In a narrow 5-to-4 vote, the board of the Massachusetts state pension fund approved a compensation plan Tuesday that will increase bonuses for investment staff and introduce new hurdles for earning them, while rejecting others proposed by Treasurer Steve Grossman.
Michael Trotsky, the $50 billion fund’s executive director, said the new plan would give him the tools to compete for top hires — something the pension fund has long struggled with, and which contributed to a slew of vacancies this year. He also vowed to cut expenses elsewhere in his $300 million budget.
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From the article: "He had pushed for bonuses to be linked to the fund’s long-term 8 percent annual return goal, because, over time, a failure to deliver that will mean taxpayers have to cover the shortfall."
A fund that, by definition, should be conservatively managed, is not going to produce 8% a year. If state pensions are based on this return assumption, either the pensions will have to be reduced or the taxpayers will have to pay more. Gee . . . I wonder which it will be.
Both 2011 and 2012 performance are, essentially, the same as the S&P 500. In other words, they could take the whole pension fund, invest it in index funds, pay 10 basis points (or less) and fire everyone and get the same performance. I'd bet the performance over the last decade isn't much better than the classic 60/40 split of equities to bonds that, historically, is about the most prudent mode of diversification. They aren't going to make 8% even if they go to all equities. Bond yields are the lowest in decades, if they don't go higher, they can't make 8%. If yields do go higher, any existing, longer term fixed income investments, will lose principal values (until they mature). What they should do is adjust the pension PAYMENTS each year according to performance. Lowering them somewhat in bad periods and raising them in better years. Instead, they pick an artificial target, that's impossible to reach, and will then come back to the taxpayers to fund pensions that make those retiring at $60,000 or higher payments, essentially, MILLIONAIRES. Do taxpayers understand that it takes $767,000 in present value of assets invested to assure a $60,000 payment for 25 years at just a 6% return? If they only average 4% it would take $937,000 in assets to fund a 60k pension. Does the public know the state is regularly retiring workers with a net worth of nearly a million dollars in pension benefits?