Women outnumber men and earn more degrees, yet men vastly outnumber women in executive leadership roles, including among public pension plans. TEXPERS Pension Observer magazine profiles two women who are leaders in Texas public pensions to find out what it took for them to rise through the ranks and why more women should do the same. Find out what they have to say and if they have any advice for their male peers in the new edition of TEXPERS Pension Observer. 

Things you'll learn in this issue:

• A mistake in Kentucky could become an important lesson for Texas pensions.
• Being a trustee isn't easy but two things will always be at the heart of the job.
• What's good for corporate isn't good for public.
• A new TEXPERS report indicates 93 state and local pension funds are maintaining positive trend performance.
• It's not a good idea to keep a fund's actions secret, says an open meetings expert.

TEXPERS Pension Observer is published quarterly and is the official magazine of the Texas Association of Public Employee Retirement Systems. 

A print version is in the mail and will soon arrive in the mailboxes of TEXPERS members. 
Until then, enjoy the digital version below.

Factor-based investing among few options in 

period of  slower markets and higher rates

By Michael Hunstad

Guest Columnist

While there is nothing we can do about low beta returns and many have become highly skeptical of traditional active stock picking as a consistent source of return, it seems that in the coming years that factors may be one of the best options. Over the next five years, we expect macroeconomic, market and monetary policy conditions to be aligned with strong factor performance.

Expected returns are disappointing

Our return expectations on major asset classes like equities, bonds, and hedge funds have declined over the last several years. In 2012, we expected a traditional 60/30/10 portfolio to generate a return of about 6.2 percent. In 2016 that figure dropped to less than 4.5 percent, well short of the return targets used by most pensions, foundations, and trusts.  Importantly, our equity forecast has dipped below 6% for the first time in recent history.

Our research tells a different story for factors

While the falling expectations are cause for concern, there is no need to panic. As Exhibit 1 shows, factor performance is at its best when market returns are lackluster. Specifically, factor returns in heady markets tend to fall behind. In contrast, factors tend to outperform significantly when market returns are coasting. In these middling conditions, exactly where we expect to be over the next five years, factor exposures like quality, value and low volatility can add materially to equity performance, thereby narrowing the gap between realized and target returns.

Slower markets can translate into factor outperformance

Admittedly, this differential in factor returns is somewhat counterintuitive.  It seems the word on the street is that factors, especially value and momentum, are in peak form when markets are a go-go. However, mechanically speaking this cannot be the case. Very strong markets require the preponderance of stocks to be moving in the same direction: up. In other words, individual stock returns are necessarily highly correlated or, putting it another way, the dispersion of returns tends to be quite low. In this scenario factors really can’t outperform because nothing is underperforming and, hence, there is nothing to beat.

The story changes when markets slow. Dispersion among stock returns tends to increase, which gives factors the opportunity, although not necessarily the means, to beat benchmarks. While pairwise correlations among stocks were elevated in the period from 2012 to 2015, a time of strong markets and disappointing factor returns, correlations have come down in 2016 and remain low today. This set the stage for resurgence in factors which began in earnest, not surprisingly, in early 2016.

Naturally, if dispersion drives factor performance we must ask why dispersion fluctuates. Dispersion and factor returns may be related to prevailing monetary conditions. We see a strong relationship between the policy stance of the Federal Reserve and performance, with factors doing better during periods of contraction. Exhibit 2 demonstrates this historical pattern.

Within a contractionary monetary regime the central bank is effectively engineering a recession, the impacts of which will vary considerably by sector, industry and individual company, thus generating a broad and varying dispersion. In contrast, when policy is expansionary the effects tend to be more homogenous. For example, companies simultaneously benefiting from “easy money” cause dispersion to narrow. In short, contractionary monetary policy leads to more dispersion which leads to higher factor returns. Recent signaling from the Federal Reserve is unambiguously contractionary.

