WRS News Online

WRS Among the Best: SWIB Works to Reduce Risk, Protect Against Market Downturns

by Michael Williamson, SWIB Executive Director

Across the country, headlines scream of looming public pension problems for many cities and states. From plans to reduce retiree benefits to significant increases in employee contributions, many public pension funds are struggling to meet their obligations, leaving lawmakers scrambling to find money in state budgets to fix the problem and money managers making risky investments in hopes of big returns.

In Wisconsin, things are a bit different. We can celebrate that the Wisconsin Retirement System is one of the best-funded public pension plans in the U.S., thanks to the contributions made by employees and employers, and solid investment returns.

Did you know that over the last 20 years the Core Fund has a return of 8.6% and the Variable Fund has a return of 8.8%? Those are significant numbers — not only because they are well above the system’s 7.2% assumed rate of return, but also because approximately 80% of the WRS’s income comes from investment returns. Just as significant as the consistent long-term performance is that we are able to generate those returns while reducing risk and protecting the system from market downturns.

Because only about 50% of the Core Fund is invested in stocks — with 25% of that amount in U.S. stocks — some might argue that we are missing an opportunity to generate even higher returns. While our returns did not mirror the U.S. stock markets in 2014, we were still able to generate a solid return because other assets performed well. We saw strong performance from our real estate, private equity and multi-asset investments. Real estate returned 14%, private equity returned 15.5% and our multi-asset portfolio returned 7%. All of those portfolios were well above their benchmarks.

The Core Fund is a fully-diversified fund, meaning it includes investments in more than just U.S. stocks. Because 85% of our investment risk comes from the stock market, over the past several years we have implemented an investment strategy designed to reduce the risk of investing in stocks and increase allocation to lower-risk assets. In other words, we have designed an investment strategy that allows us to achieve solid returns and help keep the WRS fully funded, while helping to reduce market downturns that could have a negative effect on you in terms of a reduction in annuity payments or higher contribution rates for employees and employers.

How does having a diversified fund help protect all members of the WRS? Many members compare SWIB’s Core Fund to market indexes such as the S&P 500. Since 2000, there have been four years where the Core Fund has produced negative returns, due in large part to severe market downturns. However, during these times when stocks were struggling, the Core Fund’s diversification has helped it generate higher returns than the S&P 500. Although we will not see the “highest of the highs” when the markets are performing well, we can all appreciate the diversification and protection that comes with our investment strategy when the markets are struggling.

And — maybe most important — SWIB’s investment of WRS assets directly affects the bottom line of the WRS trust funds. Over the past five years, reducing costs, increasing internal money management, negotiating lower fees and investing in low-cost assets — combined with the performance of investment strategies — have resulted in more than $1.4 billion in extra value added to the WRS above market returns, after costs.

Our work to keep the WRS among the best public pension systems in the country is never done. Our staff will continue to work to implement strategies that keep us agile, integrated and innovative in the way we effectively manage risk, control costs and achieve target returns over the long-term. And you can take that to the bank.

Year

Core Fund Return

S&P 500 Return

2000

-0.8%

-9.1%

2001

-2.3%

-11.9%

2002

-8.8%

-22.1%

2008

-26.2%

-37.0%

Diversification allows for solid investment returns and protection during downturns in U.S. stocks. This chart shows the Core Fund has performed better than the S&P 500 during the last four market downturns.