WRS News Online

The Great Recession: 10 Years Later

This is the second in a three-part series that looks back at the Great Recession, its effect on the Wisconsin Retirement System, and how the State of Wisconsin Investment Board invests first to help protect the pension system during another major downturn and then to earn reasonable returns.

From December 2007 to June 2009, the United States suffered through the worst economic downturn since the 1930s. The Great Recession left the country desperately trying to recover from an economic tailspin. The Wisconsin Retirement System, like many public pension funds, felt the impact of the downturn. WRS retirees experienced negative annuity adjustments for the first time ever; active employees and employers also saw increases in contribution rates.

Despite the downturn, the WRS remained among the best-funded public pensions in the country, in part, because of SWIB's strong long-term performance. Since the Great Recession, the financial markets have had dramatic swings that have proven challenging for many investors. To help meet those challenges, SWIB implemented a relatively conservative investment strategy. This strategy is designed to weather a variety of economic environments and at the same time ensure the system continues to meet its obligations today and in the future.

"SWIB has been, and continues to be, a long-term investor," SWIB Chief Investment Officer David Villa said. "Historically, markets tend to be cyclical and decline after a few years of strong performance. Because SWIB is a long-term investor, it can be more patient than many other investors. However, it must also be responsible and committed to a well-thought-out plan that provides the best value to all WRS participants in the long run."

SWIB's strategy is designed to mitigate the effects from another major market downturn, and still to earn reasonable returns. With the help of its investment consultant and approval from the Board of Trustees, SWIB has slowly reduced the trust funds' reliance on the stock markets to achieve consistent performance. The Core Fund is a broadly diversified portfolio of stocks, bonds, private equity, real estate, hedge funds, and other investments. The investment goal of the Core Fund is to earn an optimum rate of return while taking an acceptable level of risk.

"We have slowly reduced the variability of Core Fund returns by investing a modest allocation of assets in volatility-reducing strategies," Villa said. "These strategies are designed to help limit the impact of significant market downturns and include multi-asset strategies, which are often designed to distribute volatility more evenly over asset classes."

Measured alone or over the short-term, these multi-asset strategies may underperform the market. Measured within the context of the entire trust fund over the long term, however, these strategies provide diversification and allow the plan to mitigate the impact of severe market downturns.

SWIB works to find the right asset allocation – one that doesn't take too much risk, or one that is too conservative and doesn't generate enough returns to fund the WRS. For the strategy to work, SWIB must adapt to the challenges of the market.

"For the WRS that means an allocation that strives to produce returns that keep contribution rates affordable, generate positive annuity adjustments, avoids annuity reductions, and maintains a fully-funded retiree reserve," Villa said.