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Dec. 7
Audit Committee Meeting
Tony Chavez, director of ERS’ Internal Audit, joined by Internal Audit Manager Tressie Landry and Internal Auditors Jonathan Puckett and Greg Magness, briefed the Board on results of three audits:
- Private real estate investments—Conducted to see if investments in private real estate were in accordance with ERS Investment Policy, this audit led to an overall satisfactory rating. One area was rated “Needs improvement” with two observations:
- Active Risk Management—Puckett observed that risk management guidelines and review of risk limits should be formalized.
- Governance—Improved organization and sharing of information would allow stakeholders to better discuss long-term performance of the asset class.
- State of Texas Dental Choice PlanSM—This audit was conducted to see if the Texas Employees Group Benefits Program’s (GBP’s) dental PPO insurance plan delivers member benefits properly. Landry reported that the audit was rated satisfactory overall, with the following suggestions that can help ensure participants get maximum costs savings, Landry said:
- ERS should establish a way to determine and document if projected in-network service discounts are realized.
- The third-party administrator of the plan should provide cost trend analysis in its annual report.
- Performance measure management—This audit was conducted to determine if ERS adequately reports required performance measure information to the Texas Legislative Budget Board. Magness reported that the overall result of the audit was satisfactory, but did have some recommendations:
- Ensure each performance measure had documented policies and procedures related to each part of the performance measures process outlined by the State Auditor’s Office in their Guide to Performance Measure Management.
- Update calculations to match approved methodologies.
Chavez then presented the results of the Annual Audit Performance and Quality Review. Overall, the Internal Audit division at ERS meets its mission to provide comprehensive and objective audits of the agency’s internal operations and program management. Chavez noted that the Internal Audit Division does a good job of ensuring its audit plan aligns with ERS’ strategic goals and provides audit results efficiently.
Board of Trustees Meeting
Group Benefits Advisory Committee
Bernie Hajovsky, ERS’ director of Enterprise Planning, reviewed the Group Benefits Advisory Committee’s (GBAC’s) mission. He then introduced GBAC member Megan LaVoie, of the Texas Office of Court Administration, who reported on GBAC activities in 2021. They included discussion on:
- the 2021 legislative session,
- COVID-19’s impact on health plans and
- fertility benefits and coverage.
In 2022, the GBAC hopes to focus on various program topics, including:
- the GBP’s wellness program and
- virtual nutrition education.
Later in the meeting, Board approved two reappointments to the GBAC. Their new three-year terms begin in 2022:
- Janet Bezner, professor and chair, Department of Physical Therapy, Texas State University, and current chair of the GBAC
- Gary White, retiree, an original GBAC appointee
ERS rule amendments
Keith Yawn, director of ERS’ Strategic Initiatives Division, presented proposed amendments to Texas Administrative Code Chapters 61, 63 and 65. The change to Chapter 61 updated words and terms used when talking about ERS and its Board. One noted change within Chapter 63: retirees can run in a Board election for the first time in 2023. ERS employees must not have worked for the agency for at least six years before they are eligible to run for election. The Board approved the proposed amendments. The change to Chapter 65 clarified the duties of ERS’ executive director.
Assistant General Counsel Emily Miller of ERS’ Office of the General Counsel presented a proposal to re-adopt Chapter 69 with amendments. Among those amendments: an implementation of statutory provisions requiring ERS to terminate the annuities of elected officials or corrections officers convicted of qualifying felonies.
ERS Director of Group Benefits Diana Kongevick proposed amendments to Chapter 85 to update TexFlex guidelines that resulted from COVID-19 relief options permitted under federal regulations.
The Board approved the proposed amendments.
Texas Employees Group Benefits Program health plans
Kongevick and Blaise Duran, manager of ERS’ Actuarial and Reporting Services team, along with Phil Dial of Rudd and Wilson, Inc., reported on FY21 cost trends for GBP health plans. Duran noted that combined medical and pharmacy trends were up by close to 12%, but that increase was skewed because of the lower-than-normal PY20 trend—a result of the global pandemic. In “normal” circumstances, the combined trends would be around 6%. ERS expects trends to return to normal in PY23 and beyond.
Another item of note: Based on claims data, HealthSelectSM had approximately 41,000 COVID-19-related cases in PY21, with an estimated cost of $126.9 million. The plan spent an additional estimated 20.7 million on tests and vaccine administration. The PY21 net cost of the pandemic is an estimated $85.9 million.
