Delaware pension investment risk noted in university report

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Delaware’s public employee retirement is coming under scrutiny for its use of more risky investment vehicles.

The report came from the Mercatus Center at George Mason University in Fairfax, Va.

Eileen Norcross,  author of the study said  Delaware is viewed  as a state that operates a well-funded, well-managed defined benefit retirement system.

According to the state’s pension valuation reports, Delaware’s nine plans are, on average, funded at 81.4 percent, with an unfunded liability of  slightly more than  $1 billion.

However, when valuing Delaware’s pension plans on a fair-market basis (a guaranteed benefit based on a 2.03 percent US Treasury bond yield—the average funding ratio for Delaware’s plans drops to 40 percent and the unfunded liability rises to $11 billion.) This amount is several times larger than Delaware’s total outstanding general obligation debt, reported at $1.62 billion in fiscal 2013, and the state’s current budget of $3.6 billion.

On the plus side,  the report’s author indicated that Delaware is also well-placed to reinforce its current defined benefit system and to pursue reforms that ensure the state does not end up with insurmountable obligations.

The good news is that Delaware has a long history of making full annual contributions to its pension system. Unfortunately, since these contributions are calculated based on the expected rate of return on plan assets, the annual payments fall short of the amount needed to truly fully fund the plan. To be fully funded, Delaware must increase its annual contribution to the pension system based on a market valuation of plan liabilities.

According to the report,  Delaware’s asset portfolio is increasingly made up of alternative investments such as venture capital funds, hedge funds, and real estate.

“While investing in alternatives is not necessarily problematic, unless the pension portfolio is balanced to hedge the risk inherent in the liability, this asset strategy may introduce more risk into Delaware’s pension system,” the author noted.

 

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