PA pension to reduce 'alternative' investments, add stocks

The Pennsylvania State Employees' Retirement System has a problem: Thanks to overpromising and underfinancing by the state's elected leaders since the 1990s, it has around $27 billion worth of investments on hand to pay $42 billion worth of pensions (calculated at present value).

That means Pennsylvania taxpayers will have to pay a premium of 11.5 cents on every dollar paid to General Assembly members, State Troopers, social workers, corrections officers and other state employees in the current fiscal year, to keep the system moving toward solvency under current state guidelines.

That surcharge, close to zero in the mid-2000s, is expected to keep rising unless investment markets suddenly improve a lot. (That's in addition to the payroll deductions state workers also pay into the fund.)

To try and close the gap, SERS spent $170 million last year on professional hedge fund, buyout fund, venture capital fund, and other private investment managers, and $23 million on publicly traded stocks and stock fund managers, among other expenses, according to its annual report.

How'd that go? In the first quarter of 2012, stocks returned around 13% -- while those expensive private investment returned under 4%, according to a report SERS released yesterday. (Sometimes it's the other way around, though it's hard to know what many private investments are really worth, since they rarely change hands.)

SERS said today it plans to reduce its "alternative investments" to 16 percent over the next 10 years, from a five-year target of 24 percent. Meanwhile stock holdings will rise to 38%, from 32%, while bond investments also rise.

SERS isn't doing this to cut costs or boost returns, but to improve its "liquidity," according to the new Strategic Investment Plan.

That means SERS needs to be able to sell investments faster as it cuts more checks in the years ahead.