Investment returns on the state of Michigan's pension portfolio, which includes public school employees, were just 5.3% in the fiscal year that ended Sept. 30, 2020. This appears well below the returns earned by managers of other government pension funds.

It’s also far below stock market returns. The S&P index of large U.S. companies earned 13.4% for investors over the same period. That is expected, however: In a rising market, stocks will beat a diversified pension fund that holds bonds, which offer far lower yields in return for safety and stability.

But the state's pension portfolio performance also looks low next to more comparable private sector offerings like the Vanguard Balanced Index Fund, which holds around 60% of its assets in stocks and 40% in bonds. This mutual fund earned 10.6% during same period Michigan’s school pension fund returned just 5.3%.

Besides stocks and bonds, Michigan’s pension fund managers can also put money into derivatives and private equity ventures, the latter of which involves groups of investors acquiring smaller companies not traded on any stock exchange. In 2008 the Michigan Department of Treasury lobbied legislators to increase the amount its pension managers could put into private equity. The Legislature agreed to allow up to 30%.

According to an annual state report, Michigan’s state pension portfolio didn’t just underperform private sector investors last year, it was also beat by comparable public pension plans. Other public pension plans with greater than $10 billion in assets had a rate of return of 7% in 2020. Over the past 10 years, unfunded liabilities for the state's public school employees pension fund have grown from $17.6 billion to $33.8 billion.

When measuring returns over a 10-year period, the state of Michigan pension portfolio performance fares better at 9.4%. A comparison to other large public pension plans in the state report shows average gains of 8.1% over that same 10-year span. The Vanguard stock and bond fund cited earned an average annual return of 10.33% in the 10 years ending June 30, 2021.