September Board News

From STRS, September 21, 2009
Subject: [News] September Board News Details Retirement Board Actions and Discussions

Last 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

OHIO'S FIVE PENSION SYSTEMS PRESENT THEIR PLANS TO THE ORSC

On Sept. 9, all five Ohio public pension systems - STRS Ohio, Ohio Public Employees Retirement System, School Employees Retirement System, Ohio Police & Fire Pension Fund and the Highway Patrol Retirement System - presented their plans for achieving or maintaining a 30-year funding period to the Ohio Retirement Study Council (ORSC). This council serves as the legislative oversight body for the five systems.

At the beginning of the ORSC meeting, Rep. Todd Book (D-Portsmouth), who is chair of the council, noted that it was clear that none of the systems would be able to "invest" their way out of future funding challenges. The systems' plans call for changes in contributions and/or pension plan design to strengthen their funds. This month's Legislative News, developed by STRS Ohio's Governmental Relations Department, includes a chart detailing the major components of each system's plan. (The newsletter can be accessed via STRS Ohio's Web site (http://www.strsoh.org/quicklinks/legislative.html); a paper copy can be obtained by calling 614-227-2913.)

Because of the differences in each system's funding situation, demographics and current plan design, there was wide divergence among the five proposed plans. Several council members expressed their distaste for proposed increases in employer contributions, citing the burden this puts on taxpayers. This sentiment was echoed in a major daily newspaper editorial that morning. This same editorial called for the public sector to move to defined contribution plans and away from defined benefit plans.

In the coming weeks, ORSC staff will be working with the systems to assess the five reports. It is anticipated that eventually legislation will be drafted and introduced; then the normal legislative process will begin. Almost all the changes proposed by the systems require legislative action by the Ohio General Assembly and the governor before they can be implemented. ORSC is scheduled to meet on Oct. 14, where additional details of the next steps are expected to be presented.

RETIREMENT BOARD DEFERS PAYMENT OF PBI PAYMENTS

Earlier this year, in January 2009, the Retirement Board voted to suspend the Performance-Based Incentive (PBI) Program for eligible Investment Department associates as of Feb. 1, 2009. With that suspension, it was noted that any earned PBIs for that fiscal year would be limited to 7/12 of the performance results for July 1, 2008-Jan. 31, 2009. PBI payments are calculated on the performance of various portfolios and asset classes against their respective benchmarks for multiple-year periods, total fund performance and absolute return. While the value of STRS Ohio's investment fund has dropped significantly during the recession, the net value added from active management over the total fund benchmark return for the time period of July 1, 2004, through June 30, 2009, was more than $1 billion. This means that investment assets were higher at June 30, 2009, by $1 billion than if STRS Ohio had invested only in index funds. This number takes into account all direct investment costs , including earned PBIs, during that period. The benchmark annualized rate of return over the five-year period was 2.30%; the return on STRS Ohio's total investment fund was 2.69%.

At its September meeting, the board voted to not pay the earned $3.39 million in PBIs for fiscal year 2009 in fiscal 2010, but instead, defer their payment as well as spread the payment over future fiscal years. One-half of the payment, or about $1.7 million, will be paid only when: (1) STRS Ohio investment assets total $60 billion or higher at the fiscal year-end; and (2) the total investment fund has a positive return. This latter provision is in keeping with an earlier board action that stated no PBIs would be paid in the future (beginning July 1, 2009) when the total investment fund has a negative return - regardless of the performance of individual investment associates against their respective benchmarks. The first payment of $1.7 million cannot be made before July 1, 2010.

The remaining $1.7 million in PBIs can only be paid when: (1) STRS Ohio investment assets total $65 billion or more at the fiscal year-end; and (2) the total fund has a positive return. This second payment cannot be made until at least July 1, 2011.

As of Aug. 31, 2009, STRS Ohio's total investment fund has a preliminary market value of $56.8 billion.

In related action, the board approved a compensation study for investment associates. Currently, total compensation - base pay plus maximum PBI - for most STRS Ohio Investment Department associates is targeted at the bottom 25th percentile of total compensation levels in the private market. STRS Ohio benefits from the lower cost of internal management by STRS Ohio associates compared to paying fees to external money managers. The savings from internal management totaled more than $100 million in calendar year 2007 alone. The compensation study will include public and private sector data and will include a recommendation for the mix and amount of base pay versus variable pay for all professional Investment Department positions. The study will be completed in November.

RETIREMENTS APPROVED

The Retirement Board approved 502 active members and 141 inactive members for service retirement benefits.

ADDITIONAL ITEMS REPORTED AT THE MEETING BY EXECUTIVE DIRECTOR MICHAEL J. NEHF

IMPLEMENTATION OF 2010 HEALTH CARE PROGRAM UNDER WAY STRS

Ohio staff members continue to work collaboratively among all departments to prepare for the 2010 health care program. Open-enrollment packets are scheduled to begin mailing on Oct. 23. Targeted postcards are being mailed this month to enrollees, advising them of the "Health Care Program Highlights Meetings" being held in their area. These meetings are scheduled to begin Oct. 19 and will run through Nov. 13. The meetings will be tailored to the differing needs of enrollees; Medicare and non-Medicare enrollees will attend different meetings. Additional information about the meetings, as well as registration information, can be found on the STRS Ohio Web site (http://www.strsoh.org/resources/2k.html), or by calling toll-free 1-888-227-7877. Advance registration is required.

BENEFIT COUNSELORS RETURN TO THE ROAD STRS

Ohio benefit counselors are on the road for fall counseling. The fall season includes 28 locations around the state. Scheduling for the available appointments began in July with nearly 1,000 members setting appointments at one of the first seven locations. Internet scheduling is still popular, with half of the appointments scheduled through the STRS Ohio Web site. Counselors will meet with more than 4,000 members at various locations in Ohio during the next three months.