Pension criticism misses the target

In his recent op-ed piece ("Maryland's mismanaged pensions," July 10), George Liebmann mischaracterizes numerous aspects of the Maryland State Retirement and Pension System that require correction.

He begins his missive with a critique of the system's assumed rate of return — 7.75 percent — stating that earnings for the system have fallen short of that assumption over the last 10 years, a period of time that includes the global recession. Since the pension system takes the long view on investments, a more appropriate metric would be to look at the 25-year average, where the system has earned an average of 8.55 percent as of June 30, 2011, well above the assumed rate of return.

In his piece, Mr. Liebmann makes the blanket assumption that any investments outside of public equity, fixed income and cash should be considered alternative investments, when in fact, a large portion of investments housed in the other asset classes should not be given that moniker. For example, more than half of the assets in the Real Return portfolio are invested in U.S. Treasury Inflation Protection bonds and Global Inflation-Linked bonds — certainly not what anyone would call alternative investments.

He also suggests that the pension fund pays too much in investment management fees. While alternative investment strategies are generally more expensive than traditional ones, the system has benefited, on a net of fee basis, for diversifying into these areas. As of May 31, (the latest date returns are available), the system's private equity portfolio has consistently and significantly outperformed public equities net of all fees over the last 10 years. The real estate portfolio has outperformed both public equities and fixed income on a net of fee basis over the last 10 years. And since its inception date of April 1, 2008, the absolute return portfolio has outperformed public equities by 6.7 percent annualized net of all fees. So, while the system has paid more for these more expensive alternative strategies, these higher costs have been more than offset by both higher returns and risk reduction.

Mr. Liebmann also questions the merit of utilizing a manager to implement a currency hedging program for a portion of the system's non-U.S. public equity program. Given the size and global nature of the public equity portfolio, currency risk is one of the greatest risks facing the system. The primary objective of the currency overlay program is to provide some protection against a strengthening U.S. dollar and reduce the volatility of the currency portion of the system's non-U.S. equity investments over the long-term. Since inception, the currency overlay program has reduced volatility in the international and global equity programs by 14.6 percent and 9.8 percent, respectively, while at the same time realizing positive gains for the system.

R. Dean Kenderdine, Baltimore

The writer is executive director of the Maryland State Retirement and Pension System.

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