| Choosing the right asset mix is critical to achieving our investment goal to support pension benefits. The cornerstone of our investment program, it specifies the ratio of equities, fixed-income securities and inflation-sensitive investments we should hold.
Our goal is to select an asset mix that balances risks and rewards, and avoids excessive volatility in the plan's assets.
Our asset mix must be appropriate for the size and duration of the plan’s liabilities (that is, the cost of future pensions). Pension benefits, which will be paid out over several decades, are affected by many long-term economic, investment and demographic factors. For example, teachers’ pensions are indexed to the Consumer Price Index.
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Over the past 10 years, we have reduced our policy weighting to equities and increased our weighting to inflation-sensitive and other non-traditional pension investments.
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In addition, the value of liabilities is very sensitive to real interest rates: when interest rates go down the cost of future pensions goes up, and vice versa. The plan pays out more than it takes in from contributions, making stable investment returns crucial to the funding of the plan. As the ratio of active to retired members has declined, we have had to develop a more conservative asset mix.
Board members review and approve the asset-mix policy annually and give management the flexibility to adjust each weighting by up to 5% in either direction to take advantage of investment opportunities as they arise.
The fund’s overall exposure to equities has been reduced over the past 10 years, reflecting the plan’s lower risk tolerance. Our intent is to avoid unduly burdening the declining proportion of working teachers, with the risk of higher contributions to cover investment losses that may occur.
