Strong governance, flexibility over benefit structures, clever investment strategies, and maintaining savvy relations with investment trustees are among the best practices that can help pension funds do well in the post-pandemic era.

A panel of four allocators and consultants discussed solutions in CIO’s virtual conference “Inside the Minds of CIOs.” Speakers included pension investment chiefs from Maryland and New Mexico, as well as leaders from Backstop Solutions and Insight Investment.

Public pensions face any number of challenges to deliver good returns. Navigating board bureaucracy and funding liabilities has always been tough. But the pandemic has worsened pressures on chief investment officers, who have to deliver high return targets in a low interest rate environment, while local governments are strapped and are less able to increase plan contributions.

Introducing flexibility to benefit payment structures is one way to make retirement systems more resilient during times of fiscal trouble, said Dominic Garcia, CIO of the New Mexico Public Employees Retirement Association (PERA), a $16.4 billion plan. It is about 70% funded.

The retirement system now has created two benefit payment structures. It kept its promised statutory benefit costing 5.5% to 6%, but it changed its cost of living adjustment benefit (COLA) to a variable rate, from a fixed one. The changes were approved last year by the state legislature.

Instead of the fixed 2% COLA payment all current retirees received in the past, members will now get payouts fluctuating between 0.5% and 3%, based on a new “profit-share” model that ties benefit payments to investment performance and funding ratio. Garcia said the change is “kind of a relief valve” for the plan, which can make COLA payments based on shifts in the economy.

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