Duran stated that as vaccine rates rise, PY22 should see fewer cases than in PY21.
Plan administrator/insure performance guarantees
Kongevick was joined by Group Benefits Division colleagues Georgina Bouton, assistant director, and Nora Alvarado, manager of voluntary income plans, to report on how insurers and third-party administrators (TPAs)—or “vendors”—met performance guarantees (PGs) outlined in their contracts.
Bouton explained that ERS uses PG metrics to ensure that TPAs meet regulatory standards and industry best practices. In FY21, contract compliance was high—most TPAs and insurers had only minor or moderate issues. Two met all PGs:
- Superior Vision Services, Inc., for the State of Texas VisionSM plan
- Securian (Minnesota Life), for life insurance and accidental death & dismemberment (AD&D) coverage
Award of benefits consultant contract
Kongevick and Duran explained the need for benefits consultant services to support the agency with projects related to GBP health benefits. Gabrielle Schreiber, director of ERS’ Office of Procurement and Contract Oversight, described the process for determining the best candidate for the contract. Based on that process, ERS staff recommended Willis Towers Watson US LLC. After some discussion, the Board approved the motion.
Actuarial valuation of retiree health insurance benefits
ERS’ Chief Financial Officer Machelle Pharr and representatives of ERS’ consulting health care actuarial firm, Rudd and Wilson, presented the FY21 actuarial valuation of the state’s retiree health insurance program, also known as other post-employment benefits (OPEBs). The total OPEB liability increased 3.8%, primarily due to higher pharmaceutical costs and a decrease in the 20-year tax-exempt general obligation bond discount rate. In addition to current retirees, the total OPEB liability includes the projected cost of benefits to be paid to active employees during their retirement and vested non-contributing members.
HIPAA training
ERS’ General Counsel Cynthia Hamilton introduced a partner with Akerman LLP, who provided ERS trustees with required training on provisions of the Health Insurance Portability and Accountability Act of 1996 (HIPAA).
Executive director’s update
ERS Executive Director Porter Wilson provided updates on agency activities over the last quarter, including the following.
- Preparing for implementation of the new cash balance (Group 4) retirement benefit, enacted as part of Senate Bill 321 and applying to new employees hired on or after Sept. 1, 2022
- Efforts by ERS to improve certain processing times and call answer time metrics
- Plan Year 2022 Fall Enrollment activities
- The State Employee Charitable Campaign
- Cynthia Hamilton’s appointment as ERS general counsel effective Oct. 1, 2021
2022 meeting dates
The Board set the following dates for 2022 Joint Board and Investment Advisory Committee meetings.
- March 9
- May 11
- Aug. 24
- Dec. 6 and 7
Dec. 8
Joint Board and IAC Meeting
Texa$aver Product Review Committee recommendations
Kongevick, Bouton and a representative of GWI Portfolio Strategist Inc., presented a recommendation from the ERS Product Review Committee to remove the current actively managed US small cap equity fund from the Texa$averSM 401(k) / 457 Program, with the assets to be transferred to a passive US small cap equity fund. The Board and IAC approved the plan.
Texa$aver program compliance and operational updates
Alvarado joined Kongevick and Bouton to report on the PGs for the Texa$aver TPAs. Of note: Empower Retirement was given three critical PG assessments related to a delay in correcting file transfer/data errors. Most errors were due to newly hired state employees not being automatically enrolled into the 401(k) plan, and that issue has been resolved.
Chief investment officer’s report
ERS’ Chief Investment Officer David Veal began his report by discussing ERS’ investment mission and strategy. He stated that the ERS Retirement Trust Fund (the Trust) outperformed the policy benchmark across all time horizons; the Trust outperformed the long-term public index across shorter time horizons.
Investment performance for the third quarter of CY21
Veal was joined by a representative of NEPC (ERS’ general investments consultant), who reported that, for the year ending September 30, 2021, the ERS Retirement Trust Fund outperformed the policy benchmark by 7.7%.
In addition:
- The Trust market value on September 30, 2021 was $34.95 billion; it includes a $7.2 billion investment gain in the calendar year and a $919.0 million investment gain in the third calendar quarter of 2021.
