Friday, August 2, 2019

Texas Pension Investment Performance Reviews: 

A Sign of Things to Come?

Editor's Note: Our friends at the National Council on Teacher Retirement, a nonprofit organization that supports retirement security for America's teachers, allowed TEXPERS to republish this column. To learn more about the council, visit

A new Texas law will require the majority of the state’s public pension funds to begin filing evaluations of their investment processes beginning in 2020. The analyses are to contain suggested improvements, as well. Will this be the start of a legislative trend that could extend nationwide?

The new requirement (Senate Bill 322) became law on June 10 and will currently apply to 65 of the state’s 99 public pension funds. They will be required to hire external firms experienced in evaluating institutional investment practices to review the system's investment practices, policies and performance in the previous year and to create a report with recommendations for improvement to be submitted to the Texas Pension Review Board no later than June 1 after the fund's prior fiscal year-end.

Plans with assets greater than $30 million will have until June 1, 2020, to submit their first evaluation reports. Thereafter, evaluation reports must be filed every three years for plans with more than $100 million in assets and every six years for plans with assets between $30 million and $100 million. Plans with less than $30 million are not subject to the new evaluation and reporting requirements.

Each evaluation must include:
  • An analysis of any investment policy or strategic investment plan adopted by the retirement system and the retirement system's compliance with said policy or plan
  • A detailed review of the retirement system's investment asset allocation, including the process for determining target allocations; the expected risk and expected rate of return, categorized by asset class; the appropriateness of selection and valuation methodologies of alternative and illiquid assets; and future cash flow and liquidity needs
  • A review of the appropriateness of investment fees and commissions paid by the retirement system
  • A review of the retirement system's governance processes related to investment activities, including investment decision-making processes, delegation of investment authority, and board investment expertise and education
  • A review of the retirement system's investment manager selection and monitoring process
The Texas Pension Review Board is then required to submit an investment performance report to the governor, the lieutenant governor, the speaker of the Texas house of representatives, and the legislative committees having principal jurisdiction over legislation governing public retirement systems. The report must compile and summarize the information received by them during the preceding two fiscal years.

The new law also requires Texas public pension funds list investment managers and provide direct and indirect investment fees by asset class in their annual financial reports, as well as post annual investment reports on a pension system's website or another publicly available site.

According to a recent article in Pensions & Investments (P&I), Texas State Rep. James Murphy, R-Houston, said he and the bill’s co-sponsor, Texas State Sen. Joan Huffman, R-Houston, introduced the bill to make it easier for the Texas Pension Review Board to make apples-to-apples comparisons of the investment health of the public pension plans it oversees. Murphy said this would give the PRB adequate data from each pension fund to identify plans that might be in trouble with regard to investment performance or funded status.

"Investment performance and benefit structures can become uncoupled leading to problems," Murphy said. He suggested pension plans would be able to "self-correct" problems using the suggestions for improvement provided by the external reviewers, thereby avoiding "the need for big brother to step in," he told P&I.

"What makes this law unique is the breadth of the regulation,” Leon F. "Rocky" Joyner, Atlanta-based vice president and actuary, public-sector retirement practice leader, with Segal Consulting, told P&I. “While many elements were already covered in GASB 67/68, the level of detail required for commissions and fees sets a new level of disclosure standards."

Finally, the new law allows a pension system to engage a firm with which it already has a relationship, such as an investment consultant, to prepare the fund evaluation. However, it expressly forbids hiring firms that directly or indirectly manage money for the fund.

Generally, reaction to the new requirement has been neutral to leaning positive. The City of Austin Employees' Retirement System "supports the bill's transparency requirements and the focus on fiduciary standards," and Tim Lee, executive director of the Texas Retired Teachers Association (TRTA), told P&I that requiring these plans to submit these evaluation reports “may help identify potential problems," particularly with regard to the many smaller pension funds in Texas, and allow action to be taken if necessary.

Furthermore, most of the large Texas public retirement systems already capture the investment information mandated by the new law, and some said they might use their existing investment consultants to prepare fund evaluation reports.

For example, Brian Guthrie, executive director of the Teacher Retirement System of Texas, told P&I it "won't be a big lift" for his system, noting most of the required information already is being collected by the pension fund and the system's consultant, Aon Hewitt Investment Consulting, as part of regular reporting. Keith Yawn, director of the office of strategic initiatives at the Employees' Retirement System of Texas, also said "there won't be a lot of change" to what the fund already reports.

However, plans are required to pay an evaluation firm, so the cost burden on smaller plans may be high, warned Christopher Hanson, executive director of the City of Austin Employees' Retirement System. Although his fund already collects the vast majority of what the legislation requires, Hanson said having the fund's investment consultant gather required information and evaluate the system's operations will cost about $40,000. And this cost would be even higher if the plan hired another consultant, which would need more time and labor to study the system, he explained.

Will the Texas legislation serve to spark similar action in other states? P&I says Texas is the only state to mandate detailed reporting on the public pension fund investment except South Carolina, which enacted a similar law in 2017.

And there are other sources for reviews of such investment activities. For example, State Street Global Advisers did a report in 2018 on how public pension funds invest, looking at everything from local to global assets. The Pew Charitable trusts also did a review that same year of state public pension funds’ investment practices and performance.

However, Pew used their report to claim state retirement systems are becoming unsustainable, falling short of their investment targets and failing to put enough money aside to reduce liabilities. 

"Perhaps having these kind of analyses from our own systems might be a better approach," said Maureen Westgard, NCTR’s executive director. "However, if they are then used as the basis for prescriptive legislation, that will become a problem. Hopefully, the Texas approach can provide an example of the way in which plans can 'self-correct'."

But only time will tell. And in the meantime, be aware of this possible trend. NCTR will continue to monitor if there are any coordinated efforts to advance such legislation nationwide.

More information: Be sure to check out TEXPERS Pension Observer, our membership magazine, to read more about Senate Bill 322 and another bill that could impact Texas pension systems. The story starts on page 6.

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