Report on September 2011 STRS Board Meeting

From STRS, September 16, 2011
September Board News

Pension Legislation Remains on Hold; Six Firms Respond to RFP

Six potential vendors have submitted proposals in response to the Request for Proposals (RFP) from the Ohio Retirement Study Council (ORSC). The six firms that submitted proposals are: Deloitte, The Segal Company, Bolton Partners Inc., Hay Group, Milliman, and Pension Trustee Advisors. The ORSC has not met since the proposals were submitted. Senator Keith Faber (R-Celina), chair of the ORSC, reiterated at the August meeting his intention to conduct regional hearings on the five pension system boards' pension reform proposals; however, no announcement regarding the hearings has been made. STRS Ohio will share information concerning these meetings as soon as it becomes available.

Retirement Board Updated on Asset-Liability Study

Callan Associates, the Retirement Board's investment consultant, is conducting an asset-liability study for the pension fund that is expected to conclude in December. Pension funds use asset-liability studies to establish investment policy by evaluating various criteria including pension plan design (benefit structure), actuarial data, and investment risk and return objectives.

During the September board meeting, Callan Associates' staff discussed asset allocation with the board, calling it a long-term strategic process that is the primary determinant of investment return and asset volatility. The board's consultant will create a series of asset mix alternatives with different levels of risk/reward for consideration. This "modeling" will include the June 30, 2011, valuation results. The study will also evaluate the impact of different interest rate and economic scenarios on STRS Ohio's liabilities.

The presentation also noted that the appropriate asset allocation policy should satisfy two basic criteria:

• The asset mix will be efficient — generating the maximum level of expected return for a given level of risk; and

• The asset mix will reflect the appropriate level of risk for STRS Ohio.

Investment Cost Effectiveness Analysis Shows $94 Million Saved Through Internal Management

A CEM Benchmarking report, "Investment Cost Effectiveness Analysis" was shared with the board at the September meeting. The analysis compares cost and return performance to a custom peer group of pension systems. One of the more significant findings is that STRS Ohio saved $94 million in 2010 by managing about 80% of its total assets with in-house staff. The analysis compared those internal management costs to the median management costs that the peer group pays for external management. The report also noted that STRS Ohio's five-year total return of 4.4% was ahead of its policy return of 4.2%. The five-year value added figure of 0.2% was above the peer median.

Retirements Approved

The Retirement Board approved 1,517 active members and 151 inactive members for service retirement benefits.

Other STRS Ohio News

Finance Staff Educates Employers About GASB Exposure Draft
As noted in last month's Executive Director's Report, the Governmental Accounting Standards Board (GASB) has recently issued two exposure drafts about pension accounting and financial reporting that would make fundamental changes to standards for state and local governments, including public school districts, colleges and universities. The proposed change is most likely to directly impact STRS Ohio reporting employers, because employers participating in a cost-sharing, multiple employer pension plan (like STRS Ohio) are required to report a net pension liability in their financial statements for a proportionate share of the plan's entire unfunded liability. Finance staff sent a bulletin to employers to make them aware of the exposure drafts and how these rules, if they become standards, will impact them. The bulletin also gave employers information about how to submit written comments to GASB.

Benefit Counselors Are on the Road Again
Benefits counselors took to the road for fall field counseling the week of Aug. 15. The fall season includes 26 locations around the state. Scheduling for the available appointments began in July with nearly 1,300 members scheduling appointments at one of the first 11 locations. Internet scheduling is still popular, with half of the appointments being scheduled through the STRS Ohio Web site. Counselors will be available to meet with more than 4,600 members at the various locations around the state during the next three months. This is a 30% increase in capacity compared to fall 2010.

Express Scripts Inc. and Medco Health Solutions Sign Definitive Merger Agreement
Express Scripts Inc. (ESI) and Medco Health Solutions Inc. announced recently that they entered into a definitive merger agreement. The transaction is targeted to close in the first half of 2012. However, monopolistic concerns and scrutiny as to whether regulatory review will approve the merger have been raised.

Under the terms of the definitive merger agreement, ESI management is sustained and becomes the executive driving force. STRS Ohio, as a client of ESI, expects little if any adverse impact to enrollees. Looking ahead, ESI should have opportunity to leverage additional dispensing facilities, augment clinical pharmacy services and potentially enhance volume discount negotiations.