State Board of Administration greenlights asset allocation revisions for FRS pension plan

by | Oct 25, 2023

  • The Florida Retirement System (FRS) Pension Plan has undergone key asset allocation changes, including reducing global equities and increasing core fixed income and private equity, aiming to maintain the expected rate of return with reduced volatility.
  • As stated during Wednesday’s State Board of Administration meeting, the new investment strategy has been adjusted to accommodate a setting with a higher natural interest rate and a diminished equity risk premium.
  • Asset allocation changes include a reduction in global equities while increasing core fixed income and private equity.

Revisions to the Florida Retirement System (FRS) Pension Plan were approved by the State Board of Administration (SBA) during its meeting on Wednesday.

With past approaches driven by accommodative monetary policies that favored risk-taking, the newly approved investment strategy is adapted for a fiscal environment characterized by a higher natural rate of interest and a reduced equity risk premium.

Key changes in the asset allocation include reducing global equities from 53 percent to 45 percent, elevating core fixed income from 18 percent to 21 percent, and introducing the Active Credit Asset Class with a 7 percent target allocation.

Further, private equity saw an increase from 6 percent to 10 percent, while strategic investments were reduced from 12 percent to 4 percent. The allocations for cash and real estate remain unchanged and slightly increased, respectively.

“The objective of these revised allocations is to target approximately the same expected rate of return as the previous asset allocation but it’s substantially reduced above the expected volatility levels,” said Lamar Taylor, Interim Executive Director and Chief Investment Officer for the SBA.

To reach the amended values included in the revision, SBA staff consulted with external experts and the Investment Advisory Council. The revised asset allocation was finalized following analyses of the pension plan’s assets, liabilities, and strategic investments.

Beyond adapting to market changes, additional revisions were made to align with statutory requirements brought forth by House Bill 3, which necessitates modifications related to retirement system investments, governance policies, and specific reporting criteria.

The legislation, signed by Gov. Ron DeSantis in May, prohibits consideration of “environmental, social and governance” (ESG) standards in investing government money. The bill also prohibits banking institutions from using “social credit scores” in making financial lending decisions.

The measure’s signing expanded on a directive issued last year by DeSantis and state Cabinet members which required investment decisions in the Florida Retirement System Defined Benefit Plan to prioritize the highest returns without consideration of ESG standards.

Accordingly, the SBA is slated to submit a comprehensive report by December 15, 2023, detailing governance policies, fiduciary standards, and exercising shareholder rights.


%d bloggers like this: