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Consultant reports strong first-half 2025 returns, cautions that funding ratios and benchmarks can mislead
Summary
RVK investment consultant told the Retirement Study Council that Ohio funds outperformed policy benchmarks in the first half of 2025 but cautioned that 80% funding is not equivalent to fully funded, actuarial smoothing masks market value, and asset allocation drives roughly 90% of long-term returns.
RVK, the council's independent investment consultant, told the Retirement Study Council the first half of 2025 produced "a lot of good news" for Ohio's public retirement plans, noting that each of the state funds met or beat their policy benchmarks for multiple lookback periods.
The consultant emphasized caution in interpreting common funding metrics. "When a public fund reaches 80% funded, it's essentially fully funded. Not true," he said, arguing that an 80% ratio leaves 20% unfunded and can translate into higher future contribution rates when actuaries recapture that deficit. He also warned against over-reliance on actuarial smoothing: "Assets are worth what people are willing to pay for them today," he said, urging boards to consider market-value metrics alongside actuarial measures.
On investment program design, the consultant said asset allocation is the dominant determinant of a fund's returns, estimating that allocation choices explain roughly 90% of long-term return outcomes, with asset-class structure next and manager selection a smaller factor. He recommended periodic benchmark studies to ensure policy benchmarks are appropriate measures of execution.
Council members asked for examples of "other alternatives" being used to seek diversification. In response the consultant listed examples including "specialized hedge funds," "certain types of commodity exposures" and "private credit" as possible alternative allocations. A question about outlier assumed-return choices in the survey prompted a discussion about reasons a fund might adopt very low or very high assumed returns, ranging from overfunded conservative posture to extreme underfunding and statutory constraints.
The presentation included a discussion of risk-adjusted measures (Sharpe ratio and information ratio) and a visual "cloud chart" that compares funds by reward for risk. The consultant noted several Ohio funds occupy favorable positions (higher reward, lower volatility) on that chart and praised consistent execution against policy benchmarks while reminding trustees that sustained funding improvements typically require a combination of steady contributions, sound allocation, and time rather than short-term investment outperformance.
The council did not take an action on the investment report; members thanked the consultant and moved on to budget items.