- On average over the past 10 years, total fund returns outperformed the policy benchmark by 0.75%, as well as the fund’s assumed actuarial rate of return of 7.0%.
- The private equity asset class saw the best performance with a return of 52% for the year ending September 30, 2021.
Update on investment risk and opportunities
Carlos Chujoy, ERS’ director of Risk Management and Applied Research, reviewed the major market factors that affected investment performance in the third quarter of FY21. These included:
- concerns about slower U.S. economic growth and high inflation;
- fears of a worsening environment, worldwide; and
- China’s economic slowdown.
Chujoy also noted that the diversified nature of the ERS portfolio, along with prudent management of the Trust assets, should help ensure that the Trust will continue to grow, albeit at a slower pace than in the past year.
Retirement program actuarial valuations and financial status review
ERS’ Pension Policy Analyst Ariana Whaley and representatives of ERS’ consulting pension actuarial firm, Gabriel, Roeder, Smith & Company (GRS), presented the Fiscal Year 2021 actuarial valuations of ERS’ retirement plans. They noted that, although SB 321 would not impact the status of the ERS plan until 2022, it had already improved the outlook of that plan by changing the narrative from fund depletion to full funding.
In passing SB 321, the 87th Texas Legislature guaranteed that the ERS Plan would get annual payments from the state (called “legacy payments”), in addition to the state and agency payroll contributions. As a result, the funded ratio is expected to improve every year until the unfunded actuarial accrued liability (UAAL) is eliminated by 2054. (The legislation also requires ERS to implement a new retirement benefit structure for employees starting work at Texas agencies on or after September 1, 2022.)
Key points from the August 2021 valuation:
- The ERS plan UAAL decreased slightly—from $14.7 billion as of Aug. 31, 2020 to $14.1 billion as of Aug, 31, 2021. This is the first year-to-year decrease in the UAAL since 2007.
- A declining UAAL means the package of benefits, funding and investments is strengthening in comparison to the target.
- The ERS plan funded ratio—actuarial value of assets divided by the actuarial accrued liability—increased from 66.0% to 68.0%, as of Aug. 31, 2021, a result of the strong investment performance from FY21.
- The ERS plan now has an amortization period of 33 years, instead of a fund depletion date.
- However, the two other plans, LECOS and JRS2, continue to have depletion dates and require increases in funding to stabilize the plans. Current contribution levels to the LECOS and JRS2 are not sufficient to sustain the plans; benefit security will continue to decline without legislative contributions reform over the current schedules.
Global public equity market update
John Streun, director of Internal Public Equity, and Lauren Honza, director of External Public Equity, delivered the annual report on ERS’ global public equity program. They reported that global equity represents 57% of the Trust (assets in public equity at 39%; assets in private equity, 18%). The global public equity portfolio saw a one-year return of 30%. The internal public equities portfolio program underperformed its benchmark by 0.3% on a trailing five-year basis due to overweighting of international equities and an underweighting to domestic large-cap equities.
External advisor program
Honza gave an external advisor program update. She reviewed the Investments Division’s process for finding suitable external advisors for the global equity program. As of August 31, 2021, 30% of the global equity portfolio is managed by external advisors. The external public equities portfolio outperformed its benchmark by 0.86% on a trailing five-year basis as the substantial majority of managers delivered positive excess returns.
Emerging Managers Program
Honza also briefed the Board on ERS’ Emerging Manager Program. As of September 30, 2021, ERS had more than $2.3 billion invested with emerging managers. This figure is well above the System's goal of having at least 10% of externally managed assets with emerging managers.
Goals for the Emerging Manager Program in 2022 include:
- Maintaining the 10% target for externally managed assets held by emerging managers
- Continuing to collaborate with fund-of-funds
- Promoting best practices by working with other investors.
ERS will co-host two conferences in January 2022 for emerging managers:
- The Real Estate Emerging Managers Summit, in Austin
- A virtual Emerging Manager Conference on Jan. 19
Education presentation: Global Demographic Trends and Their Implications for the ERS Investment Program
Michael Yuan, portfolio manager, and Veal explored key trends in birth rates, life expectancy, productivity and the labor force. They reviewed how these trends affect key drivers of investment returns such as inflation and interest rates, noting that long-term institutional investors like ERS must monitor these trends regularly and factor them into investment and employment decisions.
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