The Orange County Employees Retirement System, which runs a $6.3 billion retirement fund for county and other government workers, is going on the defensive amid Wall Street’s meltdown.
OCERS manages money for about 40,000 government employees in the county. Its investments lost about 20% of their value last year.
The fund’s conservative investments fared better than other pension funds, including the California Public Employees’ Retirement System, which lost more than 27% of its value last year.
Wall Street as a whole was off 37% last year as measured by Standard & Poor’s 500 index.
OCERS is considering being even more conservative.
“We’ve had a careful approach for many years,” said Steve Delaney, the fund’s chief executive. “But investing decisions need to be reconsidered.”
The fund invests in stocks and bonds as well as real estate, private equity, currencies and derivatives.
It aims to achieve an average yearly return of about 8%.
For the past 15 years, the fund has been near that target with an average of just more than 7%.
Future returns could be lower as the fund looks to safer investments, such as government bonds, which lost a little more than 3% last year, according to the U.S. Fixed Income index tracked by OCERS.
It also could mean fewer investments in stocks, which Delaney considers the fund’s riskiest holdings with continued losses on Wall Street.
But declines and lower returns could come at a cost if the county has to make up for investment losses as payouts to retirees hold steady or increase in coming years.
If OCERS were to cut its target for returns in half to 4%,about the same rate as annual inflation for the past 50 years,the county could have to up its contributions to the fund, according to county Supervisor John Moorlach.
Individual investors also could have to put in more to meet their own retirement goals, or look to invest elsewhere with better returns.
“You need to look at the big picture when you change the formula midgame,” Moorlach said.
Good So Far
So far, the fund is taking in more money than it’s been paying out.
Last year, it took in $400 million in contributions from investors while paying out $340 million to retirees, according to Delaney.
That could change in coming years as baby boomers retire.
“Presently 2009 and early 2010 will be very important as far as its impact on thinking from a market standpoint,” said Tom Flanigan, an OCERS board member. “All of these issues are being reviewed, debated and studied by the OCERS board.”
One of the more questionable holdings of OCERS right now is private equity, which falls into its “alternative assets” category that made up 5% of its holdings as of the end of last year.
Private equity can be riskier because it’s tied to the trust of the investing officer, and you don’t know what its value is until it’s sold, Delaney said.
All of OCERS investments are handled by outside managers it hires for specific strategies.
The individual managers are then looked at by credit rating agencies such as Moody’s Corp. and Standard & Poor’s, which verify the accuracy of holdings, according to Delaney.
Newport Beach-based Pacific Investment Management Co. handles some of the fund’s bond investing, he said.
