December joint ERS Board-IAC meeting highlights

The Employees Retirement System of Texas Board of Trustees met December 8, 2020. The Board met jointly with the Investment Advisory Committee (IAC) on December 9, 2020. A recap of the meetings follows.

Most notably, ERS’ pension actuaries emphasized the serious problems related to the pension funds’ depletion and need for reform. Read their presentation, the summary of the current pension valuation or the full pension funding report. In addition, representatives of Moody’s Investors Service discussed how weak pension-funding practices could negatively affect the state’s credit rating; read their presentation.

You can find more information, including the presentation slides and links to meeting materials and video recordings, on the December 2020 Board meeting page of the ERS website.

The next joint meeting of the ERS Board and IAC is scheduled for March 10, 2021.

Tuesday, December 8

Audit Committee meeting

Tony Chavez, director of ERS’ Internal Audit, briefed the Board on results of an audit of several incentive compensation plans, including the one in place at ERS, by the State Auditor’s Office (SAO).  The SAO found that ERS made no errors and followed policies and procedures for calculating and awarding incentive payments, but recommended that ERS continue to strengthen how it documents its calculation and review processes.

Internal Audit Manager Tressie Landry and David Friedenberg, manager, Weaver (ERS‘ co-sourced audit firm), presented results of the COVID-19 IT Review. That engagement analyzed ERS’ response to the unexpected need to transition a majority of its workforce to work-at-home status. The review revealed that ERS’ Information Systems division was successful in identifying employees’ equipment and support needs for working successfully in their new environment.

Jonathan Puckett, Internal Auditor, presented results of the Survivor Benefits Audit, conducted to determine if survivor benefits processing follows statutory requirements for timeliness and accuracy. The audit found no issues with accuracy, but recommended that ERS improve processes to better align with timeliness requirements.

Karen Norman, Internal Auditor, presented results of the Texa$aver Program Audit. The 401(k) / 457 program, funded entirely by participants, received high marks for offering high-quality, diversified investments and for service delivery. The audit findings did recommend that the Texa$aver Program establish policies to guide how participant fees are developed and a framework for future fee analysis.

Chavez then presented the results of the Annual Audit Performance and Quality Review. Overall, Internal Audit received the highest rating possible from an external peer review.

Board of Trustees meeting

ERS rule amendment

The Board adopted amendments to the Texas Administrative Code Chapter 63. The amendment allows ERS to collect signatures required of potential candidates for election to the Board through a secure and efficient electronic verification process. The Board also approved the request to no longer use Social Security numbers to verify voters’ identities.

Trustees Election Calendar

In related action, Bernie Hajovsky, ERS’ director of Enterprise Planning, presented the proposed 2021 Board of Trustees election calendar, which the Board approved. The election will fill the seat currently held by Ilesa Daniels, with a six-year term beginning September 1, 2021. The election calendar will be available on the ERS website in the first quarter of 2021.

Board Self-evaluation

Hajovsky also presented results of the Board’s recent self-evaluation survey. As part of the discussion, trustees requested better opportunities to communicate with ERS members and stakeholders and get input on ERS-related issues. 

Group Benefits Advisory Committee report

Hajovsky and Janet Bezner, Ph.D., chair of the Group Benefits Advisory Committee (GBAC), reported on GBAC activities in 2020, which included:

• hearing testimony about the value of offering fertility benefits,
• analyzing benefits satisfaction survey results and
• reviewing programs and products available through the Discount Purchase Program (DPP).

In 2021, the GBAC hopes to focus on various program topics, including:

• analysis of fertility coverage design and costs, and
• potential incentives for wellness program participants.

