Category: Inside Colorado PERA

A closer look into PERA operations, administration, and the Board of Trustees

Strong investment returns position PERA for sustainability, economic impact

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Each year, Colorado PERA releases its Comprehensive Annual Financial Report (CAFR) to provide audited financial information about the state’s retirement plan for public employees. It provides complete, reliable information that the PERA Board of Trustees, PERA staff, elected officials, and the public can use to evaluate PERA’s financial condition. It also demonstrates PERA’s careful stewardship of members’ and employers’ contributions as well as transparency and compliance with legal provisions affecting the plan.

The CAFR is a dense financial document. It is full of fiscal analysis of PERA’s past investment performance, current financial status, and future funding projections. But it contains critical information that demonstrates the strength of the plan’s financial standing as well as potential future challenges that must be managed and limited.

Included within the CAFR released on June 24, 2013, are the investment returns of the PERA funds for 2013. Over the last calendar year, PERA investments earned 15.6 percent. This exceeds the PERA Board’s expected rate of return of 7.5 percent by a substantial margin. Over the last three, five and 10 years, the fund earned 9.9 percent, 12.2 percent and 7.6 percent, respectively. (The last 10 years include the substantially negative-earnings year in 2008.)

In November of 2013, the Board adopted a more conservative outlook on long-term investments and lowered its assumed long-term investment return rate to 7.5 percent from 8.0 percent. As the CAFR shows, PERA investment returns have exceeded this rate over each of these key long-term investment horizons.

The strong 2013 investment returns resulted in $6 billion of investment income. At the same time that PERA has seen these strong investment returns, distributions to PERA retirees have contributed to Colorado’s economy. At the end of 2013, PERA held $43.7 billion in assets, an all-time high for the plan and $4 billion more than at the end of 2012. At the same time, PERA paid out more than $3 billion in distributions to retired public employees living in Colorado.

These retirement distributions in turn drive $4.78 billion in economic output in local communities across the state where PERA members live, work, and retire. Retirement distributions in Colorado sustain nearly 26,000 jobs and generate $282 million in state and local tax revenue. More detail on Colorado PERA’s economic impact may be found here.

There are 547 different employers that are affiliated with PERA including every public school district in the state, agencies of state government, judges, and 146 local governments.

PERA counts members in each of Colorado’s 64 counties and in 2013 paid benefits to more than 100,000 retirees who used to be Colorado’s teachers, prison guards, snow plow drivers, State Patrol officers, and other public employees. Of those retirement distributions, nearly 90 percent went to individuals still living here in Colorado. The average monthly PERA benefit is $3,068 and the median benefit is $2,818.

Importantly, the CAFR includes a full actuarial valuation from PERA’s actuary, Cavanaugh Macdonald. The valuation measures how well the current contributions to PERA from both members and employers position the fund to be able to pay all of its benefit obligations in the future.

In the 2013 CAFR, the actuary notes that “contributions and projected reductions in liability due to benefit structure changes for newer hires are expected to be sufficient to finance the promised benefits.” In short, PERA will be able to meet its benefit obligations in the future so long as contribution increases and benefit changes for new PERA members, which are already outlined in current law, remain in place.

In 2010, the Colorado General Assembly passed landmark legislation, known as Senate Bill 1, to strengthen PERA’s financial position after the Great Recession. As the actuary notes, changes to contribution rates and benefit structures, made primarily as a result of that legislation, will be sufficient for PERA to pay all the benefits its members are owed.

The CAFR also includes a summary of legislation proposed and enacted over the last ten years, such as Senate Bill 1, that addressed PERA’s financial sustainability and levels of funding. In 2014, the Board supported legislation (Senate Bill 14-214) that creates three separate studies that change the state’s total compensation survey process to incorporate retirement benefits; perform a comprehensive study of the current PERA plan design compared to alternative retirement plans; and perform a sensitivity analysis of actuarial assumptions.

For those who would like to dig a little deeper into the CAFR, we’ve prepared this index. For those who would like a shortened version of the CAFR, PERA also creates a Summary Annual Financial Report that is mailed to all members and retirees. Whatever your level of desire for information about PERA’s financial health, it’s always readily available.

