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Underfunded Illinois Teachers Increases PE Allocations

The Illinois Teachers Retirement System, the state’s largest pension, is the latest big pension to increase its targets or caps on alternative investments, such as private equity.

The $35 billion pension fund—which has one of the nation’s largest unfunded liabilities, with an ability to fulfill less than half its $77 billion in obligations—raised its target on alternative investments to 34 percent, from 29 percent.

That overall target includes an increase in the fund’s private equity allocation to 12 percent from 10 percent, and a rise in its absolute return target to 8 percent from 5 percent. The real estate target remains unchanged at 14 percent. Illinois Teachers currently has $3.2 billion invested in private equity, representing 9.3 percent of the total portfolio.

The move by Illinois Teachers follows a similar move last month by New Jersey, which cleared the last hurdle before a final vote on changes that would allow the state’s pension fund to invest as much as 38 percent of its funds in alternatives. That would be up from its current cap of 28 percent. The state currently has 6.4 percent invested private equity.

Moves to increase allocations to alternative investments are often seen as a response to the funding dilemmas faced by public pensions over unfunded liabilities. The more that a state pension earns through its investment program, the less money that will have to be made up at some point with state contributions and member obligations.

Alternative investments generally offer higher returns than stocks and bonds, but they also carry more risk and are less liquid. The liquidity factor is important since pension funds need liquidity to pay current retirees.

Like Illinois, New Jersey has one of the nation’s largest unfunded pension liabilities. The state disclosed in December that it had $54 billion in unfunded obligations. That stacks up against $72 billion in pension assets, which means it can meet only 57 percent of total liabilities.

Both states also have higher target rates of return than the national average. The target rate at Illinois Teachers is 8.5 percent, the highest in the nation, an honor shared with four other state pensions. New Jersey’s target rate of return is just a quarter-point below that, at 8.25 percent.