South Carolina's $26 billion state pension fund underperforms other states', and its administrative expenses have soared, Curtis Loftis told a Republican lunch group Monday.The state treasurer, a Republican elected in 2010, took his message to the Hilton Head Island First Monday Republican Lunch Group and said South Carolina and other states have over-exposed themselves to risky, nontraditional investments while paying higher fees on slimmer returns.
"For years, we were told we're a top-performing fund. That's not the case," Loftis said. "Depending on how you look at it, we're in the bottom 25 percent. It's bad enough when you're underperforming, but we were paying too much for the privilege."
The state's pension plan had a 18.6 percent return before fees for the fiscal year ending June 30, while the median return for other large public pension plans was 21.4 percent, according to an independent audit of the S.C. Retirement Systems. That same fiscal year, South Carolina's investment-management fees rose 11 percent from a year earlier, to $343 million -- or about 1.3 percent of the total fund. The average state pension plan pays about 0.25 percent, Loftis said.
"I'm not against alternative investments. I'm not against hedge funds," he said. "But if you're going to take the risk, if you're going to pay the fees for those investments, you ought to get the return."
Like most states, South Carolina is under pressure to find higher returns and hit annual targets to meet obligations to teachers, police officers, firefighters and other state and local workers.
Faced with deficits and with interest rates at record lows and more workers qualifying for retirement, many pension funds turned to riskier, "alternative" investments, such as hedge funds, private equity and real estate. But as pension costs and fees grew, returns did not keep pace, Loftis said.
He has called for South Carolina and other states to "unwind" themselves from the risky, overly complex investments and use their clout as the "largest inflow of cash" to Wall Street to push for more favorable deals that are transparent to and carry less liability for the taxpayer.
Loftis said his office is reviewing all of South Carolina's investments in private-equity and hedge funds.
The S.C. House of Representatives voted last month to make state and local government workers pay more into the system and get less in return. If the measure becomes law, it is expected to save taxpayers $8 billion over 30 years and trim $2.2 billion from the retirement system's deficit, The (Columbia) State newspaper reported.Beaufort County Treasurer Doug Henderson said Loftis has done "a marvelous job" bringing transparency to the state's retirement system and getting the state's investments under control.
"We have a lot of people in this county who are retired government employees, who are drawing money from that pension," Henderson, who attended the lunch, said. "In order to make it secure, we've got to get it under control and make sure it's a viable thing for the future."
- South Carolina Retirement System Investment Commission
- Treasurer's Transparency Center
- State Treasurer Curtis Loftis Jan. 31, 2012 testimony to state Senate Finance subcommittee on transparency of S. C. pension plan
- S.C. Retirement Systems June 30, 2011 audit
- The New York Times: Pensions Find Riskier Funds Fail to Pay Off: April 1, 2012
- The (Columbia) State: Pension changes clear S.C. House: March 22, 2012
- The Wall Street Journal: Weaning Off 'Alternative' Investments: Jan. 30, 2012