PERA Board Discusses Investments During June Meeting

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Colorado PERA’s Board of Trustees met on June 19. At the meeting, the Board approved the release of PERA’s 2019 Comprehensive Annual Financial Report. This report, which is covered at length in another story on PERA On The Issues, includes information on PERA’s investment returns for the 2019 calendar year. The total fund’s investment portfolio returned 20.3 percent, net-of-fees.

The Board covered a number of other agenda items, including information about legislation, the PERA Board election, and updates on projects currently underway within the organization.

Top of mind for many, however, was the investment landscape so far in 2020. While the CAFR mentioned above contains a detailed, audited account of 2019, it does not contain information past December 31, 2019. Investment returns for 2020 will be released in 2021. However, the Board did receive investment reports about broad trends to consider.

PERA’s investment staff monitors market trends, and the Board receives an outside perspective on PERA’s investments with help from its investment consulting teams at Aon, a leading global professional services firm. Laura Flaum, a senior consultant at Aon, shared with the Board her view on the year thus far: “We do expect to see the PERA portfolio make up some of the losses that we [saw in the first quarter] given the portfolio’s exposure to global equities,” she said. Global equities make up just over half of PERA’s asset allocation.

Flaum added that PERA’s second-largest asset class, fixed income, has played an important role so far in 2020. Fixed income, which makes up about a quarter of PERA’s overall asset allocation, consists of bonds issued by both companies and governments. Flaum explained that fixed income serves as downside protection and a risk mitigation tool during market downturns.

During the volatile markets in the early part of the year, Flaum said that fixed income “did perform as it was intended to, and this really illustrates the benefits to having a diversified portfolio.”

The Importance of Staying the Course

PERA’s Chief Investment Officer, Amy C. McGarrity, spoke to the Board about PERA’s investment strategy during volatile times. “There’s no shortage of people with opinions on where the markets are going in the near term,” she said. “But, in my opinion, market timing is extremely difficult.”

McGarrity briefly shared an example to illustrate her point. If you invested $10,000 in the S&P 500 on January 1, 2000, and left your money invested for the entire 20 years, your portfolio would have grown to $32,192 at the end of 2019.

But let’s say you miss just the five best days during those two decades. Your portfolio would be worth $21,359 today—48 percent smaller compared to those who were invested the entire time.

And, if you missed the 20 best days during that 7,305-day span, your initial $10,000 investment would be worth $10,145—virtually unchanged.

“The key, in my opinion, is to remain invested in markets,” McGarrity said, “because it’s very difficult to predict where it’s going in the near term.”

One way PERA’s investment team responded to volatility was to keep an eye on PERA’s asset allocation, ensuring that the overall portfolio stayed within the Board’s guidelines as values changed quickly. McGarrity said that doing so is crucial to meeting long-term objectives. “We think over time that the asset allocation that [the Board has established] will achieve the results that we are expecting,” she said.

PERA Releases 2019 Financial Returns

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The Colorado PERA Board of Trustees approved the 2019 Comprehensive Annual Financial Report (CAFR) on June 19. The CAFR contains information about PERA’s investments, funded status, membership, and more.

A Snapshot in Time

PERA releases this report every June. However, the information included in the CAFR actually changes on a daily basis. People start PERA jobs and leave them. People retire. The value of PERA’s investments fluctuate. Contributions come in, and payments go out. Compiling and analyzing all this data and having it audited by an outside firm takes a significant amount of time, too.

As a result, PERA follows the industry standard of compiling this data as it exists on a single day—in this case December 31, 2019. While the report is released in 2020, the 2019 CAFR doesn’t take into account any developments since December 31, 2019; they will appear next year in the 2020 CAFR.

Strong Investment Returns in 2019

PERA experienced a positive investment year in 2019. At the end of the year, the fund had a fiduciary net position of $51.7 billion, compared to $44.9 billion the year before.

The total fund’s investment portfolio returned 20.3 percent, net of fees. Returns for the past 10 years are shown below:

PERA’s Improved Funded Status

The CAFR also contains information about the projected time for PERA to reach full funding. Funding levels take into account many variables and assumptions, including investment performance and demographic information.

The projected time needed for each division to reach full funding is listed below:

The CAFR and the Automatic Adjustment Provision

The Automatic Adjustment Provision (AAP) modifies employer and employee contributions, the retiree annual increase, and the state’s direct distribution based on PERA’s progress toward its funding goals. This calculation is performed once a year, in conjunction with the CAFR’s release. The AAP was not triggered following the release of the 2019 CAFR.

