State pension system takes the long view

April 12, 2011

Investing for retirement would be quite straightforward if there were only one economic scenario to consider and its incumbent risks to manage, but that is not reality. This is the central problem with the recent column, "Questionable Investment Strategy in Maryland's pension plan" (op-ed, April 11), in which the author envisions one economic scenario for the state's pension system: recession. In reality, the system's Board of Trustees works to create an optimal, risk-adjusted asset allocation that considers both the plan's assets and liabilities, in the context of multiple risks and economic scenarios.

The board takes the long view when it comes to investments, which means tracking performance over decades. The result over the last 30 years is a gross average return of 9.4 percent, besting the assumed rate of return. The 10 years ending in 2000 returned 11.7 percent, while during the 10 years ending 2010, when many retirement accounts showed little or no returns, the system averaged 4.1 percent annually. Most recently, the state pension system finished fiscal year 2010 with net returns of 14 percent, exceeding the system's 11.8 percent policy benchmark for the year.

Each year the Board conducts a comprehensive asset allocation analysis to review current asset allocation and assumptions, and to identify opportunities for lowering volatility and improving expected returns. Scenarios are tested, including inflation, steady growth, stagflation, recession and recovery.

While the author accurately notes that the plan is not solely invested "to protect against a steep market decline in the short term," the board instead takes a longer-term approach to setting asset allocation and recognizes that investment performance can experience short-term losses in certain economic scenarios. However, these short-term negative outcomes should be viewed in the context of a much longer-term investment program and broader set of scenarios, where the losses are more than offset by investment gains.

In summary, the board must consider many variables, risks and scenarios in determining an appropriate asset allocation for a large, long-term public pension plan. Focusing on just one would be imprudent and irresponsible.

A. Melissa Moye

The writer is interim chief investment officer for the Maryland State Retirement and Pension System.

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