Thom Williams became executive director of Hawaii’s largest public pension plan, serving more than 118,000 retired state workers and beneficiaries, on Nov. 2, just a week before it was announced that its billions of dollars in investments around the world had suffered a 6 percent, half-billion-dollar decline in the quarter ended Sept. 30, to $13.5 billion — its worst quarterly performance in four years.

Said to have rebounded since then to about $14.5 billion, the fund’s quarterly result did not seem to rattle Williams, who apparently has been in the business long enough to feel confident about the long run.

Williams, 67, joined the Employees’ Retirement System of the State of Hawaii (ERS) after five years of managing the Wyoming Retirement System, which has about $7 billion in assets.

Before that he worked for about eight years in commercial real estate and consulting in the Denver area, after almost 25 years with TIAA-CREF (the Teachers Insurance and Annuity Association — College Retirement Equities Fund), a now-$866 billion organization specializing in portable pension funds for universities. He had started with TIAA-CREF in New York in 1976 as an institutional consultant and ended with the company in 2000 as a vice president and general manager of its western operations.

Williams also worked for about six years in New York for the Equitable Life Assurance Society of America, which brought him on as a management trainee and also assigned him to learn about federal pension regulations.

His academic background includes a bachelor’s degree in economics from Johnson C. Smith University in Charlotte, N.C., and a law degree from Rutgers University in New Jersey.

He also is a graduate of Peabody High School in Petersburg, Va., where he was born and raised.

He has two daughters and is married to the former Mary Ellen O’Brien.

Oh, and he really likes N-scale model trains.

QUESTION: What was your reaction when you learned that the Hawaii ERS lost a half-billion dollars in the first fiscal quarter of 2016? I’m sure that was pretty much the same for a lot of investment programs, like 401(k)s and such, but, still, were you surprised?

ANSWER: No, I wasn’t surprised. I’m not alarmed by short-term declines, nor am I overly appreciative of short-term increases. This is to be expected over time when you’re managing large asset bases and globally diversified assets.

My focus is really longer term, and I believe that our program is poised, not only as a result of its contribution rates and program structure, but as a result of its investment activities to really close the funding gap that exists today and move us steadily toward full funding.

Q: You’re talking about unfunded liabilities?

A: Yes.

Q: Could you explain briefly what it means to say, there are “unfunded liabilities,” and then how does that happen?

A: When there are unfunded liabilities, it basically means that you have fewer assets on hand than are needed to pay your current liabilities. So, for example, the Hawaii retirement system has a funded ratio of just under 62 percent; I think it’s 61.4 percent. And it means we have 61.4 cents for every dollar that we owe. So if obligations were due today — and they are not — we wouldn’t have monies sufficient to meet them all in their entirety.

Q: How does that happen? Does the Legislature take money that’s supposed to go to the ERS?

A: Unfunded liabilities can occur in a number of ways. Largely it’s a result of the failure of the plan sponsors — in this case, or in most cases, the state — to make the required annual contribution. The actuaries tell them you need to put in $20 million and they, for whatever reason, decide they’ll put in $10 million, because they’ve got split priorities. Failure to make the required contribution is the single largest contributor to unfunded liabilities.

Two others would include investment downturns — so the recession in 2008 contributed significantly to unfunded liabilities because … all investments declined in their value during 2008, though, of course, they’ve all subsequently rebounded. But that decline in 2008 added to the unfunded liability, and it takes time to recover from those kinds of down drafts.

The third contributor can be benefit promises that are not funded as well. So if a program were to promise more benefits than it could actually pay, that creates an unfunded liability.

Q: Are the benefits offered by the ERS to state workers considered generous compared to other government pension plans?

A: In broad, I’d say no. I’d say the benefits under the Hawaii employees retirement system are comparable to those provided other state employees across the nation.

Q: What basically is the deal for retired state workers? Do they get 50 percent of their former pay, or how does that work?

A: It varies significantly between the plans that members participate in, because as you know, we cover teachers, we cover firemen, police, the Legislature, the Judiciary, and each program has a slightly different formula of benefits and contribution rates that reflect the career trajectory for that profession. So firefighters don’t work until age 65, at least not traditionally; they had a 55 retirement age, whereas other workers have different normal retirement ages.

Q: You’ve probably heard about the role of the “high three”; do you think that’s a significant abuse?

A: I don’t think so. It’s very common that pension funds calculate the retirement benefit based on years of service and some level of average compensation, and the final three years or final five years, or “high three,” these are typical measures that are employed in pension funds. However, over the last two to five years, we’ve seen plans become more conservative in that regard, at least as it relates to new hires, so there’s generally new tiers of benefits whereas, for example, if the former plan had been three years of service or average three years final salary, the new plan might be five years, and that makes the liabilities lower, the benefit promises slightly smaller, and therefore the funding needed to deliver the benefits more easily attainable.

Q: If unfunded liabilities are a worry, would it help in the future if there were fewer state workers?

A: No, actually, it wouldn’t help.

