December joint ERS Board-IAC meeting highlights
The Employees Retirement System of Texas (ERS) Board of Trustees and Investment Advisory Committee (IAC) met on December 6 and 7.
Most notably:
- The Board awarded the contract to provide pharmacy benefits management services for the HealthSelectSM Prescription Drug Program and HealthSelectSM Medicare Rx prescription drug program to Express Scripts, Inc.
- Over the past one-, three- and five-year horizons, the investment performance of the ERS Trust surpassed not only its strategic benchmark, but also all its peers.
- Caroline Cooley is leaving the Investment Advisory Committee after nine years of dedicated service.
A brief recap of the meeting follows. You can find more information, including the presentation slides and links to meeting materials and video recordings, on the December 2022 Board meeting webpage.
The next joint meeting of the ERS Board and IAC is scheduled for March 1.
Audit Committee meeting
Tony Chavez, director of ERS’ Internal Audit Division; Chuck Turner, director of ERS' Information Services Division; Tressie Landry, ERS’ Internal Audit manager; and a representative of Weaver IT Advisory Services briefed the Board on the results of the Disaster Recovery Audit.
Conducted to see if processes and procedures are designed to ensure that ERS’ key systems can resume function in the event of a disruption, this audit led to an overall satisfactory rating.
Chavez and Landry then presented the results of the Annual Audit Performance and Quality Review. Overall, ERS’ Internal Audit Division meets its mission to provide comprehensive and objective audits of the agency’s internal operations and program management. Chavez noted the division does a good job of ensuring its audit plan aligns with ERS’ strategic goals and provides quality audit results efficiently.
Board meeting
Rule amendment for Chapter 615 surviving spouse benefit
Bernie Hajovsky, director of ERS’ Enterprise Planning Office, and Robin Hardaway, director of ERS’ Customer Benefits Division, presented a proposed amendment to Texas Administrative Code Chapter 75. The change to § 75.2 will clarify the monthly benefit ERS will pay to eligible surviving spouses of certain first responders killed in the line of duty, as established by Texas Government Code Chapter 615. ERS proposed the rule change based on recent legislative action (Senate B 321). The Board unanimously approved the proposed amendment.
Texa$averSM 401(k) / 457 Program fees
Diana Kongevick, director of ERS' Group Benefits Division; Angelica Harborth, ERS’ manager of deferred compensation plans; and Blaise Duran, FSA, of ERS’ Actuarial and Reporting Services, presented proposed Calendar Year 2023 administrative fees for the Texa$aver 401(k) / 457 Program. Duran explained ERS does not receive appropriated funds from the Texas Legislature for the program’s administrative costs. Instead, program participants fund the program cost through payment of a monthly fee from their Texa$aver account(s) to cover recordkeeping and other program costs.
The Board approved ERS staff’s proposal to continue the flat $1.50 monthly administrative fee for Calendar Year 2023, effective Jan. 1, 2023.
Group Benefits Advisory Committee
Hajovsky and Janet Bezner, Ph.D., chair of the Group Benefits Advisory Committee (GBAC), reported on the GBAC’s 2022 activities, which included discussion of the following:
- the future of telehealth in a post-pandemic environment,
- possible changes to life insurance coverage,
- customer service challenges and
- potential adjustments to obesity prescription drug exclusions and to modernize member bariatric surgery benefits in the HealthSelect of Texas® plans.
The Board voted to fill vacated positions on the committee with the following appointments and reappointments, which ERS staff recommended after a nomination period in fall 2022. The appointments are effective Jan. 1, 2023.
- Jennifer Cawley, Texas Association of Life and Health Insurers (reappointed)
- Dana Haulotte, Texas Legislative Council
- Matthew Miller, Department of Motor Vehicles (reappointed)
- Kara Sharman, Kilgore College
- Sandra White, Texas Department of Criminal Justice (reappointed)
Visit ERS’ Group Benefits Advisory Committee webpage to learn more.
