State pension fund achieves record gain

Posts net investment gain of 29.5%, or $22.1b


FISCAL YEAR 2021 was a record year for the Massachusetts state pension fund, which closed the one-year period ending June 30 with the highest return in its history and invested assets that swelled to a record $95.7 billion.

The 29.5 percent return net of fees beat the Pension Reserves Investment Trust fund’s benchmark by 8.9 percent, making it the highest fiscal year return since the 25.6 percent return realized in the fund’s first year, 1986. It is also the highest relative return, or the greatest outperformance, since the fund beat its 2000 benchmark by 5.9 percent.

Michael Trotsky, executive director and chief investment officer of the Massachusetts Pension Reserves Investment Management Board, presented the fund performance report during a meeting of PRIM’s Investment Committee on Tuesday morning.

“We’re pleased with a strong one-year performance but even more pleased that over long periods and through strong markets and market corrections, the PRIT fund has proven to be high performing, resilient, and cost-effective. The PRIT fund’s trailing three-, five- and 10-year returns remain strong and consistently above benchmarks,” Trotsky said. “We also believe our innovative and acclaimed work over the last 10 years in which we developed our own proprietary and statistically driven tools for asset allocation and also manager selection is paying off. We have successfully engineered a portfolio that performs well as, as you’ve seen, in a variety of market conditions.”

The record return means the PRIT fund saw a net investment gain of $22.1 billion in fiscal 2021, $6.7 billion more than the fund’s benchmark return. The fund paid out a net $1.2 billion in benefits to retirees during fiscal 2021. The retirement funds of state employees, teachers, and many municipal employees in Massachusetts are invested through PRIM.

“The people that we cover, the more than 300,000 beneficiaries, really have gotten unbelievable performance from an extraordinary group of people who work at PRIM,” Treasurer Deborah Goldberg, who oversees PRIM, said. “And, in fact, it helps the state’s financial position because with that kind of outperformance we don’t get as bullied and it doesn’t become a distraction from other things that we have to worry about in terms of the state’s financial position.”

Not only does the PRIT Fund’s outperformance help ensure that participating retirement systems can meet their pension obligations, but it could also work to reduce the state’s unfunded pension liability. Earlier this year, lawmakers and the Baker administration agreed to make a $3.415 billion transfer to the state pension fund in fiscal year 2022 — an increase of $300 million over the fiscal 2021 contribution — which is expected to keep Massachusetts on track to fully fund its pension liability by 2036.

The return is only one of the three components that all investment programs should be evaluated on, Trotsky said, along with risk and cost. He said fiscal 2021 risk-adjusted returns were at a multi-year high while costs were at a multi-year low.

“I say to people that too often, in strong markets like we have just experienced investors become much more focused on returns and less focused on risk and cost. I can assure you that we are still as focused as ever on risk and costs, too,” Trotsky said. He added, “We believe our returns will be near the top of our peer group even while risk will be near the bottom and costs remain low and well-controlled. In short, the PRIT fund is higher return, low risk, less volatile and low cost.”

Fiscal year 2021 — basically the second half of 2020 and the first half of 2021 — followed the months of volatility that rocked financial markets when the COVID-19 pandemic first took hold. Despite the uncertainty that the pandemic fueled, the markets stabilized and some indices set new records by the end of 2020.

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The PRIT Fund shed 9.9 percent during the first quarter of 2020 as the COVID-19 pandemic shook the global economy, but then posted a return of 16.4 percent from July 1 through Dec. 31, outperforming its 12.5 percent benchmark for the first half of fiscal 2021 and topping a record for a half-year return that had stood since June 1986, officials said in February.

The PRIT Fund ended calendar year 2020 having produced a return of 12.1 percent, beating its benchmark of 10.8 percent. The first quarter of 2021 saw the fund grow to have $90.1 billion in assets under management, only to increase through the second quarter to $95.7 billion.

“It was a crazy year, but I’m extremely proud of our record-setting accomplishments and even more pleased with our long-term successes. But I believe this year’s achievements are particularly remarkable because the COVID pandemic was a major distraction, if not a major headwind, to our efforts. It was an extremely difficult year,” Trotsky said Tuesday. “It’s a year that we will not soon forget.”