The Board voted to appoint the following individuals to the GBAC, effective January 1, 2021:

• Barbara Cherry, Texas Tech University Health Sciences Center
• James Dobbins, retiree (current GBAC member, reappointed)
• Megan LaVoie, Office of Court Administration (current GBAC member, reappointed)

Texas Employees Group Benefits Program health plans

ERS’ Director of Group Benefits Diana Kongevick and Blaise Duran, Manager of ERS’ Actuarial and Reporting Services team, reported on FY20 cost trends for the Texas Employees Group Benefits Program (GBP) health plans. Duran noted that the trends were lower than expected, driven in part by reaction to the spread of COVID-19. A significant number of health plan participants didn’t use benefits for non-urgent health matters as they normally would have. ERS’ health insurance contingency fund balance remains sound, even with uncertainty in the number of pandemic-related—and other—medical issues that likely will occur in PY21.

Response to COVID-19

Health Plan Operations Manager Lauren Russell reported on changes made in response to the pandemic, which included temporarily waiving some copays, deductibles and coinsurance for non-COVID-19 related medical and mental health telemedicine and virtual visits.

Group Benefits Manager Nora Alvarado updated the Board on how the CARES Act helped provide financial relief to Texa$aver^SM 401(k) / 457 Program participants.

Kongevick then briefed the Board on administrative changes to the GBP’s mental health network. BCBSTX began administering the services on September 1 for participants enrolled in HealthSelect of Texas^® health plans instead of Magellan, effectively adding more than 10,000 mental health providers to the network.

Contract compliance in ERS plans

Kongevick, Russell and Alvarado reported on the FY20 performance ratings of the third-party administrators (TPAs) and insurers of ERS plans, according to requirements of their contract.

ERS’ Human Resources Director DeeDee Sterns and ICP Program Specialist Jamey Pauley presented the annual overview of the ICP. Based on a review by executive management and other stakeholders, HR recommended several material changes to the plan, which the Board will vote on during its August 2020 meeting.

Updates to Texa$aver

Kongevick and Georgina Bouton, assistant director, Group Benefits, proposed updates to the Texa$aver Product Review Committee Charter, as well as for changes to the program’s investment policy that they presented to the Board during its August meeting. After discussion, and minor modifications of the investment policy proposal, the Board approved the recommendations.

Actuarial valuation of retiree health insurance benefits

ERS’ Chief Financial Officer Machelle Pharr and representatives of Rudd and Wisdom (ERS’ consulting actuary for the Group Benefits Program) presented the FY20 actuarial valuation of ERS’ retiree health insurance program, also known as other post-employment benefits (OPEBs). The valuation finds that ERS can expect a 15% reduction in health claims costs, primarily a result of much lower premiums for coverage through the HealthSelect^SM Medicare Advantage Plan preferred provider organization (MA PPO). About 75% of retirees who get health care coverage through the GBP are enrolled in the MA PPO.

Executive director’s update

Executive Director Porter Wilson, Deputy Executive Director Cathy Terrell and Human Resources Director DeeDee Sterns provided updates on agency activities over the last quarter, including:

• Legislative activities
• Information on the FY22-23 Legislative Appropriations Request
• Plan Year 2021 Fall Enrollment activities
• the Retirement-Insurance System Enhancements (RISE) project
• the Survey of Employee Engagement results
• the State Employee Charitable Campaign, and
• The construction status of the 1836 San Jacinto building

2021 meeting dates

The Board set the following dates for 2021 Joint Board and Investment Advisory Committee meetings: March 10; May 26; August 25; and December 7-8.

Wednesday, December 9

Joint Board and IAC Meeting

Retirement program actuarial valuations and financial status review

ERS’ Pension Policy Analyst Ariana Whaley and representatives of ERS’ pension actuarial firm, Gabriel, Roeder, Smith & Company (GRS), presented the 2020 actuarial valuations of ERS’ retirement funds. They noted that the outlook for the funds is similar to last year:

• The ERS Retirement Trust Fund is projected to run out of money in about 40 years.
• The Law Enforcement and Custodial Officers Supplemental Retirement Fund (LECOSRF) is projected to run out of money in fewer than 20 years
• The Judicial Retirement System Plan 2 (JRS 2) fund is projected to run out of money in about 40 years.