Factors entering their prime

While the outlook for passive benchmarking is sour and the efficacy of traditional active management is suspect, we must not be deterred in our effort to achieve equity performance targets. Factors are entering their prime as the various stars are aligning: low market return expectations, unambiguous contractionary central bank rhetoric, and a forecast for several interest rate increases over the coming year, all portending strong factor returns. For many investors, the only hope of meeting equity performance goals may well rest with factors. The time is now.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of Northern Trust Asset Management or TEXPERS.

Michael Hunstad

About the Author:

Michael Hunstad is the head of Research at Northern Trust Asset Management. Prior to joining Northern, Hunstad was head of research at Breakwater Capital, a proprietary trading firm and hedge fund. Other roles included head of quantitative asset allocation at Allstate Investments, LLC and quantitative analyst with a long-short equity hedge fund. Michael holds a doctorate in mathematics, a master's degree in economics and an MBA in quantitative finance. 

Leveraging your manager's best ideas

By James Perry

Guest Columnist

The formal study of finance teaches fundamental hypotheses and theories to explain market behavior and techniques for portfolio construction, while direct experience can bring to light the limitations of those tools and how ruthless a bear market can be. Though both types of study enhance knowledge, thoughtful allocators may additionally benefit from partnering with skilled asset managers who can provide them with market insight that may assist with efficiently allocating capital and weathering inevitable market storms. This approach is at the heart of the Managed Custody Account (MCA) structure which seeks to leverage partnerships between asset managers and allocators to effectively improve governance, allocation decisions, and portfolio performance.

Typically, investors allocate capital to a single investment strategy or fund at a time to which the manager has a fiduciary obligation. However, the manager has no obligation or incentive to advise the client regarding investing or rebalancing into other strategies. Under an ideal investment structure, a manager would utilize their insight to assist their clients in growing and protecting capital through informed rebalancing and would be compensated for the value they add across the entire relationship.

In today’s low-yielding environment, institutional investors are under increasing pressure to generate returns in excess of an assumed rate. Finding innovative ways of redefining the traditional relationship between allocators and managers can play a significant role in improving portfolio performance or meeting a target rate of return. The idea of a relationship-based structure and compensation agreement is the foundation of the MCA structure.

An MCA creates a template for establishing strategic partnerships between asset allocators and asset managers that seek to:

·       Create a governance structure that allows them to work together more efficiently;

·       Make the asset manager a fiduciary to the allocator at the relationship level instead of at the individual fund/asset level;

·       Enhance alignment of interests, usually through a fee netting agreement which increases compensation for the manager based on the success of the overall relationship rather than the individual sleeves or investments; and

·       Reduce contracting time and costs by capturing key terms in the MCA agreement.

Despite the benefits of the MCA structure, it is not without its challenges. Investors need to find managers who they believe would communicate valuable market insight and provide strong relative performance across multiple strategies or structures. These allocators also need strong investment teams capable of quickly reviewing and evaluating investment recommendations. The structure also increases reporting complexities and may necessitate the use of a third party administrator to address the operational challenges.

                                                           

The MCA structure remains an innovative tool for creating strategic partnerships between asset managers and investors and affords institutional investors access to investment managers' best ideas and highest performing strategies under a construct that improves the alignment of interests between both parties. By using MCAs, sophisticated investors have the ability to dynamically allocate capital and generate stronger risk-adjusted returns that will benefit them, their sponsors and the ultimate beneficiaries of those institutional investment programs.

Click here for more information on the MCA structure. 

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of Maples Fund Services or TEXPERS.

James Perry

About the Author:

James Perry is head of Institutional Investor Solutions at Maples Fund Services where he is responsible for shaping the firm’s offerings and enhancing its service delivery to institutional investors. He brings more than 20 years of investment management experience including senior investment roles overseeing portfolios of public assets in California and Texas. Perry is a recognized thought leader in the investment industry, as evidenced by a number of awards, including being named as one of the Top 30 Pension Fund Chief Investment Officers (Trusted Insight, 2016) and receiving the Investor Intelligence Award for Innovation (Institutional Investor, 2014).

