Fund lifespan down to 3 years

From a lifespan projected to last just five years a year ago, the NMI Retirement Fund’s pension program is now estimated to last just three years, if the current trajectory continues, due to “material changes” affecting the program, according to Wilshire Associates principal Maggie Ralbovsky yesterday.

Among these changes are the recent court order requiring a $100-million reserve for Fund members, the central government’s continued failure to remit its employer contributions, and the volatile stock market where a large part of the Fund’s assets are invested.

Ralbovsky, in a presentation yesterday to the board of trustees, emphasized that there’s “no way the pension plan can invest out its assets because there’s no possible return that can save the Fund in this current condition.”

It is therefore important for the Fund to refocus its strategy and protect its liabilities, to avoid significant losses arising from the market downturn, she said.

Wilshire has been the Fund’s investment consultant since October 2010, taking over from Merrill Lynch.

“A year ago…we were projecting that the Fund has five to six years of life. Fast forward today—after significant material changes—we’re looking at a three-year investment horizon before the Fund is depleted if the current trajectory continues,” Ralbovsky said.

The Fund has over $300 million in its investment portfolio. With the court mandating a $100-million reserve for retirees, this will further reduce the portfolio level.

Based on Wilshire’s projection, factoring in a $125 million reserve fund for members, the pension program will only have $180 million available for benefit payments in fiscal year 2011. This is estimated to go down to $135 million in fiscal year 2012 and further down to only $84 million in fiscal year 2013.

Ralbovsky said that benefit payments, under the same three-year trajectory, will amount to $68.4 million for the first fiscal year; $69.5 million in the second year; and $71 million in the third year.

Also factored in the calculation is the government’s expected contribution of $10 million starting fiscal year 2012, based on the government’s proposed budget.

Wilshire also projects low investment returns for the next three years: 4.9 percent in fiscal year 2011; 4.1 percent in 2012; and 3.4 percent in 2013.

For the Fund’s lifespan to last up to 10 years, Ralbovsky said the central government has to remit $58 million a year in contributions.

The government’s delinquent contributions have forced the Fund to aggressively drawdown assets for benefit payments, amounting to $70 million a year.

Responding to strong comments from board members yesterday, Ralbovsky said that there’s no way for the Fund to be saved other than to focus on the future of the pension program.

Since the Fund cannot invest and collect from the government, she said the board should instead focus on the liability side to protect its members.

Ralbovsky recommended the adoption of a “glide path,” an asset allocation policy that will rebalance asset levels, streamline operations, and reduce time lag between decisions and actions.

On an ongoing basis, when benefit payments are due, Wilshire recommends that assets be withdrawn from various index funds. This practice, Ralbovsky said, will greatly reduce transaction and custody/settlement costs.

Among the major challenges for the CNMI investment program is the Fund’s near-term liquidity needs, which Ralbovsky says restricts the Fund’s investment horizon. She said the investment horizon of three years is finite and very short.

“Most public pension plans backed by their plan sponsors [governments] with required contributions enjoy one of the highest priorities of a government’s budget. Therefore, they are usually considered a perpetuity for investment horizon purposes. The NMIRF, on the other hand, supports a closed pension plan, with no more new entrants. Over 80 percent of the actuarial accrued liabilities belong to the participant groups that are already receiving benefits,” she told the board.

The Fund, she added, has very low-risk tolerance; a de-risking strategy should be implemented as soon as possible. De-risking, she said, means gradually taking money out of the stock market and putting it in the bond market.

According to Wilshire, in order for the Fund to last 10 years, market returns need to be over 25 percent every year for 10 years—which is zero probability considering the volatile market.

The government should also be required to contribute $58 million every year for 10 years, which again, is close to zero probability.

The only choice for now, Ralbovsky said, is to “share the pain” for the long-term solvency of the Fund. That means restructuring retirees’ benefits.

“The Fund cannot invest out of its trouble. It has also lost its window in winning back contributions owed to it by government agencies,” Ralbovsky said. “Wilshire believes the Fund now must face the reality and should not miss the window of restructuring its liabilities. If this window is again lost, the Fund is expected to cease benefit payments within three years.”