The Hawaii Employees’ Retirement System has been steadily building out what it calls a “tactical” private equity programme since the start of this year and plans to keep going through the next three, according to Vijoy Chattergy, chief investment officer.
The pension is considering allocations for next year of up to $350 million that could provide commitments for as many as 10 funds. The pension has currently allocated approximately 4 percent of an overall 7 percent target. Hamilton Lane will be tasked with managing those allocations, which will include buyouts, energy, credit and venture capital.
In all, the plan amounts to a potential allocation increase of $100 million. The pension allocated approximately $250 million this year to funds with strategies including distressed debt, and middle market investments in the US.
The $13.9 billion pension is in serious need of yield. Hawaii’s unfunded pension liability is the seventh highest in the US, according to a recent report from State Budget Solutions, a non-profit policy shop that focuses on states’ fiscal responsibility. The report puts Hawaii’s pension at only 29 percent funded. The unfunded liability is almost half of the state’s total gross domestic product.
As is the case with most state pension funds, local governments aren’t and haven’t been making the required contributions to keep things afloat. State figures are a little more conservative than the SBS report, although they also involve a different way of counting the discount rate. Even with the discrepancy, Hawaii needs about $8 billion to get out of the hole. For a state that runs total budgets in the neighbourhood of $20 billion, taking $8 billion of that is a pretty sizeable chunk.
While state lawmakers take steps to decrease the benefits offered through the pension system, allocators are also working to move more aggressively into higher returning asset classes like private equity. Pension system reports show the portfolio has been able to realise gains from the equities rally, and its allocations to alternatives. As of 30 September 2014, the pension did meet its benchmark return of 10.8 percent, despite being slightly negative for the quarter ending on the same date. Watch this space.