Ken Ruth: A question for the STRS Board

Nick Treneff to Ken Ruth, March 29, 2013
Subject: RE: a question for the STRS Board

Dear  STRS Member:  

Our executive director, Michael Nehf, has asked that I respond to your recent message.  In it, you expressed your concerns about the payment of performance-based incentives (PBIs) to investment associates.  I appreciate you sharing your concerns with us.  
We at STRS Ohio understand that our members and the public at large are interested in seeing a well-managed retirement system that maximizes investment returns and minimizes expenses in a responsible manner. Recent media reports unjustly criticized the investment program and compensation practices at STRS Ohio. STRS Ohio is a $67 billion pension fund whose purpose is to provide retirement security to Ohio's public educators.  About 75% of members' benefits are provided by investment returns, so our Retirement Board, staff and all stakeholders have a strong interest in maximizing investment performance.  Here are a few key points that you should know about the investment program:

•  The media reports indicated that STRS Ohio is paying investment incentive payments while the fund is losing money.  It's important for our members and stakeholders to know that investment returns are positive over both short- and long-term time periods.  STRS Ohio currently pays about $6 billion in pension and health care benefits each year to retirees and beneficiaries of the system, while taking in about $2.9 billion in contributions from members and employers.  This results in more than $3 billion per year in negative cash flow.  During fiscal year 2012, the total fund return of +2.34% beat the system's benchmark return, but was not enough to offset the negative cash flow from the pension and benefit payments.  

•  STRS Ohio runs a very cost-effective investment program, managing about 75% of its investments using internal managers -- a higher percentage than any other Ohio pension fund, as well as most others in the country.  Studies by CEM Benchmarking have shown that STRS Ohio has saved more than $900 million during the past 10 years by managing these funds with internal staff versus using more costly external managers. STRS Ohio pays a higher total incentive amount than the other Ohio systems primarily because it has more in-house investors, which is less expensive to the members overall.  The most accurate way to measure these programs is by including both internal and external investment costs or total investment costs.  That is what the CEM Benchmarking study does, and in 2011, this study showed that STRS Ohio's total investment cost was the lowest in its peer group. 
•  STRS Ohio's 10-year total fund return is among the best in the industry. A recent report by the State Teachers Retirement Board's outside investment consultant, Callan Associates, shows STRS Ohio's 10-year total fund return of 8.37% ranked in the top 20 percent of the Callan Public Fund Sponsor Database.  As a long-term investor, it's important to note that this return exceeded STRS Ohio's long-term actuarial assumed rate of 7.75%.  STRS Ohio's 30-year rate of return of 9.3% is comfortably ahead of the assumed rate of return.  
•  STRS Ohio's compensation program is in line with other private and public institutional investors.  Eligible investment staff has a compensation program that is comprised of a base-pay component and a variable or "at risk" component that is paid only when investment performance exceeds standard industry benchmarks.  These performance-based (PBI) plans are commonplace in the investment industry. Last April, the Retirement Board revised the PBI program for eligible Investment associates. The new program includes a graduated reduction of the incentive when the total fund returns are negative for a given year (the fiscal year 2012 return was +2.34%, though media reports stated that the fund lost money) and implements an additional cutback provision when the smoothed actuarial return is below 7.75%.

To maintain the current benefit structure in place for active and retired educators, STRS Ohio must manage a strong investment program designed to attract and retain top performers, although it must pay significantly less than private sector investment professionals.  STRS Ohio members and stakeholders should know that our investment program provides solid, professional investment management at below average cost.  

I know this is a lengthy response, but since you took the time to write to us I thought you deserved a detailed reply.  Your thoughts will be shared with STRS Ohio's senior staff and the board. And thank you again for writing.  

Sincerely,
Nick Treneff
Communication Services Director
STRS Ohio  

Ken Ruth to STRS Board, March 18, 2013

Subject: a question for the STRS Board

$38,000,000 in Bonuses since 2005!  HOW?  
I thought they were eliminated years ago until the overall fund topped $65 billion.  When/how was that proviso removed?  Behind closed doors?  
Let the sunshine in!  

Kenneth H Ruth,
Retired educator
Sidney, OH  45365