Immediate changes are needed to prevent the depletion of the funds and further delay will cost the State significantly more money over time, since there will not be time for the conttributions to be invested and earn money to offset the overall cost of the benefits.

Education presentation: Credit ratings

Representatives of Moody’s Investors Service, which rates state’s credit worthiness, supported the consensus that there are negative consequences to underfunding pension plans. Moody’s noted that, while Texas’ credit rating remains strong (it currently holds the highest bond rating), weak pension-funding practices and other factors are challenges to the state’s rating and could lead to future rating reductions.

Updates to Texa$aver

Tom Nun, a representative of Great West Investments, joined Kongevick and Bouton to present a report on the recent plan analysis work by the Texa$aver Product Review Committee (PRC). The Board approved a recommendation from the PRC and staff to remove one venture fund from the Texa$aver program, due to performance concerns, and transfer the associated assets to an institutional index fund.

Review and discussion of environment, social and governance factors

ERS’ Chief Investment Officer Tom Tull, joined by Benjamin Schuman, ERS’ Global Equity Manager, introduced how environment, social and governance (ESG) factors could affect ERS’ investment strategies. Moving forward, ERS’ Investments Division will continue to monitor ESG to determine if, when and how to consider ESG-oriented strategies when evaluating plan assets. Tull and Schuman made it clear that maximizing the financial returns of trust fund assets would continue to be the primary factor in all investment decisions made by the agency.

Update on risk and opportunities

Carlos Chujoy, director of Risk Management and Applied Research, reviewed the major market factors that affected investment performance in the third quarter of FY20. These included:

• the COVID-19 resurgence around the world, which continues to drag down economic recovery;
• the U.S. election and a risk of its outcome being contested; and
• delayed fiscal stimulus.

Chujoy also noted that the Trust is poised to take advantage of the current bull market and that ERS can expect improvement in its performance in the coming months.

Global public equity market update

John Streun, ERS’ Director of Global Public Equities, reported that the global public equity portfolio saw a positive return of 8.5% for FY20. Funds in the global public equities portfolio represents 39% of the Trust.

Mike McCrary, external management investment analyst, reported on progress of current and future searches for external managers of portfolios for which ERS does not have internal expertise.

Michael Clements, chief trader, reported on the total commissions for internally traded portfolios.

Streun wrapped up with an overview of how COVID-19 affected the global equity program.

Emerging Manager Program update

External Management Portfolio Manager Lauren Honza briefed the Board on the status of ERS’ Emerging Manager Program. As of August 31, 2020 ERS had more than $1.6 billion invested or committed with emerging managers.

Goals for the Emerging Manager Program in 2021 include:

• focusing on relevant direct relationships with emerging managers in the ERS portfolio and
• promoting best practices by working with other investors.

ERS will co-host the virtual 2021 Texas Emerging Manager Conference on January 26, 2021.

Chief investment officer’s report

ERS’ Chief Investment Officer Tom Tull acknowledged the current challenging investment environment and presented opportunities for 2021. These include:

• developing opportunistic credit and infrastructure portfolios,
• allocating funds to grow the hedge fund program and
• enhancing how ERS reports risk management to the Board.

Tull also presented the Investments Division’s major initiatives for FY21. These include:

• supporting legislative initiatives to address unfunded pension liabilities,
• exploring new investment opportunities,
• refreshing the pool of external advisors/managers while refining the mix of internal and external management,
• achieving savings by negotiating best economic terms,
• continuing to develop the Emerging Manager Program
• leveraging external relationships for resources and opportunities, and
• enhancing the Investment division’s career path development, communication, succession planning and team development.

Executive Director
Porter Wilson

Board of Trustees

I. Craig Hester, Chair; Catherine Melvin, Vice-Chair; Brian Barth;
Ilesa Daniels; James Kee, Ph.D.

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