When the AAP is triggered, the implementation of those changes are delayed for one year. The 2018 CAFR, which was released in June 2019, did trigger the AAP. As a result, those changes are going into effect on July 1, 2020, following the one-year delay. Member contributions for most Divisions will increase by a total of 1.25 percent to a total of 10 percent of pay. Employer contributions to PERA will also increase by 0.5 percent and will range from 14.2 percent to 23.6 percent of payroll. The annual increase paid to retirees will be restored this year at 1.25 percent for most eligible benefit recipients.

Learn Even More About PERA’s Finances

At 275 pages, the 2019 CAFR is longer than most people care to read. However, making this information available and accessible is a core tenant of PERA’s commitment to transparency. You can learn more about this report by exploring an interactive, digital overview of the CAFR.

Another available resource is the 2019 Popular Annual Financial Report. This 12-page report condenses and presents the information in a more traditional layout, similar to a popular annual report a corporation might release to shareholders.

Note: This story was updated on June 30, 2020.

Q&A With PERA’s New Chief Benefits Officer

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At the end of April, Patrick Lane will officially start his work as PERA’s next Chief Benefits Officer. He will provide management and strategic direction of: PERA’s retirement, disability, and survivor benefit payments; member account services; benefit counseling; and customer service programs. Prior to joining PERA, he was Director of Member Services for the Oklahoma Public Employees Retirement System (OPERS).

We spoke with Patrick to learn more about his background and to hear firsthand about his future at PERA.

PERA On The Issues: Welcome to PERA, Patrick! Tell us a bit about where you’re from.

Patrick: Have you heard the John Mellencamp song Small Town? That describes where I’m from. I was born and raised in a small Indiana town. I played basketball, read Kurt Vonnegut, and went to Indiana University. I’m a proud Hoosier!

PERA On The Issues: Moving your family to a new state is never an easy task, but you must do it during some unusual times. How is your move going?

Patrick: I will be moving near the end of April, officially beginning my work with PERA on April 30. My wife is a teacher, so she’s wrapping up the school year and assisting our girls with remote learning. They’ll be joining me in Colorado in early June.

PERA On The Issues: At first, why did you choose to work in public service?

Patrick: An uncle planted the seed of public service in me. He was a fun, dynamic individual. He was a police officer before becoming city manager and ultimately a New Mexico state senator. He showed me public service was an honorable profession. One of the best schools in public administration was in my backyard, so I chose to attend IU’s School of Public and Environmental Affairs.

I first thought I would go into city management like him. But, after a brief moment working on political campaigns after college, I joined Indiana’s state pension system as the executive assistant to the director. Now, here we are, three decades later.

PERA On The Issues: What made working in public pension administration compelling?

Patrick: A lot of it was good timing. When I started, there was a referendum on the ballot that lifted a prohibition on investing in equities. Indiana was the third to last state to lift this ban. The very first thing my boss, who was previously an investment banker, assigned me to do was to draft a letter for his signature authorizing our first investment into the S&P 500 and Russell 2000. It was a letter authorizing $80-million dollars being transferred from one account to another.

As a kid from small town Indiana, this was an eye-opening experience. I never dreamed of doing anything that involved billions of dollars. I was lucky to have such a wonderful mentor who provided me learning and growth opportunities. It was an exciting time, watching a $4-billion bond portfolio being transitioned into a $12-billion diversified portfolio when I left Indiana. Changes took place very quickly as the organization grew, and that is where leadership opportunities came for me.

PERA On The Issues: At PERA, the Chief Benefits Officer is responsible for an array of activities. How do you explain your new role to friends and family?

Patrick: I can count on one hand the number of times people ask a follow-up question when I tell them I work at a retirement system. All kidding aside, most of the time when I mention I work in retirement, I get asked if I’m in finance or investments. I explain that the investment team helps make the money, and I help get it to members.

PERA On The Issues: For an average PERA member or retiree, which elements of their PERA experience has the CBO’s fingerprints on it?

