That’s NOT The Correct Objective!

The New Jersey Pension Fund has reported that the system generated a -2.47% return for the 10-months ending April 30, 2020, which is obviously quite poor given their annual return on asset target (ROA) of 7.5%. Furthermore, they are reporting that the benchmark return to which they compare their assets produced a net return of 0.72%, or more than 3% better than the fund. However, neither the ROA nor the asset benchmark is the right objective.

Let’s stop playing these performance games, especially since NJ seems to underperform on a very consistent basis trailing the asset benchmark on a 3- and 5-year basis, while besting the hybrid index by 5 basis points over 10-years (but, trailing the ROA). The only reason that the NJ pension fund exists is to pay the promised benefits to the plan participants, which means that the only true objective for the assets are the plan’s liabilities. Despite the fact that liabilities do not grow at the same rate as assets, GASB accounting rules permit the discounting of plan liabilities at the ROA. Even under this misguided accounting methodology, NJ’s system is woefully funded.

Unfortunately, it is being reported that NJ will once again fail to make the annual required contribution, as the impact from the Covid-19 crisis weighs on revenues while expenses rise. Not surprising, the state’s funded status continues to deteriorate, and the growing required contribution is negatively impacting the funds available to support the social safety net. If a true measure of the plan’s liabilities were determined, the funded ratio would be in the low 20% range and the underfunded liability would be about $300 billion! Yes, that is correct that a state with a roughly $40 billion annual budget is saddled with a $300 billion unfunded liability.

NJ’s public fund participants, who have worked for and funded this benefit, deserve a better outcome. The plan’s investment team and board of trustees need to finally understand that managing assets against an asset benchmark accomplishes very little. NJ will not get their arms around this funding crisis until they recognize the true objective is plan liabilities. Once they comprehend that fact they will then be able to begin to tackle this problem.

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