These programs work best when there is a steady out- and inflow of participants into the program, and that’s primarily because of when new people join, there are fewer liabilities, because they have fewer years of service and lower pay than the people with longer service.

So you need new people coming in to make contributions that are invested over time that rise to the level of equaling the obligations we owe to them when they leave. It’s almost a continual flow of employees in and out, a stable flow. It doesn’t have to increase in order to be sustainable, but you don’t want dramatic reductions, because then you have fewer people to pay in than you have to pay out. …

Meanwhile, what we’ve done is there are new contribution rates that were authorized, or mandated by the Legislature, and there are new tiers of benefits that will help to address the unfunded liabilities. Those things are already in place.

Q: Is that like lowering the benefits for people on Social Security or something?

A: Well, it’s for future employees, yeah. It’s a new promise, a new plan structure for new hires. So rather than continue in a way that would add to the liabilities, we have used plan changes to reduce that liability going forward.

Q: How many people are there on the ERS staff itself; and what do they all do?

A: There are 103 budgeted positions, I think. …You know, we’re managing something in excess of $14 billion in assets, and the types of things that they do here are so diverse and relatively complicated.

For example, the retirement system is seen by some as a bank. The (members) deposit money in it, we invest, and we pay it out over time when they retire.

We’re viewed in some respects as an education system. We have to educate our members and retirees about the options that are available to them, like saving for retirement, sometimes directing them toward information that helps for tax considerations. …

And we have people who account for, record keep and counsel all of our members about the full range of activities and options that are available to them.

Q: How many independent external investment managers do you work with and how are they paid?

A: The exact number varies, … but I believe we have three primary. It’s a little early for me to know all the details, but we have a general investment consultant, we have an investment consultant who focuses on real estate, and we have an investment consultant who focuses on so-called private equities. And they are generally paid fees that sometimes are achieved through, that relate to the amount of the assets that they’re responsible for counseling on or a fixed fee.

Q: How would you divide the investments generally?

A: Well, actually, we have begun to look at the assets more in the context of risk classifications. We’re trying to look at all of our assets, whether they’re real estate, fixed investments or equity investments, and then characterize them in “risk buckets,” and we’re trying to establish the proportions of those buckets in such a way that we minimize the downward pressure, the down draft in the portfolio, so as to avoid really deleterious losses, because what’s most difficult for any investor, and certainly large pension funds, is to recover from deep and dramatic losses.

Q: I noticed that in the last quarter, international equities took the biggest hit. As I understand it, the Hawaii ERS is more invested in foreign instruments than most American retirement plans. If so, what is the reason for that?

A: It’s a view that the opportunities going forward are going to be more broadly divided between domestic and international organizations.

We believe that the pace of globalization, near and long term, suggests that there will be, on average, equivalent or greater opportunities in some of the European markets and even the emerging markets. But we’re not going to put a bet in all one or the other. We think it’s important to be diversified.

And I think you’re probably right: You’ll find some domestic funds that are invested almost entirely in domestic equities, but even they have a level of international exposure because so many of our domestically based funds derive a substantial portion of their returns from international sales.

Q: What about this ruling that the board at some point told all the managers that they couldn’t hold more than 5 percent of their investments in cash? What was that all about?

A: Well, I think this was occurring in the run up to the recession, the market decline in 2008 and 2009. Because of certain difficulties managers were experiencing as to where best to allocate the monies we had given them, many of them held positions in cash, and overwhelmingly the research suggests that you have better returns over time by staying in the market, by being fully invested.

Q: About the economy in general right now — you know, the bombings in Paris, the ongoing wars, the Federal Reserve with practically zero interest rates — is it getting harder for you to figure out what to do?

A: The types of complexities that exist today, while they seem unique, they’re really not. These kinds of wars and rumors of war and economic dislocations have occurred over the last 50 years, if not longer. If you think of oil embargoes, and you think of the wars, the Vietnam War, the Middle East war, you know, problems in Brazil and China, these are not unusual times. They’re distinct but they are not so abnormal as it may seem.

That doesn’t mean we ignore these things, by any means. I think they keep many of us awake at night because they do have near-term impact on the performance. But we have to, again, be constant in our application of discipline, and maintain that discipline across these sort of unpredictable occurrences.

Q: Is there anything in particular in the new job that you’d like to achieve?

A: One of the things I want to accomplish is … some budget flexibility, which may enable us to get the resources we need, both in the context of people and technology, to optimize investment returns and impact.

Q: Is that basically saying you would like to have a bigger operating budget for the ERS?

A: No, I think in some respects we just might need flexibility in how the budget is spent.

Q: Like what?

A: For example, we may think we need a body, but the Legislature may decide they’re supporting furniture and equipment. … We’re not funded, you know, by the general fund. We are self-funded. But the expenditure of our budget is controlled by the Legislature and the Office of Budget and Finance. I think generally they do a great job of overseeing us, because we really want full transparency, and enjoy the oversight; I think it’s very appropriate. But we just may need an additional level of flexibility.

Q: One last question: ERS members right now, they can be confident that they’ll get everything they’re owed?

A: Yes, unquestionably.