Patrick: There’s a quote from Dean Smith [legendary former men’s basketball coach at the University of North Carolina] about collegiate athletics being the front porch of a house (the university) with many rooms. That quote has stuck with me, and I use it often in our context. Complex organizations like universities or retirement systems have many equally important parts working together, but one stands as the public-facing image of the entire enterprise. Member services, customer service, communications—together, are the front porch of retirement systems.

I love knowing that if we do our job well and deliver on the promises we make, then we’ll have the reputation of putting our members first. We can give them the dignity that their public service deserves.

PERA On The Issues: You were most recently Director of Member Services at the Oklahoma Public Employees Retirement System. How will your experiences there inform what you do at Colorado PERA?

Patrick: My time as director of member services was focused on pursuing operational efficiencies to tackle backlogs in our benefits processing practice, which we were able to eliminate before I left. However, going into it I didn’t know how long it would take. Each plan is different with its own economies of scale. I don’t think there are too many “best practices” that you can just lift and insert in another plan. The improvements we made in Oklahoma were the product of incremental change. I’m proud of what we were able to do.

PERA On The Issues: How much did you know about PERA going in to the interview process? When you think about PERA, what are the defining characteristics?

Patrick: I’ve admired PERA from afar for some time. It goes beyond high scores in the annual CEM benchmarking. In my years on the National Pension Education Association Board of Directors, I met many PERA staff members. I found them all to be very intelligent and engaged, open to learning from other systems as well as willing to share their strengths. This position represented an opportunity to join that group. There’s a lot to learn! I’m very excited and very humbled by the opportunity.

PERA On The Issues: How will your role contribute to PERA’s overall plans for the future?

Patrick: The Board has created a very clear strategic plan that serves as a road map. I’ll be deeply involved with three of the four primary goals, including: finding ways to enhance our role as a partner with our members in their pursuit of retirement security; improving PERA’s organizational health and performance; and offering products, services, and education that respond to our member and employer needs.   

What that means in practice is making sure our members have the information they need to make sound decisions for themselves, not just financially but also the social and emotional factors of a rewarding retirement. Fostering strong partnerships with external service providers, providing exceptional service, and expanding member and employer engagement are important aspects of this, as well.

Working with staff to continue building a strong culture at PERA is also important. There’s very little that any one person does on their own; we’re only as good as the people around us. That requires ensuring that we are attracting and retaining the best talent we can and developing those people along the way.

PERA On The Issues: Thanks for your time, Patrick, and again—welcome to PERA! We look forward to hearing more from you in the future.

Patrick: Thank you! It was a pleasure.

Issue Spotlight: Responsible Investing

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Every investor, whether an individual or an organization like PERA, makes investment decisions based on their goals or objectives.

PERA’s investment goals and objectives are listed in the investment policy adopted by the Board. It reads, in part: “The function of PERA is to provide present and future retirement or survivor benefits for its members. This objective requires the prudent assumption of investment risk in seeking to maximize long-term investment returns…”

That statement lays out both the goal – providing benefits to members in perpetuity – as well as the way it will achieve this goal: by maximizing long-term risk-adjusted investment returns.

Investing: The Big Picture

The world of investment opportunities is vast. It’s often subdivided into asset classes, or groups of distinct types of investments. These include publicly traded stocks, bonds, and real estate. Each asset class has unique features and risks associated with it.

PERA’s Board ultimately determines how much PERA invests in each asset class. They do this through their asset allocation policy. This policy lays out a target for each asset class – a percentage of the total funds PERA invests that should be dedicated to each asset class. Because the value of every investment can fluctuate, it’s impossible to “hit” the target in practice. So, the Board also provides a minimum and maximum percentage that each asset class can hold.

The Board regularly reviews and updates its asset allocation policy. Read more about the last time the Board did this, in late 2019, in this PERA On The Issues story.

Within that framework, PERA’s investment team makes its investment decisions.

Investing Responsibly

From time to time, outside groups push to mandate PERA to take up additional goals and objectives. These movements often advocate for the use of divestment – or selling off investments – in an effort to achieve policy goals unrelated to retirement security.

Regardless of a person’s attitude toward any particular policy goal, divestment is not an effective way to achieve that goal. Previous PERA On The Issues stories like this one have explored some of the ways in which divestment is ineffective.

The PERA Board’s Statement on Divestment explains their position in full, but states that “divestment is costly and limits PERA’s ability to effectively seek the best risk-adjusted returns to secure the retirement benefits of public servants.”

