ICPM Discussion Forum – Fall 2006 Toronto

October 24 - 25, 2006

Key Insights and Possible Action Items:

To download a PDF of the Key Insights from this Discussion Forum click here.

Case Study

Case Study 1: Pers and the pension revolution: Redesigning the investment function

Alyson Green took on the CEO responsibilities for the 150,000 member, $55B Public Employees Retirement System (PERS) one year ago. She had convinced her Board of Trustees, as well as the Governor of the State and the key unions, that the State’s pension plan was materially under-funded and that three bold steps should be taken to return the State’s pension finances to long-term sustainability [1]:

  1. Increase the current defined benefit (DB) plan contribution rate from 15% of pay to 20% of pay (from 7.5% each from employer and employees to 10% each). However, her argument that the inflation indexation of pensions should be made conditional on the balance sheet funded ratio had fallen on deaf ears.
  2. Close the DB plan to new employees. However, with the benefit formula unchanged, the balance sheet funded ratio of the now-closed DB plan currently stands at 80% on a mark-to-market basis (i.e., plan assets $55B, plan liabilities $70B).
  3. Start a ‘hybrid’ plan for new employees with the same 20% of pay contribution rate as the closed DB plan. The new plan is to be based on an individual ‘life- cycle, target-pension’ approach, with a number of ‘auto-pilot’ features related to investment and contribution policy adjustments. For example, the contributions of young employees are first invested in a high-expected return, but risky portfolio. Then, as these young employees age, they would automatically begin to slowly acquire inflation-indexed, deferred annuities. As employees approach retirement, the bulk of their pension assets would consist of these deferred annuities.

Alyson had next turned her attention to the investment side of the PERS operations. The new priority for the organization would be to assess the investment function of the $55B PERS pension fund to ensure that it would sustain the State’s recent public sector pension reform decisions. A logical place to start the assessment process had been to see where PERS’ investment function stood today.

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Presentation Materials:

Rob Bauer

The Performance of U.S. Pension Funds: New Insights into the Agency Costs Debate

Keith Ambachtsheer

Pension Governance Today: Strengths, Weaknesses, and Opportunities for Improvement

Bob Bertram

In the Beginning: Linking Benchmarks, Risk Budgets and Compensation

Don Raymond

Benchmarking, Risk-Adjustment, and Incentive Compensation

Birgir Örn Arnarson

Benchmarking, Risk-Adjustment, and Incentive Compensation

Barbara Zvan

Benchmarking, Risk-Adjustment, and Incentive Compensation

Keith Ambachtsheer

PERS and the Pension Revolution: Redesigning the Investment Function