ARM Board gets pessimistic investment forecast

Pension and other funds may face difficulty meeting expectations for several years

Alaska shouldn’t look for investment returns to bail it out of its pension liability debts, according to information presented at the Alaska Retirement Management Board meeting in Juneau last week.

The board oversees about $20 billion in assets in its retirement trust funds, but is still expected to be short of what it will need to pay future benefits, meaning higher costs for the state in the future.

Stronger than expected investment returns will bring that amount down, but investment advisor Michael O’Leary said even that amount will be difficult to reach.

“I hope we’re wrong, but that’s what we expect,” he said.

O’Leary’s firm, Callan Associates, advises numerous entities, including the ARM Board and the Alaska Permanent Fund.

He will testify before the Legislature’s Senate Finance Committee today about his firm’s capital market expectations.

O’Leary presented his first review of 2011 since the year ended, and said a good fourth quarter saved the year.

“We almost had a miserable year,” he said, before the strong year-end performance by U.S. stock markets.

While the ARM Board’s expected return on its investments over the long term is 8 percent, in 2011 the stock market earned just 2.1 percent, O’Leary said.

That follows two strong years, more than 15 percent in 2010 and more than 26.5 percent in 2009, as the market rebounded from 2008, one of the absolute worst years in the history of stock markets, with losses of 37 percent.

Those 2008 losses, yet to be fully recovered, have compounded the problems of inadequate contributions to retirement trust funds in past years and higher than expected growth in medical costs.

O’Leary said Callan’s view was typical average stock market returns of the past “will be hard to achieve over the short, medium and even longer run.”

Among the potential problems are a housing market that has yet to truly hit bottom, weak business growth and the possiblity of a crisis that could cause oil prices to spike and impact the economy.

At the same time, with interest rates at record lows, there may not be much the Federal Reserve can do to help, he said.

“There’s a view that the Fed has spent its bullets, and the policy options that are open to them are less direct,” he said.

The economy and the stock and bond markets on which the ARM Board relies are likely headed for “an ugly period of rising interest rates, capital losses in fixed income and volatile equity markets,” he said.

There are some stabilizing factors out there, he said, with businesses doing well and likely to maintain dividend payments. Companies are also holding huge amounts of cash, giving them flexibility to respond if they see opportunities.

While a double-dip recession is possible, that’s not what Callan expects, O’Leary said.

Later this year the board will use Callan’s projections and other information to determine what its future earnings expectations should be.

Last year it reduced expected earnings from 8.25 percent a year to 8 percent, one of the factors causing the state’s unfunded retirement liability to grow.

• Contact reporter Pat Forgey at 523-2250 or at


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