Wellness presentation: “Leaders Leveraging Existing Solutions to Improve Health and Well-being”
Lacy Wolff, ERS’ health promotion administrator for the Texas Employees Group Benefits Program (GBP); Janet Tornelli-Mitchell, M.D., with the Texas Tech University (TTU) System; and David Yebra, deputy director over Training and Leader Development at the Texas Department of Criminal Justice (TDCJ), briefed the Board on how important wellness is to them as employers and the success they have had focusing on employee health using available GBP health and well-being initiatives, including Catapult Health and WondrTM. The panel showcased the engagement efforts they have developed and the programs’ impact on their diverse member populations.
HealthSelect of Texas® cost trends and impact
Kongevick and Duran discussed cost trends in the HealthSelect of Texas medical plan, the Texas Employees Group Benefits Program (GBP)’s primary health plan for Texas agency and eligible higher education employees, and non-Medicare retirees and their dependents.
- 80% of all GBP participants are enrolled in HealthSelect of Texas (as of Aug. 31, 2022).
- Reduced utilization during the first year of the pandemic (2020) indicated some services were delayed (including preventive services).
- In Calendar Year 2021, screenings and average health costs returned to pre-pandemic levels.
- The average medical cost for those with diabetes continues to rise, largely due to prescription drug costs.
- Virtual visit utilization (via MDLIVE® and Doctor On Demand®) continued to increase during Calendar Year 2021, while telemedicine utilization (using a provider’s virtual platform) remained steady after the large increase in utilization beginning in Calendar Year 2020.
Kongevick discussed the U.S. Food and Drug Administration’s recent approval of new medications to treat obesity (without a comorbidity such as diabetes), many of which are now on the market or in the pipeline. HealthSelectSM plans currently exclude weight loss medications and drugs prescribed for the treatment of obesity; however, ERS leadership and Group Benefits management are evaluating whether a modification should be made to this exclusion. Once the research is complete, this item will follow existing timing for Board consideration of plan rates, generally during the May Board meeting.
Kongevick also briefed the Board on the Group Benefits Division’s consideration of potential changes to Basic Term and Optional Life Insurance. The division’s leadership is analyzing the regulatory and cost impacts of the proposed changes and will present their findings to ERS Board trustees during the May meeting.
Contract compliance in GBP plans
Kongevick and Georgina Bouton, assistant director of ERS' Group Benefits Division, provided information on the performance ratings of the Texas Employees Group Benefits Program (GBP) third-party administrators (TPAs) and insurers with plan years ending in Fiscal Year 2022, in accordance with contract requirements. The panel covered those programs with plan years ending Aug. 31, 2022. (At the March 2023 Board meeting, Group Benefits leadership will review those programs with plan years that ended Dec. 31, 2022.) Each plan met most of its performance guarantees for the year. Bouton noted minor and moderate performance guarantee assessments largely related to customer service issues that stemmed from pandemic-related staff shortages.
Health insurance financial update for Fiscal Year 2022 and outlook for FY23
Kongevick, Duran and Phil S. Dial, FSA with Rudd and Wisdom, Inc. (ERS’ external actuarial firm), presented a health plan FY22 financial update with trend information. The HealthSelect of Texas® trends show an expected decrease in medical trend (4.1%) as COVID-19 expenses stabilize and a slight increase in pharmacy trend (11.3%). Duran said the estimated FY22 combined medical and pharmacy trend (6.1%) is in line with historical trend. Based on claims data, the HealthSelectSM plan’s FY22 net cost impact due to the pandemic resulted in an estimated $87.7 million cost increase.
Duran explained that, based on what we see today, current projections indicate a reduced pandemic impact in FY23 due to the level of immunity achieved by much of the population through vaccination or exposure to COVID-19 itself. If things remain the same, the GBP likely will need to draw down funds from the contingency fund beginning in FY24. Duran noted the agency’s projection does not take into account any projected savings from a new pharmacy benefits manager contract or other potential savings going forward. Based on the plan’s financial performance, ERS did not request additional funds in the legislative appropriation request for the FY24-25 biennium.
