WRS News Online

What Does the Future Hold for Investment Returns?

Michael Williamson
Michael Williamson

by Michael Williamson, State of Wisconsin Investment Board Executive Director

One key to the success of a public pension system is, obviously, return on investments. Like many public pension funds, the Wisconsin Retirement System sees a majority of its income – about 76% – come from returns generated by the investments SWIB makes.

Since 1983 the Core Fund has been fortunate to experience just six years with single-digit returns, and one of those years, 1992, was a 9.7% return. Over the past 32 years, there have only been six years with negative returns, including two years with losses less than 1%; 1994 at a 0.6% loss ; and 2000, with a 0.8% loss. Throughout the 1980s and late 1990s, double-digit returns – sometimes more than 20% – were the norm for the WRS. Some of you may be fortunate enough to remember 1985, when the Core Fund return was 27.5%, its highest since 1983.

More recently, however, an ever-changing global financial environment has meant more volatility in investment returns. Since the market downturn in 2008, which produced a 26% loss for the Core Fund, returns have bounced between a high of 22.4% in 2009 and a low of 1.4% in 2011. Last year, the Core Fund returned 5.7%.

Many economists believe we are entering a financial period that will result in long-term investment returns similar to those we saw in 2014, rather than those we saw in the 1980s and late 1990s. It will be a period marked by the economic turmoil we are seeing in Greece, the rollercoaster ride the Chinese stock market is on and the potential for rising interest rates here at home.

No matter what the economic environment has been over the past 32 years, the WRS has remained one of the few public pension systems in the country that is fully funded, meaning it is able to meet its obligations to members. That is not the case in some states, where plans are severely underfunded. Those states are now forced to make drastic system design changes and make riskier investments in an attempt to improve the funding status of those plans.

Although no one can predict exactly what will happen in the years ahead, it does seem we may be facing significant investment challenges moving forward. Will we ever see the days of double-digit returns again? Well, maybe. But it does mean that moving forward, we have to continue to implement an investment strategy that is designed to weather a variety of economic environments to ensure the WRS is able to meet its obligations not only today, but also in the future. We have already begun to put in place initiatives designed to protect against drastic falls in the market. These initiatives will work to protect against dramatic swings in annuity adjustments and contribution rates. Most importantly, they are designed to keep the WRS among the top public pension funds in the country.

When I am out speaking to members and they ask me what I think is going to happen with regard to investments, I joke with them that if I could predict the future I wouldn’t be working for the State of Wisconsin! While I can’t predict the future, I can predict with certainty that we will continue to do everything we can to protect the WRS for the more than 590,000 members who are counting on us to generate respectable returns to help fund their retirements.