State’s pension fund soared to new record amid strong markets in 2020

Riding a market rally, its value rose by more than 12 percent during the year

Michael Trotsky, executive director and chief investment officer of the state’s Pension Reserves Investment Management board.

Like most investors, amateurs and professionals alike, state pension fund chief Michael Trotsky was concerned about the short-term outlook last March as the COVID-19 pandemic swept across the country and the stock market plunged.

Few expected the market rally that followed, one that boosted the Standard & Poor’s 500 index by an impressive 16 percent last year. That rally helped lift the state pension fund to a new record of $87 billion in assets by the time 2020 was over, according to figures disclosed Tuesday by the pension fund’s overseers. That represents an increase of 12.6 percent, or 12.1 percent after the pension fund’s investment fees are factored into the equation. In fact, the fund enjoyed its strongest six-month stretch ever during the back half of the year.

That should be good news for the roughly 300,000 public-sector employees and retirees who depend on the fund’s solvency for retirement benefits. The pension fund’s return easily exceeded its annual goal of 7.15 percent for the second year in a row. The fund needs to at least clear that threshold on average, over the next 15 years, for it to become fully solvent and weaned off contributions from the general state budget.

The fund paid out about $1.5 billion to retirees last year, according to Trotsky, executive director of the Pension Reserves Investment Management board.

“I’m thankful our strong return is a shot in the arm . . . to provide pension security for our beneficiaries in a time of so much struggle and uncertainty,” he said. “It’s a cruel irony because we’re doing so well, and so many people aren’t. It seems like a hollow victory in light of what our country is going through, a raging global pandemic and [economic] damage that might take years to reverse.”

Trotsky said stock investors have been lately taking a longer-term view, looking past setbacks such as high COVID-19 case numbers, the emergence of fast-spreading variants, and problems with the vaccine rollouts. “These near-term issues have not been enough to stop very strong market momentum, mainly because of a few hopeful developments,” he said.

Trotsky has been taking a deliberative approach to reducing the pension fund’s allocation in stocks during the past five years. About 43 percent of the fund is invested in stocks today, down from about 50 percent five years ago, he said. The pension fund’s global equity portfolio posted a 15.9 percent return last year. Private-equity was the pension fund’s strongest performing asset class last year, with a 26 percent return. (Nearly 13 percent of the fund’s assets were in private equity investments as of Dec. 31.) The fund beat its benchmarks in most of its asset classes last year.

Still, Trotsky’s mood seemed more somber than celebratory on Tuesday. He lamented the toll the pandemic has taken on downtown Boston’s small businesses. He said he walks by closed-up shops almost daily on his way between North Station and the pension fund’s offices on State Street.

“That breaks my heart,” Trotsky said. “The stock market is a little disconnected from the reality of our society right now.”