Report on September, 2008 STRS Board meeting
From STRS, September 19, 2008
This week, the State Teachers Retirement Board held its monthly meeting. Following the regularly scheduled meetings, a report titled "Board News" is posted on the STRS Ohio Web site, as well as mailed to a number of members and education organization representatives who have requested it. As a member of STRS Ohio with an e-mail address on file, you will also receive this report each month. The September report follows.
SEPTEMBER BOARD NEWS
BOARD REVIEWS MARKET CONDITIONS AND INVESTMENT RETURNS DURING SEPTEMBER MEETING
During the September meeting of the State Teachers Retirement Board, the current turmoil in the bond and domestic equity markets and its effect on the retirement fund was discussed. Since October 2007, the S&P 500 Composite Index has declined by 22%. At the same time, some major players in the financial sector, such as Fannie Mae, Freddie Mac, Lehman Brothers, AIG and Merrill Lynch, have been severely impacted by the credit crisis. As a result, STRS Ohio's total fund return was -5.44% for fiscal year 2008 and the return thus far in fiscal year 2009 (July 1-Aug. 31) is -1.2%. Many of the losses have been recorded by stock holdings in STRS Ohio's passive index portfolios rather than in the actively managed portfolios.
A passive index portfolio replicates the holdings, weights and return of an index and complements the active portfolios. For example, STRS Ohio's passive index portfolio for its domestic stock holdings includes companies such as Fannie Mae and Freddie Mac in the same proportion as the Russell Index. This overall exposure to the investment market ensures that investment dollars are spread throughout all sectors of the markets and not concentrated too heavily or too lightly in any one area. It also means that a passive index portfolio experiences all losses for stocks that decline in value, as well as all gains for stocks that increase in value. The passive index strategy is widely used among public and private pension funds and widely offered by mutual funds.
In discussing the market declines, it was noted that this is not the time for knee-jerk reactions or to change the whole approach to investments that has served STRS Ohio well over the years. STRS Ohio is a long-term investor with a diversified portfolio that is designed to weather the expected ups and downs of the market over time.
The Retirement Board has a policy in place regarding how passive and active investments are managed. This policy will be thoroughly examined as part of a review of STRS Ohio's domestic equities program that is currently under way by Russell Investments, the board's investment consultant. The results of this review will be presented to the board in the coming months. In addition, STRS Ohio will be conducting a scheduled asset allocation study later this year to take a "big picture" look at the system's investment fund to determine if the current allocation levels for the different asset classes within the fund (e.g., domestic stocks, international stocks, real estate, fixed income and alternatives) are appropriate or should be adjusted. One of the things the Retirement Board will be doing as part of this study is evaluating risk versus projected returns for their investments. For example, STRS Ohio could move more of its money into bonds, which are considered to be less risky investments than stocks; however, history would show that the returns over time from bonds would be too low to adequately fund the system's benefits. This study, which will involve the entire board, will begin in November 2008 and conclude in March 2009.
RETIREMENT BOARD APPROVES PBI PAYMENTS
As noted in the August Board News, Retirement Board members received a detailed presentation last month regarding fiscal year 2008 investment returns and projected Performance-Based Incentive (PBI) program payments to eligible Investment Department associates. The total fund return for the past year (July 1, 2007- June 30, 2008) was -5.44% versus the benchmark return of -5.79%. All asset classes exceeded their benchmarks in fiscal year 2008 except domestic equities. The net value added after deducting all direct investment costs (including earned PBI payments and external manager costs) was 24 basis points or an estimated $215 million for the year and more than $2.5 billion during the five-year period from July 1, 2003. This represents the additional value brought to the fund through active management by STRS Ohio associates and external managers, above and beyond passively indexing system assets.
As noted in the August Board News, Retirement Board members received a detailed presentation last month regarding fiscal year 2008 investment returns and projected Performance-Based Incentive (PBI) program payments to eligible Investment Department associates. The total fund return for the past year (July 1, 2007- June 30, 2008) was -5.44% versus the benchmark return of -5.79%. All asset classes exceeded their benchmarks in fiscal year 2008 except domestic equities. The net value added after deducting all direct investment costs (including earned PBI payments and external manager costs) was 24 basis points or an estimated $215 million for the year and more than $2.5 billion during the five-year period from July 1, 2003. This represents the additional value brought to the fund through active management by STRS Ohio associates and external managers, above and beyond passively indexing system assets.
In calculating this year's PBI payments, two program criteria came into play. Under the PBI program, eligible Investment associates have as one of their goals that the STRS Ohio total fund return will exceed its benchmark by 40 net basis points. Since this was not achieved in fiscal year 2008, no Investment associate will earn a maximum payment. In addition, all PBI payments earned are reduced by 20% as the total fund had a negative absolute return. This reduction totals $1.5 million.
