SCERS Nears Fully-Funded Status
The Sacramento County Employees’ Retirement System (SCERS) is closing in on a fully-funded pension plan to support the long-term benefit obligations for its 30,000 members.
Following a record-setting investment return of 27.8% in the 2020-21 fiscal year, SCERS now stands at more than 94% funded, as of June 30, 2021. This means SCERS has in hand 94 cents of every dollar owed to current and future retirees. Last year, SCERS was 79% funded.
“This is truly incredible and positions SCERS to better absorb any future economic shocks in coming years,” said Chief Executive Officer Eric Stern. “It’s even more impressive because SCERS has taken a slightly more conservative outlook on our investment assumption, which had the effect of increasing liabilities and moving the goalposts out. Our members’ pensions are safe and secure.”
In 2020, the SCERS Board of Retirement adopted a 6.75% assumed rate of return.
The $12.4 billion fund gained more than $2 billion in 2020-21, reducing the unfunded liability, or gap between assets and liabilities, to $745 million.
“This is the best position SCERS has been in since the dot-com boom in the late 1990s,” said Richard Fowler II, Board President. “But the lesson from the ‘90s was the boom became a bust, and it’s critical to hold steady.”
SCERS’ funding policy is designed to reach full funding in 20 years. Additionally, before setting contribution rates, SCERS has been building a contingency reserve equal to 3% of assets to offset future losses. The reserve is now nearly full.
More than half of the unfunded liability payments are still tied to pre-2012 events: benefit enhancements that increased liabilities followed by the financial crisis that severely impacted assets.
Since then, SCERS has built back the fund and made conscientious decisions to tighten up assumptions used in its funding model to keep the plan solvent and healthy for decades. Importantly, more than 42% of the unfunded liability payment is due to assumption changes adopted by the Retirement Board that better take into account variables such as increased longevity for members and a more prudent investment outlook.
Because SCERS smooths gains and losses over 7 years, there will be a smaller, immediate impact on contribution rates, though still favorable, in the upcoming fiscal year. Employers were facing a 2-percentage point increase in July 2022 because of prior assumption changes; the average rate will now increase by about 1%.
However, as the deferred gains are recognized in coming years – and holding everything constant – employer contribution rates are projected to decrease by about one-third over the next 7 years, from an aggregate rate of 32% to 21% of pay.
Employee contributions rates for most members are expected to stay flat. Detailed rates will vary by employer and member retirement tier.
SCERS’ investment portfolio generated an extraordinary return of 27.8%, net of fees, for the fiscal year that ended June 30, 2021. The return sets a new a record for SCERS, besting the 22.5% return in 2010-11 following the rebound from the Great Recession.
“The SCERS portfolio experienced a massive rally across almost all asset classes and segments, rebounding from the pandemic-related market dislocation in the spring of 2020,” said Steve Davis, Chief Investment Officer. “We know most years will not be like this, but we have a disciplined approach to ride these waves. Our asset allocation is designed to participate in and take advantage of growth markets and opportunities, while also building in diversification within the portfolio to withstand market downturns.”
The SCERS portfolio carries a slightly lower exposure to public equities (the traditional stock market) than most pension plans. SCERS allocates more heavily to return-enhancing and cash-generating private market assets, such as private equity and infrastructure, as well as less-correlated strategies.
As of June 30, 2021, SCERS ranked in the top quartile, net of fees, in the peer universe of public pension plans over 3- and 5-year periods.
Established in 1941, SCERS supports retirement, disability, and death benefits for public employees and retirees in Sacramento County, the Superior Court, and several special districts.