In this paper Massachusetts Pension Reserves Investment Trust (PRIT) is analyzed and recommendations are given on how funds of the trust should be allocated in order to maximize the returns while minimizing the risk. Currently, Pension Reserves Investment Management Board (PRIM) aims to “reasonably exceed” its actuarial rate of 8.25%. However, with the right portfolio allocation it is possible to achieve better performance than 8.25% return.
The PRIM Board believes that, by the year 2040, PRIT will grow to an amount sufficient to meet then-existing pension obligation of the Commonwealth, which means that the funded ratio of PRIT will be equal to 1 at that time. The long-term actuarial rate of return for PRIT is 8.25%, which was adopted by Commonwealth. And the funded ratio for PRIT in 2011 was 72.6%. By using this information and the following formulas
Current Asset*(1+required rate of return)nPVLiability*(1+discounted rate)n=1.
It is possible to derive that 0.726*(1+required rate of return)29=(1+0.0825)29, which means the annualized required rate of return should be equal to 9.45%
Since the growth for the asset consists of annual payments in accordance with a legislatively approved funding schedule and total return of PRIT, the required rate of investment is equal to the required rate of return minus the funding schedule rate. According to the historical data from 2007 to 2011, the funding schedules are all larger than 4% except for 2007, which is 3.9%. Thus, it is reasonable to assume that in next 29 years the funding schedule rate will remain constant at 4%. Thus, the required rate of investment is equal to 5.45% (9.45%-4%) which should be generated from the asset allocation.
According to the most recent reports as of October 2012, the fund did pretty well in recent years. And the PRIT returned 8.36% in one year, 9.14% over 3 years, 0.41% over...