As noted in last month’s MPERS’ Matters, the MPERS Board of Trustees has responsibility for the investment of assets used to cover the payments for the System’s beneficiaries.
This is an area where the Board of Trustees has a lot of flexibility with decision-making. These decisions are critical for public pension plans because investment returns often cover 60% or more of the cost of a pension plan. Over the last 20 years or so, investment returns have covered approximately half of the cost of the benefits administered by MPERS.
Investment direction is largely established through MPERS’ Investment Policy, which includes the asset allocation. Asset allocation involves dividing an investment portfolio among different asset categories such as stock, bonds, real estate, and cash. This board-approved allocation, noted in the chart below, provides direction for the professional investment staff on how to invest these assets.
In order to have positive investment returns, the investor (MPERS) must take some amount of risk otherwise the employers would have to cover an unnecessarily high cost. If an investor takes too little risk, investment returns are minimal, thereby putting extra costs back on the covered employers. Taking too much risk on the other hand, may result in excessive losses during market downturns, again putting extra pressure on covered employers. The Board must consider this delicate balance and spend considerable time and attention when developing or changing an asset allocation.
