The state Investment Commission on Wednesday approved a recommendation by General Treasurer Seth Magaziner to reduce the 15 percent hedge fund allocation in Rhode Island’s $7.65 billion pension plan to 6.5 percent over the next two years.
The change will begin to take effect immediately.
Magaziner said the pension plan’s hedge fund stake has had a 4.85 percent rate of return since Governor Gina Raimondo, then the state’s treasurer, spearheaded a move in 2011 to increase the state’s allocation in hedge funds.
While Raimondo touted the heightened investment in hedge funds as a way cushion the pension fund from volatility, critics like Edward “Ted” Siedle have called it a way to enrich Wall Street investors while hurting retirees. Magaziner said Siedle had “zero” influence on his decision to adopt a strategy dubbed by his office “Back to Basics.”
“I mean, this is not something that we just woke up and decided to yesterday,” Magaziner said during a briefing with reporters. “This was the process of a very intense, very thorough review process that has lasted for several months, has involved some of the state’s leading investment experts and national investment experts. This was a very deliberate process, and we are making these changes because it is the right thing to do for the strength of pension system and the state’s finances. That’s it.”
Magaziner said gradually reallocating $500 million from hedge funds to more traditional asset classes will return more money to the pension fund over the long haul.
“This is now about making sure that we get the best performance that we can, so that from here going forward, costs stay under control and retirement security is solidified for the 60,000 members of the [retirement] system,” he said. “Stronger investment performance will be both good for taxpayers and good for members of the system.”
Magaziner defended as necessary the 2011 pension overhaul spearheaded by Raimondo — which earned her the lasting enmity of many public employees and retirees — as well as her stated intention to reduce risk by using a higher stake of hedge funds. “We were too risky going into the financial crisis, which hurt us,” he said.
Asked if putting a bigger stake of the pension fund in hedge funds was a mistake, Magaziner said, “Well, some of the funds performed very well. I would say that most of them didn’t meet expectations.”
Magaziner said changes are now needed to improve the pension fund. “I would say that the new strategy is expected to improve performance and reduce risk. The new strategy is projected to get us a higher return over time and also lower our volatility.”
In a statement, Raimondo spokeswoman Marie Aberger said, “The pension system is much stronger today than it was when Gina Raimondo was first elected Treasurer. Between the Governor’s pension and Medicaid reforms passed last year, Rhode Island is now able to make record investments in K-12 education and make college more affordable and accessible. Businesses are taking a fresh look at our state because of our more stable, more predictable finances. Treasurer Magaziner and the State Investment Commission are keeping with the strategy of having a diverse mix of investments to protect against risk, and the Governor continues to support that approach to make sure people’s pensions are there when they need them.”
The treasurer said Raimondo had a positive reaction when he shared the final version of his recommendation with her last week.
Magaziner also indicated he’s leaning toward recommending lowering the 7.5 percent rate of return for the pension fund, because it is unrealistically high.
“I think that over time it is going be harder to justify the 7.5 percent rate,” he said. “With inflation the way it is, with persistently low interest rates the way they are, the equity markets had a good rally from 2010 to 2014 as we came back from the financial crisis. That’s over now.”
Magaziner said he expects to make a recommendation next spring, which is also part of the current fiscal year, to the Employee’s Retirement System. He declined to specify which rate of return he is inclined to support.
This post has been updated.
