Facing the Challenge of Pension Performance

It has been an exciting first few months as your new state treasurer, digging into the big issues facing our state to see how my team can find solutions.

More people should be concerned with the largest debt our state has—the liability for our pension plans.

What has caused this liability? Our pension plan has underperformed for decades, which means billions of dollars have been left on the table. Over the past five years alone, the median public pension earned about 2.25% more per year than the North Carolina Retirement System, which means $15 billion of foregone gains—almost exactly the amount of our pension liability.

What does leaving that money on the table actually mean? It means the employer contribution (the amount the state puts into the plans each year) has increased by tenfold over the last 20 years and will comprise more than 10% of the state budget in the next fiscal year.

But that employer contribution increase has not resulted in changes to benefits for state employees, or an increase in the number of employees. It has simply been covering for subpar investment performance. The Boston College Center for Retirement Research helpfully maintains a database of pension investment performance across all major public pension plans, and unfortunately North Carolina ranks either 49th or 50th depending on the time horizon. If we had performed at the average level for other plans in the last decade, we wouldn’t have a pension deficit and would’ve been able to give our retirees cost of living increases.

I believe the reason, in part, for this poor performance is the sole fiduciary governance model that we have. The data shows it—plans governed by a board of trustees model outperform sole trustee models by a substantial margin. And there is a logical reason for that—by definition, elected sole trustees change each election, and with that, so does the investment strategy. The enemy of long-term investment success is consistently changing strategies, which has been the case in North Carolina.

I’m asking the legislature to adopt a new governance model for our pension plans. We have evaluated data from the 47 other states who have already made this change, and we believe we have a model that will allow North Carolina to perform better over time.
We look forward to discussing this proposal with anyone who is interested, and to delivering better results.

It’s time that the assets we manage work as hard for the employees and retirees of our state as our employees and retirees have worked for North Carolina. Let’s make that happen—and help set up future retirees for success, too.