Message to STRS Ohio Members From Executive Director Michael Nehf

From STRS, October 23, 2008

The events taking place in Washington and on Wall Street are unprecedented. We are being bombarded with news reports that describe the current economic situation with terms like "crisis," "meltdown" and "slow-motion crash."

Many Americans are seeing the direct effects of this on their own personal investment accounts and are worried about their future. At times like this, the value of the defined benefit plan that we offer to our members is more apparent than ever. Every month, we have thousands of retirees who can count on receiving a pension check from STRS Ohio - regardless of market fluctuations.

This has not come about by chance. It has come about through the prudent management and ongoing oversight of funds by board and staff. Going forward, we will continue to be proactive in managing the current and future responsibilities we have to our members by taking all factors into consideration to ensure the long-term solvency of our pension fund. Under my leadership, your management team is closely monitoring what is happening in the markets and is assessing both the short- and long-term impacts.

It also means that we will continue to be prudent as an organization in managing our own expenditures. When I took this job, I stated that I wanted STRS Ohio to be the best-managed retirement system in the country. That goal transcends market fluctuations. My intention is to be sure we continually implement operating improvements and efficiencies to make sure every dollar we spend is spent wisely - whether the market is up or down.

In the past few days, we have received some e-mails from STRS Ohio members who question how we could award Performance-Based Incentive (PBI) payments to eligible Investment associates in this time of steep market declines and challenging economic conditions for many Americans. We have frequently shared information about our PBI Program with our members, including most recently in the October 2008 issues of our member newsletters; postings on the STRS Ohio Web site in August and September 2008; messages sent to more than 44,000 subscribers to our e-mail news service, also in August and September; and handouts at a number of speaking engagements this fall.

We would like to take this additional opportunity to share information with you. Here are some major points about the PBI Program you may find helpful:

- The $6 million paid to 87 Investment associates in September 2008 was for the period from July 1, 2007-June 30, 2008 (also known as fiscal year 2008). During this period, active management by these associates and external managers beat the benchmark return by +.35%, resulting in an additional $215 million for the pension fund than if assets were passively indexed.

- STRS Ohio Investment associates internally manage about 80% of STRS Ohio's investment assets; third-party studies have shown that internal management is extremely cost-effective for STRS Ohio, saving $100 million in external fees in calendar year 2007 alone.

- The PBI Program for fiscal year 2008 was approved by the State Teachers Retirement Board more than 1½ years ago, in March 2007. Applicable PBI payments were discussed at the August 2008 board meeting, approved by the Retirement Board at its September 2008 meeting, and paid later that month. Given the extraordinary market downturn since then, the Retirement Board has accelerated its annual review of the PBI Program usually conducted in March, and has been conducting discussions this fall.

- The PBI Program is very transparent to both STRS Ohio members and the Legislature.

* Permitted by state statute;

* Reviewed by the Ohio Retirement Study Council (ORSC) and the Joint Committee on Agency Rule Review (JCARR);

* Included as a separate line item in the budget presentation made annually to the ORSC prior to adoption by the Retirement Board;

* Communicated to the membership through newsletters, postings on the STRS Ohio Web site, messages sent to subscribers to STRS Ohio's e-mail news service, and handouts at speaking engagements; and

* Included in the monthly posting of the STRS Ohio budget on the STRS Ohio Web site (both budgeted amount and actual expenditure).

- Including a PBI as part of an overall compensation program for Investment associates is an appropriate and commonly accepted practice in both the public and private sectors. As noted in a study of STRS Ohio's program conducted by Aon/McLagan in March 2005, "STRS' incentive plan for Investment Associates can be considered 'mainstream' relative to competitive practice."

- The PBI Program is only available to eligible Investment associates; no other STRS Ohio staff members participate.

- References to a $25 billion loss reflect the period from mid-October 2007 through mid-October 2008, which covers portions of two fiscal years. Losses recorded in fiscal year 2008 are reflected in the September 2008 payments; investment results for fiscal year 2009 will be reflected in any applicable September 2009 payments.

As STRS Ohio's new executive director, I endorse the compensation program we have established for our eligible Investment associates. It is an accepted and appropriate practice within the investment industry to provide investment professionals who earn more than the benchmark return with a form of performance-based compensation. This outperformance is critical and directly benefits your pension fund.

Thank you for letting me share my thoughts with you.