Beating the Pension Horse Again

Pension funds cannot meet their future obligations without significant changes in their operating philosophies. The latest example of investment shortfalls is Harvard University as reported in the Wall Street Journal.

"Harvard University’s endowment delivered its worst investment performance since 2009, and its interim chief warned in an annual report that “returns could be muted for some time to come.”

The 2% loss for fiscal 2016 fell short of the university’s goals and contributed to a $1.9 billion drop in the value of the world’s wealthiest endowment. Harvard Management Company, as the endowment is formally known, now manages $35.7 billion. It provides more than one-third of the university’s operating budget."

Notice that the Harvard investment pool is only about 50% larger than the Texas Municipal Retirement System (TMRS) investment fund. And, "the smartest investment managers in the world" cannot meet their own investment goals.

Harvard’s losses for the year ending June 30 reinforce the challenges facing all college endowments as they wrestle with volatile global markets and a sustained period of low interest rates around the world. College and university endowments tracked by Cambridge Associates posted net returns of -2.7% for the year June 30. The S&P 500 gained 3.25% during the same period, according to FactSet.

“With a backdrop of slowing growth and rich valuations, endowment returns could be muted for some time to come,” Harvard Management interim chief executive Robert Ettlsaid in the endowment’s annual report released Thursday.

Harvard Management CEO expects returns "to be muted for some time to come."  That means that when calculating your pension obligations, an assumed return of 6.75% is not appropriate, which is what TMRS uses.

TMRS admitted in their 2015 CAFR that their investment returns also did not meet their goals. Here are the returns they reported for 2015.

"TMRS: 0.34% return for the year (6% in 2014)
3-yr annualized = 5.3%
5-yr annualized = 5.6% 

10-yr annualized = 5.4%"

Why are they still assuming a 6.75% annual return?

TMRS would not have had a positive return of 0.34% except for the fact that employers and employees contributed $1.1B in 2015.

It is time for Georgetown city council to get more involved with TMRS to assure future pension obligations can be honored.