The Benefits of Engagement

PERA maintains its focus on being a responsible, engaged investor. What does this look like?

  • Every shareholder of a company owns a piece of that company. As a result, they are able to voice their opinions on some business decisions through voting. PERA outlines its approach to dozens of issues it reviews when voting in its Proxy Voting Policy, which the Board last updated in early 2021.
  • When casting these shareholder votes PERA considers many issues, including sustainability issues that could have a financial impact on a company.  
  • There are many sustainability factors that could have a financial impact on PERA’s investments. PERA’s most recent Stewardship Report lists a few: carbon emissions, labor rights, natural resource utility, executive oversight, animal welfare, corporate culture, and social impact. As the report states, “When stewardship efforts impact a firm’s financial success, they become financially meaningful to stakeholders.”
  • PERA advocates for companies to reliably inform shareholders about any climate-related risks and opportunities that could have a financial impact on the company. PERA has voted in support of 91 environmental proposals over the past three years.
  • With this information, investors are able to make better-informed decisions about how they invest. In PERA’s case, this means making investment decisions that align with PERA’s goals and objectives. Companies that adopt sustainable business practices may signal quality and longevity, which are important features for a long-term investor like PERA.
  • PERA staff actively engage with portfolio companies, legislators, regulators, standard setting bodies, and other institutional investors about matters that can impact PERA’s investments and the integrity of global markets.

Investing for Members

The world has faced a variety of critical issues since PERA’s founding in 1931. Maintaining focus on the primary goal has served PERA and its members well. The following statement from the Board’s Statement on Divestment shows that they intend to maintain that focus well into the future: “PERA serves the singular purpose of ensuring the retirement security of Colorado’s current and former public servants.”

PERA Board Selects New DC Plan Administrator at March Meeting

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Key points from this story:

  • The PERA Board selected Empower Retirement as the new recordkeeper for PERA’s defined contribution (DC) plans
  • Nothing will change for PERA members right away
  • New actuarial assumptions mean it will take longer for PERA to reach full funding
  • An automatic adjustment will likely be announced with PERA’s annual report in June

PERA’s Board of Trustees convened virtually for its regularly scheduled meeting on March 19. The Board heard updates from PERA staff on a number of aspects of PERA’s operations, and also took action on some items, including selecting a new recordkeeper for PERA’s defined contribution (DC) plans.

The Board also discussed how changes to PERA’s actuarial assumptions — estimates for inflation, rate of hiring and how long people will live, for example — will affect how long it takes for PERA to reach full funding.

Defined contribution plans recordkeeper

Background

PERA members who participate in the PERAChoice DC plan or PERAPlus 401(k)/457 plans know Voya Financial as the company that has been the recordkeeper for those plans since 2011. But recordkeeping needs change over time, so, last year, PERA began the process of reviewing its recordkeeping needs and selecting a recordkeeper who could deliver the best value for members.

Five companies responded to PERA’s request for proposals. At the March 19 meeting, the Board weighed the pros and cons of each company and voted to move forward with Empower.

What that means for PERA members

Nothing will change right away. At some point in the future, all accounts with Voya will be transferred over to Empower. After that happens, participants will be able to access their accounts directly through Empower, either by logging on to Empower’s website or by calling Empower on the phone.

Some of the advantages Empower brings to the table include:

  • Significant experience with large public plans like PERA
  • Expanded call center hours
  • Enhanced digital and mobile tools
  • Simplified account access

What’s next?

PERA staff will begin contract negotiations with Empower to finalize the details of the partnership and the transition from Voya to Empower.

PERA will be sure to communicate any changes to members before they happen.

What new actuarial assumptions mean for PERA

Background

Every four years, PERA conducts what is called an experience study. The Board uses this study as it reviews actuarial assumptions. Actuarial assumptions are projections about factors, including inflation and life span, that have an effect on PERA’s unfunded liability calculation, among other things.

An experience study compares the projections PERA had been using to the last few years of recorded data, known as “experience.” The Board can then adjust the actuarial assumptions PERA will use for the next four years. This rigorous review process keeps projections as accurate as possible.

Actuarial assumptions are grouped into two categories—economic and demographic. Economic assumptions include information like inflation, salary increases, and the projected growth in the number of employees hired by PERA employers. Demographic assumptions include information like the ages at which PERA members retire and how long people tend to live.

