The Dallas Police & Fire Pension System will be focusing more on public equities and fixed income, and less on private markets, as it seeks a path to financial recovery approximately three years after finding itself on the brink of insolvency.
The pension fund’s new investment strategy – adopted earlier this year according to a Q4 2018 performance report compiled by Meketa Investment Group, the pension’s investment consultant –includes eliminating infrastructure from its asset allocation.
Until October 2018, when the fund released its 2017 annual report, DPFP’s target allocation to infrastructure stood at 5 percent. Its actual allocation as of 31 December 2018 amounted to $56.9 million, accounting for 3 percent of its $2 billion portfolio.
However, it is unclear what prompted DPFP’s decision to abandon infrastructure, given the performance of the asset class. Although it generated a loss in 2018, posting a -6.7 percent return, it had outperformed all other asset classes – both public and private – generating three-year and five-year returns of 15.3 percent and 8.3 percent respectively. It has achieved an 8 percent return since it was introduced into the fund in July 2012.
Meketa – which, since being appointed as DPFP’s investment consultant in April 2018, has merged with the Pension Consulting Alliance – declined to comment. DPFP did not respond to a request for comment.
The pension fund has also slashed its target allocation to real estate from 12 percent to 5 percent. DPFP is heavily exposed to this asset class, which accounts for 23.7 percent of its total portfolio. Three- and five-year returns for that asset class were 2.4 percent and -5.4 percent, respectively. However, it is maintaining its 5 percent target in private equity, which has delivered negative returns since being introduced into the fund in 2005 and as recently as the fourth quarter of last year.
Private debt is also being abandoned as an asset class.
According to Meketa’s performance review, DPFP will pivot towards public equities and fixed income, with policy targets of 50 percent and 35 percent respectively of its overall portfolio. Its global equity portfolio has generated three- and five-year returns of 7.4 percent and 5.3 percent, while global bonds have posted returns of 3.3 percent and 1.5 percent during those same time periods.
Road towards insolvency
The pension fund’s financial troubles surfaced in July 2015, when an actuarial evaluation projected it would become insolvent within 15 years. Executive director Kelly Gottschalk wrote in a letter to the Board of Trustees, and which was included in the 2017 annual report, that this was “due to the reductions in the valuation of certain real estate and private equity investments and recognition that the investment portfolio was not expected to earn the rate of return previously projected”.
The following year, DPFP found itself under greater financial strain when beneficiaries withdrew more than $600 million from their Deferred Retirement Option Plan accounts; this compared with $81 million in 2015 and $56 million in 2014. Since then, changes to governance, contribution rates and benefits have been made following the passage of House Bill 3158, which became effective on 1 September 2017. Under the new state law, future DROP distributions are limited both in terms of amount and frequency, based on liquidity.
In order to address the liquidity strain and debt compliance issues created in 2016, DPFP sold private equity and real estate assets. It also sold its ownership interest in two Texas toll road projects in which it held direct stakes: a 10 percent interest in NTE Mobility, the consortium developing the North Tarrant Express managed lane project; and a 6.6 percent share in LBJCintra, developer of the LBJ Freeway.
According to the annual report, DPFP had a combined $87 million invested in these two projects. It sold both for $180 million in September 2017.
As of 1 January 2018, DPFP’s funding ratio was 47.7 percent and the funding period was 45 years.