In unusual move, Maine pension considers lowering PE target

Maine Public Employees Retirement System could reduce the target of its private equity allocation by 2.5 percent to meet a deadline originally set in the 1990s that requires it to eliminate its unfunded liabilities by the end of the decade.

Steep unfunded liabilities plague many public pension plans, which drive asset allocation decisions. In 1995, with its pension less than 30 percent funded, Maine voters took an extreme step by ratifying a state constitutional amendment to eliminate its unfunded liabilities by 2028.

Today, $18.8 billion MainePERS is now more than 82 percent funded, making it one of the better funded plans in the country. And as the 2028 deadline approaches, MainePERS has recommended an allocation strategy to reduce risk with little impact on returns to increase liquidity, which includes reducing its private equity target from 15 percent to 12.5 percent.

“The proposed reduction in PE is based on two factors: an increased need for liquidity related to the (unfunded actuarial liability) payoff, and the desire to maintain stable funded status and contribution rate volatility as the system approaches and becomes 100 percent funded,” said MainePERS Chief Investment Officer James Bennett via email.

Bennett also recommended the fund to reduce its allocation in traditional credit from 7.5 percent to 5 percent but increase its target in alternative credit from 7.5 percent to 10 percent and holdings in U.S. government securities from 7.5 percent to 10 percent.

The MainePERS Board of Trustees will make a decision about the change to asset allocation at its May meeting.

Bennett added that there will be no manager or strategy shifts due to the proposed changes.

One example of this comes with its relationship with Advent International GPE, as MainePERS just committed $45 million to its tenth fund, having had previously invested in three previous Advent offerings.

Other managers MainePERS has placed sizable commitments with include Thoma Bravo, Technology Crossover Ventures, Riverside, Hellman and Friedman and Charterhouse Capital Partners.

MainePERS worked with advisors Cambridge Associates and Cheiron in developing its asset allocation policy.

Bennett expects it will take four-to-five years to reach the proposed 12.5 percent target for private equity.

In a phone interview, MainePERS Chief Executive Officer Becky Wyke also said the state’s plan is reaching a “mature” phase. In addition to a change in its funding structure, at that point MainePERS will have more recipients it needs to pay than employees paying into the system.

“As contributions shift, liquidity becomes more of a concern,” Wyke said.

Currently, MainePERS is overweight its private equity target, with 20 percent actually allocated to the asset class. As of June 30, 2021, the net asset value of MainePERS private equity investments total $3.9 billion.

Maine’s potential move is unusual as many other US public systems are maintaining or seeking to increase their exposure to private equity. Just last month, a Commonfund survey revealed that LPs overwhelmingly believed that private equity would deliver the best returns over the next year when compared to other asset classes.