The last experience study took place in 2020. The Board updated its assumptions in November. The changes included revisions to the inflation, payroll growth, and active member growth assumptions, among others. Read more about those changes here.

What the new assumptions mean for PERA

At the March meeting, representatives from PERA’s actuarial consultant, Segal, provided further information to the Board on how specific assumptions will affect PERA’s calculations.

PERA’s liability — the cost of paying benefits to current and future retirees — changes when actuarial assumptions change. Some of those assumptions have a bigger impact than others. Positive investment returns, for example, can help reduce PERA’s unfunded liability, but lower-than-expected payroll growth and retirees living longer, and therefore receiving benefits longer, can have a bigger effect in the long term and add to PERA’s liability.

In this case, the newly adopted mortality and payroll growth projections will extend the estimated amount of time it will take PERA to achieve full funding. This doesn’t mean PERA is running out of money; rather that it will take longer than expected to reach its funding goals.  One result of these changes is that an automatic adjustment, established in Senate Bill 18-200, will likely be announced when PERA releases its annual financial report in June, but the changes would not take effect until July 2022. These adjustments help keep PERA a secure benefit for current and future retirees. Read more about how PERA’s Automatic Adjustment Provision works here.

PERA’s Board is committed to maintaining this routine and rigorous review to ensure PERA is able to plan for the future and provide a secure retirement for all its members.

The Board’s next meeting is scheduled for June 18.

Nearly 1,700 People Respond to Reader Survey

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Over the past few weeks, 1,659 PERA On The Issues readers responded to our reader survey. Your feedback is critical as we look to keep you informed about the subjects you find important.

Below we’ve shared a few results from the survey and what we plan to do in response. We’ll share additional updates in the future.

Survey result

  • 88% of respondents said that the current newsletter frequency (every two weeks) is ideal
  • 93% said the length of a typical story is just right
  • 89% said story complexity is just right
What we heard

Readers like the form of the current website and newsletter.

What we’ll do
  • We will continue sending a newsletter every two weeks.
  • We will continue publishing stories that take no more than a few minutes to read.
  • A number or readers indicated they would like to see a summary at the top of each story. We will incorporate that idea whenever practical.

Survey result

Question: How important is each the following topics?Average rating (out of 10)
-Stories about legislation9.1
-Stories that explain the policies and concepts found at PERA8.0
-Stories that recap PERA Board meetings7.3
-Stories about insights, research, and reminders related to personal finance and retirement planning7.2
-Stories about the people and processes behind PERA6.7

What we heard

Legislative updates remain the top area of interest for PERA On The Issues readers. On the whole, readers are highly curious about understanding more about how PERA functions.

What we’ll do
  • We will continue delivering as many legislative updates and details as practical.
  • Because Colorado’s legislative session only lasts about four months out of the year, we will look to fill out the calendar with stories that align with other reader interests.
  • A number of people indicated they would like to learn more about PERA’s investment program. We will keep this in mind as we plan our editorial lineup.

Other takeaways

  • We’d like to find opportunities to talk with PERA members and retirees as we put stories together. More than 100 people said they’d be interested in talking with us.
  • We’ve heard from a few readers that they’d prefer a logo with the site’s name spelled out. Be on the lookout for a logo refresh soon.
  • More than 27% of readers said they don’t follow PERA on social media but that they would consider it. You can get started now by visiting us on Facebook, Twitter, LinkedIn, and Instagram.
  • About 40% said they’d like to see more charts and graphics in stories. We will find opportunities to bring more visuals to our stories.

Evaluating Sustainability in PERA’s Investment Portfolio

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In this story:

  • PERA invests for the long term for its members
  • The investment team considers a variety of risk factors when evaluating investment opportunities
  • Comparing the risk in PERA’s investment portfolios to the risk found in their respective benchmark portfolios is one way these factors are evaluated
  • Because investments contain multiple risks, PERA takes a comprehensive approach, considering the sum of these factors rather than each in isolation

Colorado PERA invests billions of dollars on behalf of its members. It holds investments around the world in a variety of asset classes and industries. This diversified approach to investing helps PERA achieve its investment goal: to maximize risk-adjusted returns for the benefit of members and retirees.

