Confidence in your benefit during challenging times

Global stock markets collapsed in 2008 with no economy emerging unscathed. The credit markets led stocks and the U.S. economy down for the year, setting records along the way. The U.S. stock market decline experienced in 2008 was the third-worst year in more than a century, lagging behind only 1931 and 1937 for the biggest losses in a year.

The difficult investment environment has not been contained within the stock market. As Warren Buffett said recently, “We have had an economic Pearl Harbor hit.” Virtually every asset class (including such historically safe investments as high quality corporate bonds) posted negative returns for the calendar year. The only major asset class that had positive returns for the year was United States Treasury securities.

Every individual, whether in a defined benefit plan such as PSRS/PEERS or in an individually directed 401(k), is concerned about their retirement in the current distressed economic environment. We want to address some of the most common concerns (as they relate to PSRS/PEERS) in this update.

Defined benefit plans
PSRS and PEERS are defined benefit plans. Unlike defined contribution plans, your benefit is NOT influenced by market volatility and, thus, will not fluctuate. Your benefit plan was constructed through Missouri statutes and is guaranteed by the Missouri Constitution. Both the Missouri Constitution and case law indicate that PSRS/PEERS benefits may not be diminished or impaired.

Will I receive my check at the end of the month?
Yes, you will definitely continue to receive your monthly benefit from the Systems. We pay approximately $140 million a month in benefits; however, we receive contributions from members and school districts on a monthly basis to cover much of these benefit payments. Additionally, we have several billion dollars of very liquid assets to meet any monthly cash flow needs.

How much more will the contribution rates continue to increase, especially with the current market issues?
Employee and employer contributions have increased for the last several years as we continually work toward a 100% funding status. On an annual basis, your contribution rate cannot be increased more than 0.5% (0.25% for PEERS members) over the previous year. Rising contribution rates are not in response to the Systems’ inability to provide promised benefits for the foreseeable future. Instead, it is about ensuring that future generations of Missouri’s teachers and school support staff will inherit a system as strong and reliable as the one we have today. Negative investment returns such as those experienced in fiscal year 2008 and 2009 do have a direct impact on future contribution rate increases.

PSRS/PEERS is a long-term investor
While unpleasant to go through, we generally view the recent market event as a healthy and necessary correction to the overall financial system. Ultimately, we believe that the investment environment will offer opportunities for patient, long-term investors such as PSRS and PEERS. As a large institutional investor, we have the ability to invest over a 30-year time horizon because we have significant assets to cover current liabilities. For example, even if the stock market continues to decline, we believe that the current environment offers an attractive opportunity to buy stocks at fundamentally sound prices. Over the long-term, we believe this ability to prudently buy inexpensive assets through various market environments will provide consistent and meaningful investment returns for the Systems.

What are the PSRS/PEERS funds invested in?
PSRS/PEERS maintains a long-term investment objective to achieve an 8% return over rolling 5-year periods. The asset allocation is highly diversified among bonds (U.S. Treasuries), U.S. stocks, non-U.S. stocks, real estate and private equity. We have held the view for some time that the credit problems facing the financial sector could unfold over an extended period of time. As such, about 25% of the entire portfolio was transitioned to U.S. Treasury bonds in January 2008. Treasury bonds are the safest and most liquid assets in the world today. As of December 31, 2008, the Systems had over $7.2 billion invested in high quality bonds including U.S. Treasury securities.

Has the recent severe stock market downturn affected the value of the PSRS/PEERS investment portfolio?
Yes. All large institutional investors that are invested in the stock market were affected by the downturn in the market. The U.S. stock market (S&P 500) finished 2008 down 38.5% while non-U.S. stock markets declined even more, with the Dow Jones World Index (excluding the U.S.) falling 46% in dollar terms. However, only a portion of the PSRS/PEERS assets are invested in the stock market. This diversification (as described above) provides the Systems with a moderate degree of downside protection in periods when the stock market declines.

Investment returns and level of assets
The PSRS/PEERS investment return for the 1-year period ending December 31, 2008 was -25.0%. The investment return for the first six months of fiscal year 2009 (July 1, 2008 through December 31, 2008) was -20.2%. The total assets of both PSRS and PEERS were approximately $23.5 billion on December 31, 2008. PSRS/PEERS performed better than two-thirds of public funds in the last quarter of the year and better than the average public fund for all of 2008.

Investment markets are poor
As the credit crisis continues to unfold, we are mindful of the day-to-day volatility within the markets and are in communication with various market participants to evaluate potential developments. We continue to believe that until there is more clarity in the credit markets, there will be difficult times ahead. However, our overall primary mission and focus still remains investing the Systems’ assets in a manner to earn the 8% actuarial assumed rate of return over a long time horizon. As such, we will continue to deploy assets in attractive investment opportunities.

Your benefit
Again, we want to emphasize to all of our members that your PSRS/PEERS benefit is secure. PSRS/PEERS is a long-term investor and has the ability to withstand market volatility. The Board and professional staff are committed to managing the Systems’ assets in a prudent manner that will ensure the viability of your pension.

by DeeAnn Aull
Director of Programs and Public Relations

Feb. 1, 2009