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The Employees Retirement System of Texas (ERS) Board of Trustees and Investment Advisory Committee (IAC) met March 11, 2020. A brief recap of the meetings follows. You can find more information, including the presentation slides and links to meeting materials and video recordings, on the ERS website.
The next joint meeting of the ERS Board and IAC is scheduled for Wednesday, May 20.
Audit Committee
Representatives of the State Auditor’s Office reported that there were no issues with ERS’ Fiscal Year 2019 financial reports. The auditors did find one error, which ERS corrected before issuing its financial statements; ERS has taken measures to avoid similar errors in the future.
Tony Chavez, Tressie Landry and Jonathan Puckett, director, manager and project lead, respectively, of ERS’ Internal Audit, presented findings from the 2019 IT Governance Review. Among other observations, Puckett noted that ERS’ IT Governance processes are aligned with best practices. However, the review found that IT Governance could improve how it identifies and reports on performance metrics.
Joint Board and IAC meeting
Hixson nomination approved
Milton Hixson was appointed to the Investment Advisory Committee for a three-year term beginning March 1, 2020 and ending March 31, 2023.
Investment updates
Tom Tull, ERS Chief Investment Officer, along with a representative of NEPC (ERS’ general investments consultants), reviewed ERS' asset allocation and implementation assumptions. Despite the current uncertainty and volatility in the marketplace because of global events, Tull stated that the ERS Retirement Trust Fund is positioned to weather the turbulence in the current environment. Tull acknowledged that any asset allocation and implementation assumptions need further discussion before the Board takes any action.
Also reviewed: the investment performance for the last quarter of 2019. The Fund's assets increased from $26.87 billion to $29.41 billion in the past calendar year, which includes an $866.9 million investment gain in the fourth calendar quarter of 2019. Over the past 10 years, the Fund has outperformed the policy benchmark by 0.2%.
Carlos Chujoy, ERS’ risk officer, discussed global events that had a positive impact on investments, but said some “headwinds” led to a mixed picture in the last quarter of 2019. Acknowledging growing concern about COVID-19, Tull indicated that the ERS investment team is evaluating how it can capitalize on market volatility.
ERS’ John Streun, director of Global Public Equity, Lauren Honza, external advisor portfolio manager, and Michael Clements, chief trader, gave the annual public equity update. The outlook for Global Equity in 2020 is still positive, but ERS should expect far more moderate returns relative to 2019.
Nick Maffeo, hedge funds portfolio manager at ERS, was joined by representatives from Albourne Partners to update the Board on the Opportunistic Credit Program Annual Tactical Plan for Fiscal Year 2020. The Board and the IAC approved the plan.
Experience study preliminary findings
Ariana Whaley, ERS’ pension policy analyst, along with representatives from Gabriel, Roeder, Smith & Company (GRS), explained the pension experience study process and presented preliminary results. GRS found that the current 7.5% investment return rate assumption is too high and will recommend that the Board approve lowering it. The Board will review and vote on final recommendations during its May Board meeting. If they adopt the new assumptions, ERS will start using them moving forward in preparation for the upcoming legislative session, including the Legislative Appropriation Request and the annual valuation.
Investment compliance updates
Aaron Ismail, investment compliance officer at ERS, presented the annual investment compliance report. Ismail noted a plan in the next year to expand compliance monitoring efforts in areas such as alternative investment approval, investment parameters, and employee gifts and entertainment policies.
Ismail, who was joined by an NEPC representative, also updated the Board on progress in meeting mandates established in Senate Bill 322, which requires Texas public retirement systems with at least $100 million in assets to complete an Investments Practices and Performance Evaluation every three years.
Contracts awarded
The Board approved ERS staff’s recommendation to award the contract for global custody services to the Bank of New York Mellon (BNY Mellon).
The Board approved ERS staff's recommendation to award the contract for the private equity consultant services to TorreyCove Capital Partners LLC.
Board of Trustees meeting
Tobacco user status will include e-cigarettes and vaping
Keith Yawn, ERS Director of Strategic Initiatives, presented a proposal to amend the definition of “tobacco product” in the Texas Employees Group Benefits Program (GBP) tobacco policy to include electronic cigarettes and vaping products. The change in definition would mean participants who certify ongoing use of such products would have to pay an additional Tobacco User Premium of $30 per month. The Board approved the proposal, and impacted participants should make sure their tobacco certifications are updated by September 1, 2020. The communications campaign about this change will begin this spring. ERS will revise related forms, instructions and systems during the 2020 Summer Enrollment period.
Texas Employees Group Benefits Program (GBP) Update
ERS’ Director of Group Benefits Diana Kongevick, Blaise Duran of ERS’ Actuarial and Reporting Services, along with a representative of Rudd and Wisdom (ERS’ insurance actuarial firm), provided an update on the GBP:
- In the self-funded HealthSelectSM plans, the FY19 medical trend is better than reported at the December Board meeting. ERS expects the FY20 medical trend to be slightly higher than historic averages. However, the combined FY20 trend (medical and pharmacy) is expected to be lower than the historic average resulting in favorable experience in FY20.
- Duran presented the HealthSelect of Texas® non-financial medical plan key performance measures, reviewing the following indicators: network performance, competitiveness of benefits, utilization of benefits and participant satisfaction with the health plan.
While the established performance measures are specific to HealthSelect medical plans, future enhancements will include non-financial performance measures for other GBP plans.
Texa$aver 401(k)/457 program updates
Georgina Bouton, assistant director of Group Benefits and Tom Nun, Portfolio Strategist from Great-West Investments, joined Kongevick to give the first annual Texa$aver performance review. As of December 31, 2019, the program’s assets under management totaled $3.6 billion, with 73% of those assets in the 401(k) plan and 27% in the 457 plan.
Nora Alvarado, manager of voluntary income plans in ERS’ Group Benefits Division, and Duran joined Kongevick in proposing a reduction to Texa$aver fees. The Board approved the proposal, which results in a 15% reduction in participant fees, effective May 1, 2020.
ERS Agency update
ERS' Executive Director Porter Wilson provided information on key agency activities, including:
- legislative activities and hearings;
- development of the agency’s FY21-25 Strategic Plan;
- efforts to manage calls to ERS Customer Benefits despite staffing challenges; recent mandated publications:
- ERS employees’ participation in the Survey of Employee Engagement; and
- ERS employees’ participation in the 2020 Get Fit Texas State Agency Challenge.
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