PERA is also a long-term investor. To better understand how an investment might perform in the long-term, PERA’s investment team considers a variety of risks when evaluating investment opportunities.

Risks come in many forms, and they can be considered in isolation or in combination with other risks that can impact an investment decision. Examples can include:

  • Interest rate risk: How do interest rates impact valuations and expectations for future growth?
  • Competitive risk: Does a company operate in an industry that has highly innovative peers?
  • Climate risk: Does a company have a business plan that takes into account potential impacts of climate change?
  • Supply chain risk: How dependent is a company on resources that it does not directly control, and what are the risks associated with those suppliers?

PERA considers these and many others as they evaluate investments.

An Example of How PERA Evaluates Risk

One method PERA uses to evaluate risk is to compare a PERA portfolio to its respective benchmark .

For example, carbon risk is part of environmental or climate-related factors an investor may consider. So it can be helpful to compare the carbon risk in PERA’s portfolio to the carbon risk in the portfolio’s benchmark .

The chart* below shows the carbon intensity of a few PERA portfolios alongside the carbon intensity of each portfolio’s respective benchmark . Lower bars indicate lower carbon intensity .

While PERA does not target specific environmental, social, or governance (ESG) scores when making investment decisions, these factors are part of a much broader mosaic of understanding of a company’s fundamental business.

The Importance of Sustainability

PERA has in place many measures to evaluate its portfolio exposures to various risks and opportunities. Because investments contain multiple risks, PERA takes a comprehensive approach, considering the sum of these factors rather than each in isolation.

Investing is also a dynamic activity. Markets evolve as political, social, environmental, and economic conditions change. Broadly speaking, a company that operates with sustainable business practices may be better able to navigate these changes. How?

  • Sustainable business practices can signal the ability to manage risks and seize business opportunities more effectively than competitors.
  • Sustainable practices can lead to more efficient operations, which can boost profits.
  • Companies that have sustainable business practices also can attract and retain top talent. Top talent can yield innovation that enhances competitive advantages and, thus, returns to investors.

“PERA’s commitment to investing in companies that have strong financials, operations, and opportunities for growth means we have a bias toward higher quality companies in our actively managed portfolios,” said Tara Stacy, PERA’s Director of Investment Stewardship. “These companies are likely to score more favorably among their industry peers in other aspects of their business as well, such as in the management of various ESG risks.”

By focusing on financial sustainability, PERA is able to effectively evaluate and manage investment risks and opportunities across the portfolio in order to provide lasting benefits to its members and retirees.

* This report contains certain information (the “Information”) sourced from MSCI ESG Research LLC, or its affiliates or information providers (the “ESG Parties”). The Information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. Although they obtain information from sources they consider reliable, none of the ESG Parties warrants or guarantees the originality, accuracy and/or completeness, of any data herein and expressly disclaim all express or implied warranties, including those of merchantability and fitness for a particular purpose. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such, nor should it be taken as an indication or guarantee of any future performance, analysis, forecast or prediction. None of the ESG Parties shall have any liability for any errors or omissions in connection with any data herein, or any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.

Sustainability: Digging Deeper to Understand How PERA Will Pay Benefits Over the Long Run

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There has been considerable commentary on the sustainability of Colorado PERA. Using a simple definition, PERA is sustainable. In this instance, meaning able to pay future retirements without depleting the trust funds.

But digging a little deeper, there are additional criteria pension plans should meet to be considered sustainable:

  • A sustainable pension plan has a reasonable benefit design. According to a recent study completed by Gabriel, Roeder, Smith & Company, PERA’s hybrid defined benefit plan design delivers a higher percentage of income in retirement than other plan designs – and does so at a lower cost.
  • A sustainable pension plan has a commitment from the plan sponsor (public employers, in PERA’s case) to regularly fund the plan. The Colorado General Assembly and the Governor, through the passage and enactment of 2010’s Senate Bill 1, have ensured that the contributions received by PERA’s employers will achieve this goal when the contribution increases contained in SB 1 are fully recognized in 2017 and 2018.
  •  A sustainable pension plan has a strong governance process. PERA is overseen by a 16-member Board of Trustees consisting of three Trustees appointed by the Governor and confirmed by the Senate; four members from the School Division; three members from the State Division; one member from the Local Government Division; one Judicial Division member; two PERA retirees; a non-voting representative from the DPS Division; and the State Treasurer as an ex officio, voting member. All Trustees are fiduciaries bound by law to act solely in the best interest of the PERA membership.

