COLUMBIA, SC — The $26.6 billion fund that South Carolina uses to pay retirement benefits to state workers grew by 12.39 percent in 2012, adding about $3 billion in value.
But state Treasurer Curtis Loftis called the numbers “deceptive,” adding the Retirement System Investment Commission, which reported the numbers, “lacks a moral core.”
In June, the Investment Commission announced it ended the 2011-12 fiscal year with returns of less than 1 percent. That essentially flat growth, combined with payouts to retirees, meant the fund lost about $1 billion in value.
But earnings picked up during the second half of 2012, according to Hershel Harper, the commission’s chief investment officer. “We are very pleased with where we are at today.”
However, Loftis says the state’s retirement fund performed poorly, compared to its peers. The fund’s returns were in the bottom 35 percent of similar funds, according to a report by the Bank of New York Mellon.
“If a child comes home and makes a 35 on a test out of a possible 100, very few people pick up the phone and call their neighbor,” Loftis said.
“The commission touts its performance but, in reality, they are far below average,” Loftis said. “I want people to understand as the elected state treasurer, the custodian of the funds, I am very, very worried about state of the Investment Commission and, regardless of rosy press releases they put out, there are some serious issues that must be dealt with.”
Harper said the retirement fund’s investments are less risky than other states’ investments, making it unfair to compare the S.C. fund to other states. He said that, from July to December, the retirement fund posted investment earnings of 7.2 percent. And he expects that number to grow once numbers from January are finalized.
State officials expect the retirement fund to average investment returns of 7.5 percent a year, and they make financial decisions based on those predictions. If the investments miss their mark, it could cause problems for the fund. Even with a more conservative investment strategy, the fund still earned returns of 12 percent in 2012 and its three-year average was 10.8 percent as of June 30, Harper said.
“We really try to balance out how can we generate a significant level of returns while taking the minimal amount of risk,” he said.
Loftis, a longtime outspoken critic of the Investment Commission, disagrees.
He said the state’s investment strategy is “so complex that it puts us at risk.” Specifically, Loftis points to nearly $300 million a year in management fees that the fund pays, which he criticizes as being too high.
“It cost us a lot of money to perform poorly, and yet we beat our chest as if we had done something noteworthy,” Loftis said.
Harper said those management fees are based on how much profit managers make for the fund through the investments that they guide.
“Before they get paid those fees, they are having to achieve those much higher returns,” Harper said. “The higher fees we pay, that means our performance is even better.”
Reach Beam at (803) 386-7038.