Connecticut Pension Funds Shine Through Difficult 2023

Connecticut’s state pension funds posted strong investment returns in 2023 boosted by asset allocation and manager selection improvements, according to the state’s latest annual report.

The Connecticut State Treasury Department reported that, in the fiscal year ending June 30, 2023, Connecticut Retirement Plans and Trust Funds (CRPTF) posted a return of 8.5%. This placed the organization in the top quartile of public funds with assets greater than $1 billion.

In addition to the strong absolute return, the investment portfolio experienced significant relative outperformance of 260 basis points over its policy benchmark, generating more than $1 billion in added value. In total, over 90% of the assets in the portfolio outperformed their respective benchmarks, the annual report stated.

The report said these returns were the result of an improved asset allocation implemented in the prior fiscal year, as well as good manager selection over the past several years.

Over 10 years to the end of June 2023, the CRPTF generated a 6.9% return, in line with its benchmark and the Treasury Department’s long-term financial objective.

CRPTF began the fiscal year with $41.7 billion in assets and this increased by $7.8 billion to $49.5 billion by June 2023. Pension fund assets also received additional contributions from the state’s excess budget reserve fund transfers in September and December 2023, respectively, adding $1.9 billion.

Asset class performance

Over the fiscal year, the CRPTF made significant new investment commitments totaling $11.9 billion across private and public markets.

In private markets, the CRPTF committed a total of $4.1 billion, including $1.5 billion in private equity, $1.3 billion in private credit, $400 million in real estate, and $900 million in infrastructure and natural resources. Over the year, 27 managers were added to these private market asset classes.

In the public markets, the CRPTF invested $7.8 billion across various asset classes and 21 managers were added to the fund’s manager roster.

Almost all public market allocations outperformed their respective benchmarks during the fiscal year, the report showed. Only emerging market debt underperformed.

Infrastructure and Natural Resources was established as a separate allocation during the year, and gained 11.3% net of fees — outperforming the allocation’s benchmark 9.2% return.

Strong performance from pension funds

The two largest pension funds within the CRPTF are the Teachers’ Retirement Fund (TERF) and the State Employees’ Retirement Fund (SERF).

TERF returned 8.35% over the fiscal year and SERF gained 9.02%, according to the annual report. Over 10 years to June 30, 2023, TERF and SERF generated net investment results of 6.94% and 7.04%, respectively.

This result outpaced the plans’ composite benchmark returns of 6.91% for TERF and 6.92% for SERF.

The Budget Reserve Fund (BRF) reached an historic high exceeding the statutory limit of 15% in 2022. This allowed the state to pay down unfunded pension liabilities by transferring $903.6 million to TERF and $3.2 billion to SERF. This was repeated in 2023, with just over $1 billion transferred to SERF and $828 million to TERF.

In the coming years, Connecticut’s Treasury Department said it would focus on maintaining the strong investment performance recorded in 2022-23. It said this would require continued perseverance, sensible asset allocation, high quality manager selection based on a rigorous and systematic investment process, and a strong team of investment professionals.

Ellen Shuman, chair of the investment advisory council, said: “I believe we have the ingredients in place that provide a reasonable probability of generating outperformance net of all fees over a full market cycle that will benefit beneficiaries and taxpayers.”