Aggressive Tactics Boost Pension Plan.

Colorado's $31 billion state retirement portfolio has a larger proportion of its money in common stocks than any other U.S. public pension fund.

For 27 years, teacher Susan Christensen has worried far more about her third-graders at North Stair Elementary in Thornton than about her state-sponsored retirement plan.

Fortunately for Christensen, she's had little reason worry about whether her retirement check will bounce. Her pension plan, the Public Employees' Retirement Association of Colorado, has become one of the best-performing public retirement organizations in the business.

"Until I started getting close to retirement, I never paid much attention to it," Christensen said. "I just put my trust hi them and said, 'Here's my money.'"

So far, Christensen's trust has been well placed.

PERA has adopted an unusually aggressive money management style to produce an eye-catching rate of return fox its 297,000 members--employees and retirees of school districts, cities and state government agencies. The $31 billion state retirement portfolio has a larger proportion of its money in common stocks than any other U.S. public pension fund.

Despite its greater exposure to the volatility of stock market swings PERA has kept losses to a minimum and capitalized on market gains to earn far more money than it disburses in benefits. The strong performance has resulted in, higher payouts to retirees and less of a burden to state taxpayers, who fund a portion of the retirement benefits.

And in building its portfolio, PERA has attained a stature in the pension plan industry that has led retirement plans in other states, large and small, to copy Colorado's successful approach.

"We used PERA to get help on how to structure our funds," said Phil Archibeck, state investment officer for the New Mexico State Investment Council.

Archibeck said he has long been an admirer of the style of Norman Benedict, PERA's deputy executive director of investments, who helped create the strategy that pushed PERA to the top of the performance rankings.

"He's been a little more aggressive than you'd normally find in this business," Archibeck said of Benedict. "More people should be oriented to where he is. There's more risk and volatility, but in the long run you're going to get a lot better return.

"His performance has been exemplary," Archibeck said.

MUTUAL FUND-LIKE RETURNS

Statistically, PERA's performance has more resembled the handsome returns of a mutual fund than the stodgy results once typical of public retirement plans.

PERA last year earned a return of 19 percent on its investments, substantially better than the 15.3 percent average increase for large U.S. public pension funds, according to national fund adviser R.V. Kuhns & Associates of Portland, Ore. In fact, PERA's 19 percent was not far behind the S&P 500's return of 21 percent, even though PERA's portfolio contains some lower-yielding investments such as bonds, real estate and cash accounts.

Over a five-year period, PERA has earned an average annual return of 18.5 percent, less than the S&P's 23.4 percent but well above the average pension-fund yield of 13.7 percent.

The above-par performance is a simple reflection that stocks will perform better over time than other investment vehicles, said PERA's Benedict.

"The way to create wealth is to invest in common stocks," he said. "Pension funds historically have relied on fixed-income investments. But in reality. bonds are probably one of the worst things to do."

The typical public pension fund places an average of 40 percent to 45 percent of its portfolio in relatively safe, but low-yielding bonds.

PERA has turned that ratio on its ear, investing an aggressive 77 percent of ifs funds in domestic and international stocks, while keeping its bond holdings down to 7 percent of total assets.

The remaining funds are held in a combination of real estate, cash and venture capital-style investments in private businesses.

Benedict said he reduces the risks of owning stocks by using hedging mechanisms that slightly reduce PERA's return, but help stem losses if share prices drop.

PERA isn't immune to risk; it got hammered, along with almost all investors, in this year's Nasdaq drop. But characteristic of its aggressiveness, the fund used the market fall to increase its holdings in Microsoft from 6.5 million shares to 7 million.

Its top 10 stock holdings are weighted toward technology, with large positions in Cisco Systems and Intel, but PERA also owns "old economy" stalwarts such as General Electric, Wal-Mart and Exxon Mobil.

A high concentration of stocks and the resulting higher return look good to Meredith Williams, PERA's new executive director, who took the job in July after longtime chief Bob Scott retired. Williams for merly headed the Kansas Public Employees Retirement System, a fund with about the same number of members as PERA, but with only one-third of the assets.

"I've been in the business for 10 years, and I've been a longtime admirer of PERA," Williams said. "It's been a big success story."

He said PERA's performance stems not only from an emphasis on equities, but from an internal group of money managers whose stockpicking prowess has rivaled that of private mutual fund groups. Two-thirds of PERA's assets are managed internally; the remainder is handled by outside financial professionals.

