Page 28 - FOP August 2021

news on companies travels quickly through sources, resulting in the current stock price reflecting all information. The board decided to move toward passive management in this asset class and aim to track benchmark returns while saving on investment management fees.
In 2020, NEPC conducted a formal asset liability study which reviewed the current and projected financial status of the fund by projecting pension liabilities, benefit payments, asset growth and contribution levels. The study also assessed the appropri- ateness of the current asset allocation relative to the expected progress of liabilities and cash flows. As a result of the study, and to strengthen the positioning of the portfolio in the cur- rent market environment, the board made modifications to the asset allocation. These included an increase in U.S. equities, a decrease in actively managed fixed income, termination of the global asset allocation mandate and the addition of an alloca- tion to passive treasuries.
The fund’s portfolio has made strong returns in recent years, posting a return of 16.3 percent in calendar year 2019 and 12.3 percent in calendar year 2020. As of June 30, 2021, on an an- nualized basis, the portfolio returned approximately 25 percent over trailing 1-year, approximately 10 percent over the trailing 3-year period, approximately 10 percent over the trailing 5-year period, and approximately 8 percent over the trailing 10- year period. Since January 1984, the fund has returned approximate- ly 8.7 percent on an annualized basis.
Although the fund’s portfolio is well positioned, we are cer- tainly staying vigilant as to the risks in the markets and what the future may hold. We have been through one of the longest bull markets in history for U.S. equities and risk assets in general.
We know that the market moves in cycles and the good times don’t last forever. Today, interest rates and yields are at historic lows, and that creates challenges for the income generation this fund relies on. As we move past COVID, it is expected that in- terest rates will increase, resulting in a low return environment for fixed income assets. In general, we expect the next 10 years to be a more challenging return environment then we experi- enced over the past 10 years. In our work with NEPC and the investment managers we work with, we will strategically make the necessary changes to our asset allocation to best position the portfolio. We will also be consistently working with our ac- tuary to make sure we are prudently funding the fund through the actuarily required contributions of the City.
All pension funds face the same fundamental challenge — contributions plus investment earnings must equal or exceed obligations. Obligations are defined as benefits and operating expenses. Over time, the fund’s investment returns exceed the actuarial assumed rate of return. However, it is not possible to invest our way out of decades of insufficient funding by the City. It is the future, required contributions that are critical to sustaining the viability of the Fund. Therefore, the Police Offi- cer Trustees continue to demand that the fund receive the re- quired actuarily determined contributions from the City. We are committed to doing all we can do to continue to improve the funding status of the fund so that current and future Chicago Police pensioners receive their hard-earned and well-deserved benefits.
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