By these additional measures, Colorado PERA is, in fact, sustainable.

But what about the retirement system’s unfunded actuarial accrued liability (UAAL)? Doesn’t that prove that PERA is unsustainable?

In a word, no.

Having an unfunded liability does not mean that a pension plan is unable to pay the benefits for which it is presently obligated or to meet current cash flow requirements. Because of the long-term nature of pensions, funding gaps can be filled gradually, over time. Most of the current unfunded liability is a result of the market decline in 2008 and a reduction of the investment rate-of-return assumption. Think of the unfunded liability as a hole which needs to be filled. Unsustainable plans are those with a deficit which are either failing to fill in the hole, or continuing to dig it deeper. PERA is not one of those plans.

One final thing to keep in mind is that sustainability isn’t measured in weeks, months, or single years. Measuring the sustainability of a hybrid defined-benefit pension plan such as PERA must reflect the nature of the liabilities which are long-term. Pension plans operate on a long time horizon where members work 10, 20, 30, even 40 years, and draw a pension for many years after retirement.

If you only focus on a few points in time or take raw data out of context to assess sustainability, you’re likely to see a distorted picture. Like with a 30-year mortgage, PERA is paying down the unfunded liability over time. Just as with a mortgage, it takes many years to see a significant reduction in the principal owed, it will take time for the unfunded liability to show large declines. There is no basis for surprise or concern that the outstanding balance does not decline materially for many years.

PERA is sustainable.

This article is based on a New Hampshire Retirement System publication. We thank them for their willingness to share information with PERA.

Inaugural Facebook Live Event Attracts Hundreds

Posted on by planeteria

Colorado PERA’s Facebook page went live earlier this year. This launch was part of a broader effort to better adapt to member preferences, including how they want to communicate with PERA. The page has become a popular destination, garnering more than 10,000 likes in less than five months.

On December 2, PERA used this channel to host its inaugural Facebook Live event. Executive Director Ron Baker and Chief Investment Officer Amy C. McGarrity spent about 30 minutes taking member questions.

“PERA needs to be a partner with our members, stakeholders and employers,” Baker said. “We need to meet members where they are. This Facebook Live event is a step in that direction. We need to be the type of organization that provides service to our members when and how they’re looking for it.”

Find a summary of a few questions and responses below. You can watch the entire event here. Please note, some questions and answers are lightly edited for length and clarity.

Q: Will there be an automatic adjustment this year?

There will not be an automatic adjustment in July. The 1.25% annual increase amount for eligible retirees will remain the same. (note: Member contribution rates in most divisions will have a slight increase, completing the 2% increase that was part of SB 18-200. This planned increase, which is not due to the automatic adjustment, has been phased in incrementally since 2019.)

Q: Can I depend on PERA to manage my money well and to be there when I retire?

We are solely focused on investing your money for the long-term. Every dollar you contribute to PERA, by statute, will be returned to you with an interest and potentially a match, whether through benefit payments if you receive a pension or a refund of your account.

Q: Is PERA invested in cryptocurrency, like Bitcoin?

PERA does not hold cryptocurrency in our custody relationship, and we don’t have someone programming to obtain Bitcoin. But, broadly speaking, there is a way to gain access thematically to cryptocurrencies through public markets, like global equities and fixed income. We have a large exposure to global equities, so we likely have thematic exposure to companies that provide the backbone, the infrastructure, or have segments that participate in cryptocurrency.

Q: Why do PERACare costs continue to rise?

Certainly on the pre-Medicare side in particular, costs are trending up. That’s a national trend. As an organization we do everything we can to drive down the costs and to get the best premiums we can. But we also face the realities of an older population and the rising cost of health care services. In 2021, we kick off a process where PERA reviews and selects vendors. In this process our goal is to get the best plan design—offering the best plan at the best cost for our members.

Q: Is PERA sustainable? Will additional changes need to be made by the legislature?

Yes, PERA is sustainable. The work done in SB 18-200 was designed to allow PERA to have flexibility to address periods of time where we fall behind in reaching full funding by 2047. Having that flexibility allows PERA to move forward quickly without additional legislation.