"Colorado has a more sophisticated approach, and it's been successful, given the staff that we have," Williams said. "Most states don't have the [(staffing)] horsepower to pull it off."

PERA's shift to a heavier stock presence began in 1991 after Benedict approached the retirement plan's trustees, who in turn persuaded the state legislature to loosen restrictions on the maximum exposure to stocks.

"It wasn't a rash decision," said Benedict, who began his PERA service in 1973. "We did econometric studies going back 70 years on stock performance.

"We also did a what-if scenario. What if we kept 40 percent in bonds? Well, boom, down goes your return."

Maintaining a high rate of return was judged important for two reasons:

* In 1970, PERA had 19 active workers contributing to the fund for every one retiree receiving benefits.

Today, that ratio is less than three contributing workers per retiree.

The fund must earn a higher return to compensate for the lower ratio.

* Higher costs to beneficiaries, especially for health care, have forced PERA to seek higher earnings.

In 1992, actuarial firm Towers Perrin reported that although PERA's main fund was financially sound, two separate funds that covered the cost of health insurance and cost-of-living increases for retirees needed an infusion of money to fully cover the benefits.

"With the way health care costs were rising, we had to be more aggressive," Benedict said.

The approach has paid off.

Pension payments to members have grown from an average of $330 a month for employees who retired in 1975 to $2,388 for last year's crop of retirees.

Because PERA is overfunded--it has more money than the amount needed to pay its projected future benefits--the legislature has been able to sweeten the benefits PERA gives its members.

For example, the Colorado legislature has allowed PERA to double the amount of money it contributes to retirees' health-insurance premiums, and it has lowered the age at which workers can retire and still collect full benefits.

IMPROVEMENTS IN BENEFITS

Improvements enacted this year include matching contributions to members' voluntary 401(k) or other qualifying retirement accounts, and an automatic 3.5 percent cost-of-living increase, compounded every year, on pension benefits.

Colorado taxpayers also have benefited from PERA's performance. The city and state government offices that employ PERA members have had their contributions to the retirement plan lowered from 12.5 percent of employees' salaries in 1984 to 10.4 percent this year, with a further reduction to 9.9 percent next year.

The savings to government employers, and thus to taxpayers, has been a total of $214 million since 1984.

Today's strong portfolio performance has helped PERA forget some rockier times, in particular the mid- and late l980s when a number of real estate loans turned sour along with Colorado's economy.

PERA then became a reluctant owner of distressed properties, much of them with lower market values than the amount PERA originally had loaned.

"We'd get the keys to the buildings in the middle of the night, and then the (owners) would run off," said Benedict, smiling ruefully at the memory.

"The orientation here is flexible, yet with restraints so that nobody's going off in left field," new executive director Williams said.

"It's a pretty magical place, and the performance shows that."

Steve Raabe is the Denver Post business writer. This story was reprinted with permission for the Aug. 13 edition of the Denver Post.

MORE DIVERSITY IN STATE AND LOCAL PENSION PLANS

State and local pension plan managers have made great efforts to diversify their investments in recent years Diversification has increased the return on investments and has made it possible for state and local pension systems to balance the complementary goals they are charged to meet: ensuring that participants receive the benefits to which they are entitled while reducing the costs to the taxpayer.

Twenty years ago, U.S. public pension plans collectively per formed below corporate pension plans. The gap, of about 20 percent, was caused almost exclusively by the conservative investment restrictions that states and municipalities imposed on their funds. As these restrictions were gradually lifted, public funds' performances have grown to near parity with private pension fund performance. While some public investment restrictions remain, the rates of return obtained by public pension plans as compared to private sector counterparts over the past several years have been markedly similar.

A recent study of corporate and public pension plan rates of return by the Trust Universe Comparison Service, a service of 19 of the nation's leading banks found that over the last 10-year period, the rate of return on domestic equities by public plans trailed that of private sector plans by a mere 0.06 percent. Returns for the period ending June 30, 2000, are even more impressive, with public exceeding private returns by 5.67 percent.

When comparing the return on the entire portfolio of investments held by public and private firms--including equities bonds and other investments--over the 10-year period public funds rate of return was only 0.74 percent less than that of corporate funds.

Similarly over the three-month period ending June 30, 2000, public fund performance actually exceeded private fund performance by 0.05 percent. Given these impressive returns, the short story and the long story seem clear--public retirement funds are efficiently managed financial institutions with well diversified portfolios that have achieved impressive rates of return

--Gerri Madrid, NCSL