Seth Kelly, the investment chief at the Pennsylvania State Employees’ Retirement System (SERS), joined the pension fund just half a year ago, but he’s already overseeing some big changes.

Board members at the $31.5 billion pension fund last month announced that they are increasing their fixed income allocation in order to move the pension fund toward a liability-driven benchmark. The trustees hope that the changes to the investment policy statement (IPS), including a new 7.8% target for long duration fixed income, as well as lowering the public equity, private equity, and real estate allocations, will help the fund increase cash flow and lower risk.

It’s a strategy that Kelly, formerly CIO at the Missouri State Employees’ Retirement System (MOSERS), said he discussed during the interview process prior to his appointment in July. Given that bond yields are at historic lows, he said, and the fixed income portfolio is not earning as much as it was projected to, why not allow the liability defined by the fixed income portfolio to inform the interest rate risk?

“If we have to increase the yield in our fixed income portfolio every time it falls then it must mean our liabilities are interest rate sensitive, right, at some level? If not at 100%, then at some level. They must be, if we’re reacting to this reduction in interest rate,” Kelly said.

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