Hawaii’s largest public pension fund topped $13 billion in assets last quarter for the first time as it inched closer toward closing a shortfall that must be shored up to meet future payment obligations.

The state Employees’ Retirement System posted a 5.4 percent investment return in the October-December period to boost its six-month fiscal-year return to 10.97 percent. The fund, which provides retirement, disability and survivor benefits to 115,350 active, retired and inactive state and county employees, targets an annual 7.75 percent fiscal-year return to help fulfill its commitment.

For the full 2013 calendar year, the fund rose 16.3 percent as assets climbed to a record $13.5 billion.

Still, the ERS system has a long road to climb before it is fully funded. Improvement in the fund last fiscal year moved up the date that the fund is expected to be 100 percent funded to June 30, 2041, rather than June 30, 2042, according to an independent actuarial report released in December by Gabriel, Roeder, Smith & Co.

The actuarial report, conducted once a year, found that the fund was 60 percent funded as of June 30, 2013, up from 59.2 percent a year earlier. But the unfunded liability actually rose slightly during that time to $8.49 billion from $8.44 billion a year earlier because of carryover investment losses still being recognized.

ERS Administrator Wes Machida said he’s encouraged that the fund’s 10.97 percent gain through the first six months will help curb the pension liability.

"It helps if we maintain an 11 percent return," Machida said. "That will offset the current deferred losses of $391 million that was primarily a result of the negative 0.6 percent return in fiscal 2012."

The number of eligible employees for benefits, employee and employer contributions, and mortality tables are also taken into account when determining whether the fund has enough money to pay all the pensions promised. Pension reforms taken in the past three years by the ERS trustees, Gov. Neil Abercrombie and the state Legislature also have helped put the pension plan on track to sustainability.

Last quarter, the ERS’ 5.4 percent return beat the preliminary 4.8 percent return of 35 median public funds with assets greater than $1 billion. The ERS return also beat its 5.2 percent benchmark, which comprises indexes invested in a similar way to ERS’ portfolio managers.

"We feel very fortunate that domestic equity markets were strong this (fiscal) year," ERS Chief Investment Officer Vijoy "Paul" Chattergy said. "We currently have an emphasis on U.S. equity that benefited from the strong performance. Now that’s occurred, we expect we’ll re-balance the portfolio and are taking the time to consider our long-term strategic allocation of the portfolio."

Domestic equities led the way in the quarter with a 9.9 percent return. They were up 35.3 percent over the past 12 months.

International equities rose 4.1 percent in the quarter and 12.9 percent for the calendar year.

Total fixed income, which include domestic and international holdings, edged up 0.8 percent in the quarter and slipped 0.3 percent for the year.

In other categories, covered option calls (equities with downside protection) increased 6 percent for the quarter and 14.1 percent for the year. Private equity rose 5.9 percent for the quarter and 16.9 percent for the year. Real estate, which is reported on a one-quarter lag, rose 2.4 percent for the quarter and 9.6 percent for the year. And inflation-adjusted returns linked to bonds and timber declined 1 percent for the quarter and 2.9 percent for the year. Some categories didn’t include December results due to unavailability when the ERS report was produced.