Learn This Lesson, Too, Rhode Island: Pension Returns

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No matter how many times I observe its being done, I’m always disconcerted when a government press release spins devastating news as a positive:

The Rhode Island pension fund finished well ahead of U.S. and global stock markets in December due to the defensively positioned investments in the fund’s portfolio. …

In the 12 months ending on December 31, 2018, the fund returned -2.69 percent, compared to a passive 60 percent stock and 40 percent bond portfolio, which would have returned -5.52 percent.

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The pension fund assumes an investment return (a “discount rate,” in this context) of 7% every year.  No matter how much better -2.69% might be from some arbitrary benchmark, it still means the fund came up short 9.69%.  To make up for that loss next year, the fund would have to achieve a 17.7% investment return.

This is the cycle repeated over and over again, and it’s time we all wised up enough that government officials would at least be embarrassed to spin it as a good thing.



  • BasicCaruso

    “The pension fund assumes an investment return (a ‘discount rate,’ in this context) of 7% every year.”

    LOL, no it doesn’t. It assumes an average return of 7% over the period modeled (generally long term for pensions). Justin we can assume cashes out his 401k any month where performance is below average. That’s just common sense!

    • Mike678

      And what exactly was the return for the last 5-10 years?

      • Joe Smith

        http://investments.treasury.ri.gov/performance/

        Of course, it’s not that simple to say “as of” the 5 year is underperforming and the 10 year is slightly overperforming.

        First, it’s not clear if the returns cited by the Treasurer are net of fees – your simple set and forget index fund has much lower fees than managed funds.

        Second, with an long-term fund, it’s also an issue of the yearly draw. Right, so if current fund inflow does not exceed the outflow (the 2018 report indicates current contributions are short by $200M to fund current outflows), then you have to draw annual so the annual returns do become important since a bad year stresses the net balance and need to overperform. If current funds pay for current needs, then you can stress less about a bad year and worry about the multi-year return average for when you do need to draw from the portfolio’s return income/gain.

        Third – the benchmark date matters. In the annual report by the Treasurer, using fiscal year as the time, the report states “Over a five-year period, net performance for the fund was 7.2% and 5.8% over the ten-year period;
        outperforming the System’s benchmarks for the respective time periods.” (but underperforming the 7% for the 10 year). Flip to their Dec to Dec (calendar year) and you get the underperforming 5 year and now the slightly overperforming 10 year.

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