Wilshire: 10-year investment horizon urgent to save Fund

Without any positive changes to the Retirement Fund’s portfolio, the only way to save the Fund from collapsing in 2014 will be the creation of a 10-year investment horizon for the Commonwealth’s pension program, according to a Wilshire Consulting Associates official Friday.

In a blunt presentation to the board, Wilshire principal Maggie Ralbovsky said that, as the Fund’s investment consultant, she has no silver bullet that will immediately solve the financial mess of the pension agency.

With the present value of the Fund’s portfolio, she said there’s no way it can all be invested in the stock market without an investment horizon of at least 10 years-as what is needed for an institutional pension like the CNMI Retirement Fund.

The Fund’s investment portfolio is currently valued at about $250 million.

“I am sorry to say, but I don’t have silver bullet to solve the Fund’s problem at this point. The Fund does not have investment horizon for you to take a risk and [with the amount of current assets], we can only take very limited amount of risk, which also means limited expected returns,” Ralbovsky told the board.

She urged the trustees to focus their attention on creating a lengthy investment horizon by combining various solutions such as increasing contributions and possibly restructuring near-term liability payouts to buy some time for the Fund to invest into higher return asset classes.

Ralbovsky pointed out that nothing much have changed since her last presentation to the board in August 2011 about the near-depletion of the Fund’s assets and that things have, in fact, only gotten worse.

Although the stock market is the best place to generate funds for institutional investors, Ralbovsky said this is for the long term and “obviously not a safe place for the Fund’s very limited assets.”

She disclosed that in fiscal year 2011, the Fund had a market return of just 2.9 percent. In 10-year period from fiscal years 2001 to 2011, she said there were only four times when the Fund incurred losses.

“The stock market is the place to generate return but the investor has to have a descent investment horizon. If we have only a one-year investment horizon, there’s a high chance we are going to lose money and we cannot take that risk,” she said.

Expected depletion

Ralbovsky said that if the Fund continues to get $13 million in employer contributions each year, the program is projected to be depleted by May 31, 2014.

If the contribution goes up to $23 million, Ralbovsky said this will buy some time for the program and will push the depletion deadline to Sept. 1, 2014.

If the employer contribution goes up to $33 million, she said this will lengthen the program’s lifespan to Jan. 31, 2015.

In terms of lump sum cash contributions, the program needs $300 million to achieve the 10-year lifespan while $400 million to become sustainable, she said.

Ralbovsky emphasized that this calculation disregards the Fund’s future responsibility to active members and solely focuses on defined benefit members: the retirees and other beneficiaries.

She revealed that if active members (members of the defined contribution plan) are factored in, $400 million won’t be enough to make the program sustainable.

$1B unfunded liability

The Wilshire principal disclosed that at present, the pension program’s accrued unfunded liability is about $1 billion.

According to Ralbovsky, the Fund should have made less than 10 percent drawdown from the value of its portfolio to pay the benefits of members. She said that without the $60 million drawdown incurred by the Fund each year, its assets should already be at the $600 million level.