Virginia Retirement System hoping for 5% investment return

The Virginia Retirement System is hoping for a 5% return on its investments in the fiscal year that ended June 30, after finishing the first nine months in the red.

Investment earnings had fallen by 1.8% through March 31, when the state retirement trust fund held $102.6 billion, but a month later, VRS had added $1 billion, boosting the return to 4.2% through April 30.

Spokesperson Jeanne Chenault said the retirement system does not expect to meet its targeted annual return of 6.75%, but expects the fiscal year return to rise to around 5%.

"However, until all investment information is received, we will not have a firm return until late August," Chenault said Monday.

The turn of fortune is good news for Gov. Glenn Youngkin and the next General Assembly, which will have to include money in the next two-year budget to meet long-term pension obligations for state employees and teachers.

"Even in uncertain times, the retirement system continues to deliver on its mission," VRS Chairman Scott Andrews told the Joint Legislative Audit and Review Commission during its semiannual review of the retirement system on Monday.

The VRS Board of Trustees will receive an actuarial report in October that will estimate how much the state and local school divisions will have to contribute for the next two years to meet ongoing pension obligations and pay off a portion of about $19 billion in unfunded liabilities that date to the Great Recession more than a decade ago. Those contribution rates will help shape the two-year budget that Youngkin will present to the General Assembly's money committees in December for review during a 60-day session of a newly elected legislature that will convene the next month.

Investment earnings pay most of the ongoing cost of retirement benefits for almost 800,000 active, retired and inactive workers — state employees, teachers, judges, state police and other law officers and local and regional government organizations.

The rest comes from annual contributions by government employers — whether state agencies or school divisions — under rates certified by the VRS and included in the budget for the next two fiscal years. The state shares the cost of teacher pensions with local school divisions.

The state helps fund five retirement plans managed by the VRS. Currently, teachers account for more than 159,000 of the nearly 360,000 active employees in the system, followed by about 77,000 state employees, 7,400 game wardens and other law officers, 1,900 state police and fewer than 500 judges. The system is already paying benefits to about 239,000 retirees.

The VRS has an assumed annual rate of return of 6.75%, but that is an average over 30 years that it sometimes exceeds and sometimes misses. The return reached an unprecedented 27.5% in the fiscal year that ended on June 30, 2021, but a year later topped out at 0.6%, which was acknowledged then as a victory in a volatile market that caused other public pension funds to lose an average of 8%.

The General Assembly and governor have helped by depositing an additional $1 billion in the pension system over the past two fiscal years, an investment that the VRS estimates will save $2 billion over 20 years by reducing unfunded liabilities. The assembly also maintained contribution rates for teachers and state employees at higher levels last year and this year in order to reduce those liabilities, saving an estimated $538 million over 15 years.

"These efforts will have a positive impact on contribution rates in the future," Chenault said.

A below-target return in the last fiscal year also will be offset by the record return achieved two years ago because the VRS smooths both losses and gains over five years, she said. "As a result, we do not expect rates to increase."

VRS officials say their focus remains on balancing high returns against market risks, which is why they have adopted a new investment strategy that will slightly lower investments in stocks and private equities and increase them in bonds and several other asset classes.

"We essentially increased the diversification of the (investment) portfolio," Chief Investment Officer Andrew Junkin told the legislative commission.