In light of the ongoing anger of Ohio STRS participants over the removal of COLAs (cost-of-living adjustments) in 2017, and the plan’s fairly typical asset allocation for a public plan (though better-than-peers results), I look at two recent research papers calling into question the use of alternative assets in public pensions. I have a different point to make: that the assets are not really what is at issue. The pension promises are.
Episode Links
Ohio STRS: Public meeting notice for July 19, 2024
Last item: Investment Committee Meeting Presentation
Slide exhibits I referenced:
Boston College Paper: How Do Public Pension Plan Returns Compare to Simple Index Investing?
June 2024, by Jean-Pierre Aubry and Yimeng Yin
Key Findings:
Public pension plans are increasingly relying on alternative investments and active management.
But how does plan performance compare to a simple 60/40 index over various periods from 2000-2023?
Over the full period, plan returns are virtually identical to the simple index strategy, but plans have done much worse since the Global Financial Crisis.
If the current approach doesn’t yield higher long-term returns, a strong argument can be made for sticking with a simple, transparent strategy.
Here are the key graphs from the report:
Richard Ennis Paper
Girard Miller: How ‘Alternative Investments’ Are Dragging Down Pension Performance
Commenting on the Ennis paper, in case you can’t download from SSRN.
SSRN Link: How Hidden Costs Undermine Public Pensions in the US
Abstract
Public pension plans in the US incur exorbitant asset management costs. Most spend a lot and get nothing for it. High cost has hindered efforts to realize their actuarial return requirement. It has resulted in poor performance pretty much across the board. And yet, very few plans provide a full accounting of the costs they incur. Some still fail to net all their investment expenses from the returns they report. High cost is the Achilles heel of the public pension system in the US. It’s time to bring costs down, way down.
Alternative Asset Allocation by Public Pensions … and Ohio STRS
The orange line shows the Ohio STRS allocation. Yes, it’s pretty much in line with the median allocation for the database.
Prior Ohio STRS Posts
6 May 2024: Public Pension Governance Drama in Ohio
10 May 2024: Ohio Pension Drama Continues: Investigation Called on "Hostile Takeover"
16 May 2024: Ohio State Teachers Pension Drama Continues! Board Turmoil!
17 May 2024: More Ohio STRS Commentary: Alternative Assets in Pensions, Anonymous Memos, and Teachers Pensions in General [corrected/updated on May 22]
1 June 2024: Corrections and Clarifications on Ohio STRS: Audits and Investments
27 June 2024: Ohio STRS Drama Continues: No Bonuses and Board Member Resigns
15 July 2024: Ohio STRS Update for 15 July 2024: More Legislative Action, Advisor Resignation(s), Research on Public Pension Asset Returns
Ohio STRS: Trade-Offs, Alternative Assets, and More