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October 31, 2012

S.C. retirement fund earnings up

South Carolina's $25 billion retirement fund earned a 4 percent return on its investments from July to September, but the fund’s chief investment officer said the fund will struggle to make its goal of a 7.5 percent annual return over the next five years.

South Carolina’s $25 billion retirement fund earned a 4 percent return on its investments from July to September, the fund’s chief investment officer told the State Budget and Control Board on Tuesday.

But Hershel Harper said the fund will struggle to make its goal of a 7.5 percent annual return over the next five years. State officials say the fund needs to average that return to stay solvent.

“Over a long period of time, having an expectation of 7.5 percent would be reasonable,” said Harper, the fund’s chief investment officer. “(But) over the next five-or-so-year period, I have significant concerns with respect to the ability to earn that.”

The retirement fund made a 0.37 percent return on its investments last fiscal year, which ended June 30. After paying its expenses, including benefits to retirees and fees, the fund lost $1 billion in value.

The retirement fund pays benefits to more than 100,000 retired state workers, teachers, law enforcement officers, judges, legislators and members of the National Guard, and covers more than 400,000 current public-sector workers. The fund takes in contributions from taxpayers and public-sector workers but also depends on investment returns.

The fund has averaged a 10.74 percent annual return over the last three years but only a 1.26 percent return over the last five years, which included the 2008 financial collapse.

State Treasurer Curtis Loftis, a member of the budget board and the commission that oversees the retirement fund’s investments, said part of the problem is the state has invested too much in “alternative investments,” anything other than stocks and bonds. Those investments are highly complex and often require the state to pay higher fees to investment managers.

Loftis said the state paid more in management fees than it made in investment returns.

South Carolina, with its 0.37 percent return, paid 1.24 percent of its assets in management fees last year, Loftis said. North Carolina’s pension fund earned a 2.21 percent return on its investments, while paying 0.39 percent of its assets in management fees.

“We pay 3.17 times in fees (more) than they did, and they outperformed us by a factor of six,” he said.

Harper said he is “not a fan” of comparing South Carolina’s investments to other states. He said peer rankings are often taken out of context. For example, while North Carolina outperformed South Carolina’s returns last fiscal year, South Carolina’s average return over three years is higher than North Carolina’s average.

Gov. Nikki Haley, who has clashed with fellow Republican Loftis before, said the state treasurer is “bringing up some valid points we need to look into.”

“We need to support his questions and support his actions,” Haley said.

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