, many public pension funds will increase the amount of risk they are willing to take with the money of their participants. Those funds will be forced to take increased risk because of underfunding and guaranteed annuity increases, regardless of investment returns. But what about the WRS?

Lessons Learned Influence Strategy
While 2008 was painful, it taught us that a risky investment strategy could hurt participants with a repeat of significant negative annuity adjustments and increased contribution rates. That is why we have implemented a strategy that, just like the alternative and safer route you might choose to get to your final destination when driving in the first snow storm, takes less risk but will get the WRS to its ultimate destination: a 7.2% return over the long-term.

Our strategy involves reducing the Core Fund’s exposure to stocks and, because diversification is key to managing risk, increasing our allocation to lower-risk assets such as bonds, real estate, hedge funds and private equity, which can perform well when stock returns are down. We have done this because 85% of our investment risk comes from the stock market. Currently, about 49% of the Core Fund, compared to 59% prior to the 2008 market decline, is invested in global stocks. While the performance of both U.S. and international stock markets still influence investment returns, dramatic swings in returns should be reduced. Overall, WRS investments are mixed across a variety of markets and numerous, widely varied investments within each market. With this strategy, WRS returns will rarely match market returns. Sometimes they will trail when stocks are performing well and at others they will finish ahead of falling stocks. This should reduce volatility in annuity adjustments and contribution rates as well as keep the WRS among the only fully-funded public pension plans in the country.

Confident Moving Forward
We are fortunate that the WRS is fully-funded and, despite the challenging road ahead, we are confident that our investment strategies can achieve our 7.2% assumed rate of return over the long-term. This means we will not have to reach for higher returns and take more risk with your retirement money. But -- just like preparing to drive in the snow -- there are no guarantees that getting to the final destination will be easy. We will need to be careful, monitor conditions and be ready for some rough spots. But in the end, I am confident we can hold our ground, get through this challenging period and, over the long-term, be successful.