Alternate Delivery Methods legislative report
Kongevick, Dial and Alison Archer with Willis Towers Watson (WTW) briefed the Board on the Alternate Delivery Methods Report requested by the 87th Legislature, Senate Bill 1, Rider 17. The study examined alternative methods to deliver the current benefits provided under the Group Benefits Program (GBP).
The focus of the study was on medical and prescription drug coverage under the HealthSelect of Texas® plans for active employees and retirees.
- After considering the purposes of the GBP as outlined in the Texas Employees Group Benefits Act, the study concluded that the delivery methods currently in place are highly effective approaches.
- Changes in delivery alternatives may adversely impact plan cost, the member experience and the administrative efforts required by ERS.
The study concluded GBP plans currently utilize a variety of value-based care and contracting strategies, with a number of elements promoting high-quality, cost-effective care within the plans.
Pharmacy benefit management contract recommendation
Kongevick, Bouton, Duran and Gabrielle Schreiber, director of ERS' Office of Procurement and Contract Oversight, presented ERS staff’s recommendation to award the contract to provide pharmacy benefits management services for the GBP’s HealthSelectSM Prescription Drug Program and HealthSelectSM Medicare Rx (Medicare Part D) prescription drug program to Express Scripts, Inc.
As part of the discussion, Schreiber and Duran described ERS’ rigorous process for soliciting and evaluating proposals. Following questions from the Board and discussion, the Board awarded the contract to Express Scripts and granted the ERS executive director authority to negotiate terms of the contract. The new PBM services will be in place by Jan. 1, 2024.
Actuarial valuation of retiree health insurance benefits
ERS Chief Financial Officer Machelle Pharr and representatives of Rudd and Wisdom presented the Fiscal Year 2022 actuarial valuation of ERS’ retiree health insurance program, also known as other post-employment benefits (OPEBs). Total contributions (employer and non-employer) for retiree health benefits in FY22 were $0.807 billion, with the State’s employer contributions equaling about 29.7% of the actuarial determined contribution. ERS has included the certified results of the FY22 OPEB valuation in its FY22 Annual Comprehensive Financial Report.
Trustee election calendar
Hajovsky presented the proposed 2023 Board of Trustees election calendar, which the Board approved. The election will fill the seat currently held by Catherine Melvin, with a six-year term beginning Sept. 1, 2023. One new aspect of the 2023 election is that the ERS board can now have one member who is a retired state employee serve on the Board. That opens up this election to retired state employees to run for a Board position.
The election calendar will be available on the ERS website in the first quarter of Calendar Year 2023.
Executive director’s report
ERS Executive Director Porter Wilson provided an update on agency activities over the last quarter, including:
- customer service update (Action Beyond the Call);
- workforce recruitment and retention update;
- implementation of Group 4 retirement benefits;
- Plan Year 2023 Fall Enrollment for Medicare-eligible retirees;
- ERS’ participation in the State Employee Charitable Campaign; and
- other recent agency developments.
Joint Board and IAC meeting
Actuarial valuations and financial status of the retirement program funds
Ariana Whaley, ERS' pension policy analyst, and representatives of Gabriel, Roeder, Smith & Company (GRS, ERS’ pension actuarial firm) presented the FY22 actuarial valuations of ERS’ retirement funds. The panel noted a positive result in FY22 due to legacy payments (established in Senate Bill 321) to amortize the system’s unfunded actuarial liabilities by 2054. GRS noted deferred gains produced a five-year smoothed return that slightly exceeded expectations. They also noted their concerns for the other two trust funds administered by ERS are similar to last year:
- The Law Enforcement and Custodial Officers Supplemental (LECOS) Retirement Fund is projected to run out of money in less than 25 years.
- The Judicial Retirement System Plan 2 (JRS 2) Fund is projected to run out of money in about 50 years.
Changes are needed to limit the risk to LECOS and JRS2 benefits, and delaying changes further will only make adjustments more costly.
Educational presentation: “Geopolitical Risk and International Investing”
ERS Chief Investment Officer David T. Veal and Michael Yuan, ERS’ equity strategy portfolio manager, discussed how the potential “rewiring” of global trade flows and the financial system may affect the ERS Retirement Trust Fund should the recent trend toward deglobalization continue in coming decades.
