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The primary investment objective of the Board is to ensure that current and future benefit obligations are adequately funded in a cost-effective manner. In light of this objective the preservation of capital and the achievement of sufficient total return to fund accrued and future benefit obligations are the primary concerns. The Plan strives to provide the highest risk- adjusted return consistent with the long-term time horizon of a retirement plan. Because the plan is a defined benefit pension plan (commonly referred to as a DB plan), a long-term investment horizon is warranted, given the Plan’s liability obligations and the actuarial valuation process that smoothes annual fluctuations in investment performance. Moderate short-term fluctuations in market value of the Plan should not influence the investment structure under normal circumstances.
Preservation of Capital
Benefits paid from the pension fund are often major sources of income for retirees and a protection against the contingencies of death and disability for active workers. Preservation of capital and realization of sufficient return to secure payment of future benefit requirements are fundamental objectives. Preservation of capital encompasses three goals:
Diversification
The primary means by which capital preservation will be achieved is through diversification of the fund’s investments. Accordingly, the fund is allocated among a variety of asset types in a manner that reduces the overall volatility of the portfolio while providing a reasonable rate of return. Further diversification within each asset group is achieved through allocation to multiple investment management styles, providing broad exposure to different segments of global markets.
Asset-liability Focus
The basic premise of the framework in which the asset allocation policy has been developed is that the plan’s assets do not exist in a vacuum – they are there to fund LSERS’ liabilities. Therefore, the risk and investment return alternatives from different asset mixes are derived from a framework that examines the impact on funded status, contribution volatility, projected benefits payment horizon and sensitivity of benefits to economic variables.
Rebalancing Guidelines
Because markets do not move in concert, actual allocations will deviate around the target and be compared to targets on a quarterly basis. Ranges will be set up around the targets and rebalancing will take place whenever allocations reach the outer limits of these target ranges. Continuous rebalancing of the fund’s assets will ensure that the investment objectives embodied in the asset allocation policy are maintained and will also enable the fund to achieve long-term return enhancement from the dollar cost averaging process. Asset allocations should be rebalanced when the market value of a portfolio component is plus or minus 5% of the policy’s target mix.
Asset Allocation
LSERS is responsible for the prudent management of funds held in trust for the exclusive benefits of our members’ pension benefits. Funds are invested to achieve maximum returns without exposing retirement assets to unacceptable risks.
Target and Actual Asset Mix
LSERS’ asset mix policy is based on fundamental objectives of the fund. LSERS’ investment strategy combines both domestic and foreign investments to provide maximum return with controlled risk for the fund. Over time asset styles may be changed or added for greater exposure to different asset categories.