Tag Archives: VRS

VRS Hybrid Plan Drawing Even Fewer Contributions

Virginia Retirement System overall investment returns, all funds. Source: JLARC

The percentage of state employees making voluntary contributions to their own retirement pot, contributions which are matched with free money, has continued its rapid decline over the past year.  As of March 2019, fewer than half of state employees who should be investing in their own retirement are doing so, according to a Virginia Retirement System update Monday.

A year earlier, according to the comparable report given the Joint Legislative Audit and Review Commission and reported on Bacon’s Rebellion, 58 percent were contributing something and drawing in matching funds.  A year before that it was 79 percent.  Just how much money the 52 percent adding nothing this past year failed to invest, and how many matching dollars were therefore not captured, is not in the report.  Continue reading

Fully Funded? Not Even Close

stock prices2by James A. Bacon

Earlier this month the Virginia Retirement System (VRS) announced that it had generated a 15.7% return on its investment portfolio over the previous year, bringing its total assets to $66.1 billion. It’s always good news when the pension fund for 600,000 state and local employees and retirees goes up, not down. That’s money that state and local governments won’t have to extract from taxpayers.

But pension-fund investing is a game for the long haul, and Jeff Schapiro raises interesting questions in his column in the Times-Dispatch today. Did a decision after the 2007 stock market crash to shift some assets away from stocks and bonds into “alternative” investments like hedge funds leave more than $6 billion on the table?

Schapiro quotes Ed Burton, a former VRS chairman, who criticized the investment strategy, which had the effect of moving from a portfolio of 70% stocks/30% bonds to a more complex scheme equivalent to 65% stocks/35% bonds. As a consequence, the VRS benefited less from the Obama-era bull market in stocks than it could have. It also paid millions of dollars in higher fees charged by hedge fund managers.

While the VRS had a strong year last year, over the past three years its returns have averaged a more modest 8.6%.

Investment strategy can can be argued back and forth forever without ever resolving anything. Maybe the VRS board made the right decision, maybe it didn’t. But there’s a bigger issue that Virginians need to be thinking about. Markets go up and markets go down. For the past few years, aided by an expansionist Federal Reserve Board policy, markets have gone up. Perhaps stocks and bonds will depart from 300 years of history and never go down again. But a prudent man wouldn’t bet on it.

The VRS assumes that it can generate annualized investment returns of 7% for years to come. That assumption is actually more conservative than the investment returns assumed by many states, so the VRS board deserves credit for that. But the Commonwealth of Virginia’s assertion that the VRS will be “fully funded” by the 2018-2020 biennial budget is exceedingly fragile. For starters, the state’s definition of “fully funded” is 80% or more of what the actuaries say is needed to meet pension obligations, as Erik Johnston, director of government affairs at the Virginia Association of Counties, pointed out Monday at the annual conference of the Virginia Chapter of the American Planning Association.

I wonder if the bank would be happy with 80% of my mortgage payment?

The other question is what happens when the Federal Reserve Board reverses years of monetary stimulus, as it has indicated it will do. Everyone agrees that interest rates will go up. But nobody knows how much. That will depend in part upon the strength of the economy — stronger growth will drive up demand for credit and push interest rates higher.

When interest rates go up, the market value of bonds go down. The 30-year bull market in bonds will come to an end. A bear market in bonds also puts pressure on stock multiples (price-earnings ratios), which move inversely with interest rates. It is hard to see how any money manager can replicate the performance of the past few years. All it takes is a few years of sub-7% returns and the VRS goal of “fulling funding” the pension slips farther and farther into the horizon.

Hey, everything may work out just hunky dory. The VRS may be totally vindicated. But there is considerable risk that it will not. Nobody knows the future but we do know one thing: Each percentage point that the VRS falls short of its ROI goals for a $66 billion portfolio translates into a $660 million obligation for state and local government.

Forget FOREX, VRS’ problem is with active management

by Norm Leahy

The headline news is that Virginia and Florida are suing Bank of New York Mellon for “…cheat[ing] pension funds in those states by choosing improper prices for currency trades the bank processed for the funds.

But the real headline story that, so far, I’ve only seen posted here, is how Virginia’s public employee retirement system is paying handsomely — with retirees’ money — for investing in actively managed funds:

The Virginia Retirement System, or VRS, pays millions to Wall Street, as well as highly-paid internal managers, to oversee its $55 billion fund. The state paid $125 million more to fund managers in 2010 than it did in 2005, when the system first embraced a “more active” investment strategy. The strategy yielded results in 2011, as the fund grew nearly 20 percent, still $3.4 billion short of its pre-recession high.

The fund needs a 49 percent gain to make up for recession losses.

“The reason the fees are so high is because 89 to 90 percent of our investments are under active management,” VRS Director Bob Schultze said. “We have to go to outside firms that put out all of these results.”

This feeds into an old debate: whether actively-managed funds perform better over the long term than index funds:

The VRS could achieve similar long-term investment gains with an index fund, a computer generated investment scheme designed to react to market trends, according to Andrew Biggs, a retirement scholar at the conservative American Enterprise Institute.

“The whole point of active management is to try and outsmart the market,” he said. “But 75 percent of the time, active managers don’t beat the index funds. You can’t outsmart the market.”

Some large index funds have been able to churn out results similar to the system’s performance.

I remember having a long-running argument argument with the retirement fund managers at a former employer. They weren’t keen on index funds, preferring to stick with actively-managed funds that carried higher fees.

So I asked for information on the active funds’ holdings. When that data was provided, it was not surprising to find that funds which, by their names alone, would seem to have vastly different investment goals also tended to own shares in the same companies. But we could only see what the top ten holdings were — in the past. A complete list of current holdings was unavailable, nevermind how long those holdings had been in the portfolio. And tax considerations? Fuggedaboutit.

So what did active management provide? The promise of greater returns, but rarely greater than the index used as a benchmark. And at a far higher price, with less diversity, than those same benchmark index funds. But the idea that smart people were watching the market like a hawk every day, as opposed to a dumb index that just sat there, gave some of my colleagues great comfort.

It’s the same with the VRS. The state’s retirement plan took a huge hit coming out of the 2008-2009 market swoon. They turned to active management to try to cover the losses because they believed the smartest guys in the room would give them an edge. But that move has cost them a great deal — arguably, far more than the monies in question in the suit pending against Bank of New York Mellon.

So why does the VRS stick with active managers that cost a heckuva lot more? Sen. Roscoe Reynolds offers the classic response:

“If something went wrong, could you imagine the response from the public if we were relying on a computer? I can tell you it wouldn’t be good.”

Is SkyNet running the Russell 2000? Or the Wilshire 5000? Not yet. But there’s also no indication that the bright minds behind active investment strategies — and the costs they bring — do any better than the far cheaper, and in many ways far smarter, index approach.