At its September 2008 meeting, the Retirement Board approved a PBI payment of $6 million for 87 Investment Department associates. This payment is $3.4 million less than the budgeted amount of $9.4 million and $2.2 million less than the amount paid for fiscal year 2007 performance.
THOMAS W. JOHNSON RECOGNIZED FOR BOARD SERVICE
During its September meeting, the members of the Retirement Board expressed their sincere appreciation for the valuable and dedicated service provided to STRS Ohio by their board colleague, Thomas W. Johnson. Johnson was appointed to the Retirement Board by Gov. Bob Taft on Sept. 15, 2006, to complete a four-year term that ends on Sept. 28, 2008. At this time, Gov. Ted Strickland has not yet named a replacement to the board.
During its September meeting, the members of the Retirement Board expressed their sincere appreciation for the valuable and dedicated service provided to STRS Ohio by their board colleague, Thomas W. Johnson. Johnson was appointed to the Retirement Board by Gov. Bob Taft on Sept. 15, 2006, to complete a four-year term that ends on Sept. 28, 2008. At this time, Gov. Ted Strickland has not yet named a replacement to the board.
RETIREMENTS APPROVED
The Retirement Board approved 732 active members and 110 inactive members for service retirement benefits.
The Retirement Board approved 732 active members and 110 inactive members for service retirement benefits.
ADDITIONAL ITEMS REPORTED AT THE MEETING BY EXECUTIVE DIRECTOR MICHAEL J. NEHF
HOUSE BILL 315 MEETINGS CONTINUE
Rep. Scott Oelslager, sponsor of House Bill 315, continues to bring together the parties interested in the fate of this legislation. H.B. 315 provides a dedicated revenue stream for the STRS Ohio Health Care Program by allowing the Retirement Board to increase both member and employer contributions by up to 2.5% for a total 5% increase. As drafted, the bill prohibits the board from instituting the higher contributions all at once. Rather, the bill permits the increases to be phased in by .5% increments over a five-year period.
Rep. Scott Oelslager, sponsor of House Bill 315, continues to bring together the parties interested in the fate of this legislation. H.B. 315 provides a dedicated revenue stream for the STRS Ohio Health Care Program by allowing the Retirement Board to increase both member and employer contributions by up to 2.5% for a total 5% increase. As drafted, the bill prohibits the board from instituting the higher contributions all at once. Rather, the bill permits the increases to be phased in by .5% increments over a five-year period.
This proposal has been met with resistance primarily from two groups: the Ohio School Boards Association and the Ohio Association of School Business Officials. The groups argue monies are not available from within the individual districts to fund the proposed increase. In an effort to work out some of the areas of disagreement, Rep. Oelslager has been conducting a series of meetings with all interested parties to the bill. Four meetings have been held to date with additional meetings scheduled.
STRS OHIO BECOMES CHARTER MEMBER OF THE NATIONAL INSTITUTE ON RETIREMENT SECURITY
STRS Ohio has joined the National Institute on Retirement Security (NIRS) as a charter member. The institute, which is based in Washington, D.C., is the result of a joint initiative by the Council of Institutional Investors, the National Association of State Retirement Administrators and the National Council on Teacher Retirement to create a national, nonprofit organization dedicated to fostering an understanding of the traditional defined benefit pension system in the United States. NIRS' goal is to use its research and education programs to encourage the development of public policies that enhance retirement security for Americans. To date, NIRS has issued several reports, including one titled, "A Better Bang for the Buck: The Economic Efficiencies of Defined Benefit Pension Plans." (Some of the key findings of this report will be shared with STRS Ohio members in the October 2008 newsletters.)
STRS Ohio has joined the National Institute on Retirement Security (NIRS) as a charter member. The institute, which is based in Washington, D.C., is the result of a joint initiative by the Council of Institutional Investors, the National Association of State Retirement Administrators and the National Council on Teacher Retirement to create a national, nonprofit organization dedicated to fostering an understanding of the traditional defined benefit pension system in the United States. NIRS' goal is to use its research and education programs to encourage the development of public policies that enhance retirement security for Americans. To date, NIRS has issued several reports, including one titled, "A Better Bang for the Buck: The Economic Efficiencies of Defined Benefit Pension Plans." (Some of the key findings of this report will be shared with STRS Ohio members in the October 2008 newsletters.)
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Note from Kathie: There were no speakers for the Public Speaks portion of the Board meeting. Minutes of the CORE meeting will be posted when available.
posted by Kathie Bracy at 4:10 PM
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