Investment performance for the third quarter of CY22
Veal reviewed recent investment performance for the ERS Retirement Trust Fund:
- At the end of third quarter of CY22, the Trust Fund’s performance has been consistently above the policy benchmark across three-, five- and 10-year horizons. Veal noted that this investment performance surpassed not only its benchmark, but also that delivered by its peers.
- On a five-year annualized basis, which is the primary focus of the ERS Investment Policy Statement, the Fund delivered an average of 176 basis points of excess return annually, among the strongest performances ever by the Trust.
- Such strong five-year performance amounts to more than $3 billion in value added to the Trust Fund over that time and includes more than $500 million in value added over just the last year.
Veal attributed the positive five-year performance to strong asset allocation and security selection decisions. Private equity, private real estate and global credit represented 84% of the five-year value added. He discussed the recent increase in risk levels due to rising asset correlations and the returns earned by bearing that risk.
Review and discussion of the risk management program
Veal was joined by John McCaffrey, ERS’ managing director of portfolio development and applied research, and a representative of NEPC (ERS’ general investment consultant) to discuss current global economic conditions and their impact on the ERS Trust. The panel noted:
- Central bank rate increases are not expected to stop until the middle of next year. The question is whether the peak bank rate will be enough to slow inflation without hurting growth.
- Labor market pressure continues, with the labor force participation rate remaining below pre-pandemic levels. Changes in the participation rate can influence the path for inflation.
- Financial conditions do not yet anticipate significant weakness during 2023 despite the significant recent tightening of the monetary policy environment.
Public Equity Program update
Lauren Honza, ERS’ managing director of public equity, and Keith Lyons, ERS' director of internal public equity, briefed the Board and IAC on the ERS’ Public Equity Program. Internal public equities serve as the centerpiece of the portfolio and was recently restructured to improve performance and alignment. With more than $9 billion in program assets, the program is currently within its long-term allocation range.
Proxy Voting Program review
Proxy voting is the process by which ERS, as a shareholder of public companies, exercises its say in company management decisions. Veal and Ben Schuman, ERS’ stewardship committee chair and Investments chief of staff, provided information on ERS’ proxy voting practices.
- ERS owns shares of more than 2,500 companies around the world and voted on more than 30,000 proposals in the most recent fiscal year.
- The panel discussed ERS proxy voting philosophy and guidelines and the economic value of voting proxies for securities held by the Trust.
- Looking ahead to 2023, the panel noted the proxy voting environment is evolving and becoming more politicized. ERS is adapting its internal processes in order to continue to implement the proxy voting policy faithfully.
Emerging Manager Program update
Veal, Honza and Lanesia Jones, ERS' external public equity analyst, briefed the Board and IAC on the status of the ERS Emerging Manager Program. As of Sept. 30, 2022, ERS had $2.4 billion invested with or committed to emerging managers, which at almost 14% of externally managed investments performed well and surpasses the 10% target.
Goals for the Emerging Manager Program in 2023 include:
- maintaining or exceeding the 10% target for the Trust,
- focusing on relationships with existing managers in the ERS portfolio, and
- promoting best practices by working with other investors.
In addition, ERS will co-host the 2023 Emerging Manager Conference virtually with the Teacher Retirement System of Texas in Austin on February 22.
Annual ethics training
ERS General Counsel Cynthia Hamilton and ERS Investment Compliance Officer Kurt Cressotti provided ERS trustees with required annual ethics training.
Investment Advisory Committee (IAC) member recognition
The ERS Board, IAC and ERS staff recognized Caroline Cooley, who ended her nine-year term on the IAC. With Cooley’s departure, ERS continues to maintain a complete IAC that comprises eight members with diverse investments expertise.
2023 meeting dates
The Board set the following dates for 2023 Joint Board and Investment Advisory Committee meetings:
- Wednesday, March 1
- Wednesday, May 17
- Wednesday, August 23
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