By Kevin Olineck
PERS Director
You may have read about the Oregon Investment Council (OIC) in our previous newsletter in April, or perhaps you’ve read about it on the PERS website.
If you have, then you already know OIC oversees the investment of the Oregon Public Employees Retirement Fund (OPERF) as well as other state funds.
But did you know the council has four governor-appointed members? Two of them ex officio: Oregon’s state treasurer and the PERS director (me).
Ex officio means that we are members of the council because of the positions we hold with Treasury and PERS.
One thing the PERS director does not have as a member of OIC is voting power, per Oregon Revised Statutes (ORS) 293.706(5).
Instead, my OIC role involves providing updates on administrative issues discussed during OIC meetings, such as how implementation of Member Choice went in 2021 and the number of members who chose to change their Individual Account Program (IAP) target-date fund. I also give updates or answer questions related to the Oregon Savings Growth Plan (OSGP), whose investment activities are overseen by the OIC as well.
By law (ORS 293.721 and ORS 293.726), OIC creates policies governing various aspects of investment, reinvestment, and management of money in OPERF and other state funds.
From an overall PERS system perspective, OIC is responsible for the earnings portion of the pension funding equation (see graphic above), while the PERS Board is responsible for balancing the benefits side by setting contribution rates on a biennial basis.
One of the primary roles that the PERS director plays on the council is to be the link between the various parts of the pension equation when it comes time to set policies for the investment of the funds.
For example, one of OIC’s biggest responsibilities is its annual review of investment asset classes in OPERF and how much is invested into each asset class. Asset classes include public and private equities (e.g., stocks), fixed income (e.g., bonds), real estate, etc. OIC’s decisions about assets and allocations ultimately drive the expected rate of return for OPERF.
This expected rate of return is used in an annual process to determine PERS’ “funded status,” which measures the pension system’s financial health by comparing projections of how much money the system will have versus how much it is expected to pay out in retirement benefits within a certain timeframe. A biennial process, which takes place in odd years, involves the PERS Board voting on an assumed earnings rate and other actuarial assumptions that are used to calculate funded status and turn it into a percentage (see page 21 of PERS by the Numbers).
The most recent funding status reported to the PERS Board is 80% as of December 31, 2021. Actuarial consulting firm Milliman submitted the figure to the board during its July 22 meeting. When employer side accounts are included, the new funded status increases to 86%. Contribution rates for the 2023-2025 biennium are based on these valuation results and will be formally approved at the board’s next meeting, September 30.
During the assumption-setting process, PERS Board and OIC members meet jointly to ensure both groups understand how the expected and assumed rates impact the overall pension equation. These two rates may differ depending on different assumptions the board and council use.
In 2021, for example, OIC set an expected rate of return of 6.8%, while the PERS Board set an assumed rate of 6.9%. While both entities agreed that the real rate of return should be 4.5%, OIC adopted an inflation rate of 2.4%, whereas the board adopted an inflation rate of 2.5%. These differing inflation rates resulted in the rates OIC and the board set: 6.8% and 6.9%, respectively.
Beyond OIC meetings, I meet regularly with Rex Kim, chief investment officer with Oregon State Treasury, who is my counterpart, to ensure there is effective communication and collaboration between our two interrelated agencies.
Treasury is responsible for managing PERS investments according to the policies established by OIC.
PERS is responsible for maintaining an adequate balance of funds for estimated benefit payments and administrative costs, while being able to maximize the amounts invested. To accomplish this, PERS provides Treasury with cash-flow forecasts, which then impact Treasury’s decisions about how to buy and sell investments each month in order to meet these cash-flow requirements.
When there is an $8-billion-a-year cash flow between PERS and Treasury, it is important to have effective communication and collaboration.
I hope this discussion of my role with OIC has given you some insights into the collaboration that occurs between PERS, the agency; OIC; and Treasury and how that collaboration helps to support the pension system you belong to.
To learn more about the partnerships involved in your pension system, check out our How does PERS work? video.
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