Meeting the Pension Goals

A couple of weeks ago we pointed out the shortfall in New Jersey's state pension plan, which has been rocked by underperforming equity investments in the past couple of years. Yesterday, on the same day Governor Christie announced his plans to slash of the state budget, there was also a report that the state's Investment Council plans to move more aggressively, putting a larger slice of the state's pension fund money into hedge funds.

The part of the pension fund that can be put into alternative investments - real estate, private equity, hedge funds - is now limited to 28 percent, which the Investment Council apparently wants increased. They would reduce the fund's allocation in stocks, which is currently at 47 percent.

In the past ten years, the pension fund has returned 2.47 percent annually, which isn't all that bad, truth be told. The Dow Jones industrial average is basically flat over the past ten years. But the pension fund managers have a target return of 8.25 percent annually, which borders on the unrealistic. The problem here may not so much be the asset allocation as the expectations the investment team is trying to fulfill. Rather than thinking hedge funds can pump up the returns, it might be better for the Investment Council to figure out a way to fund the pension plan on returns of less than 8.25 percent a year.