There are multiple factors to consider when incorporating carbon emissions data into investment decisions

By Dinah A. Koehler

Guest Columnist

The investment industry has begun to incorporate carbon emissions data into investment decisions, but investors who focus on simple solutions such as divestment or footprinting without considering other important factors may end up divesting companies that are successfully transitioning to lower carbon exposure. The UBS Sustainable Investors team believes that the best approach to building carbon-aware portfolios is to consider carbon emissions while leveraging additional data, such as in-depth assessments of mitigation activities and progress toward a carbon reduction goal.

First-generation carbon-aware: Footprinting

Any conversation managing carbon exposure must start with data on corporate greenhouse gas (GHG) emissions.

Commercial providers of this data rely on voluntary corporate disclosure of carbon emissions, but less than half of these corporate disclosures are third-party reviewed, let alone audited. Providers make estimates for companies that do not report, which can lead to significant differences between provider data.

Some investors use the data to report on the carbon emissions associated with stocks in a portfolio at a point in time—commonly called “carbon footprinting.”

Moving beyond footprints to glidepaths

While footprinting is useful for comparisons, carbon-aware investment should capture how companies and entire industries can contribute to the goal of limiting global warming to 2 degrees Celsius by 2100. The International Energy Agency (IEA) has modeled what it will take to achieve the 2 degrees Celsius scenario (2DS). The 2DS provides guidance on the rate of change needed to reduce carbon emissions (see Exhibit 1) and focuses on those industry sectors that emit the most carbon (see Exhibit 2). The 2DS can be thought of as the optimal “carbon glidepath" to meet the goal.

Glidepaths offer a framework for rewarding overachievers and punishing underachievers by helping investors evaluate whether or not a company is likely to stay aligned with its carbon glidepath. Because carbon emissions are so highly concentrated in a few industry sectors, optimizing solely on carbon emissions can quickly change the portfolio’s characteristics. A better way to incorporate carbon into a portfolio (or carbon-aware index) construction is to take into account all material portfolio factors along with active risk. We believe it is possible to significantly reduce carbon emissions by 50 percent in alignment with the IEA 2DS carbon glidepaths, while maintaining a low active risk of about 30 bps.

Carbon as an investment theme

Financial products that effectively incorporate carbon data into investment decisions can meaningfully contribute to “decarbonizing” entire economies. Investment teams that understand the relevance and nuances of carbon data can provide solutions that deliver financial returns and meaningfully reduce carbon emissions and climate risks.

(This is a summary of a longer report by Koehler. Visit www.ubs.com/am to access the full paper.)

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of UBS Asset or TEXPERS.

Dinah A. Koehler

About the Author:

Dinah Koehler is executive director, sustainable investment research. One of her roles is to develop partnerships with academic institutions to create our Global Sustainable Impact Equity methodology. Koehler joined UBS Asset Management in 2015. Previously she advised and worked for large global corporations, national governments, and international organizations on sustainability issues. She holds a Science Doctorate from Harvard University.

Threat to globalization must be acknowledged, but history suggests it won't be derailed

Photo: Lena Bell/Unsplash

By Michael Reynal

Guest Columnist

Chinese President Xi Jinping recently traveled to the World Economic Forum in Davos and championed the benefits of globalization while highlighting the risks of protectionism. Meanwhile, populists in Britain and the U.S.—stalwart nations of global free trade—have been busy talking up the scourge of globalization. It’s an upside-down world only Lewis Carroll would understand.

Indeed, globalization is in the cross-hairs of many politicians. Threats of tariffs and protectionism abound, and, if enacted, they could pose a drag on global economic growth. Nobody correctly predicted the political outcomes of the past year, and certainly, nobody knows how nationalism will manifest itself in future trade policies. Yet there is a feeling that more sensible minds will prevail and globalization is, ultimately, unyielding. Moreover, any setbacks and subsequent market volatility might provide opportunities for active managers who can capitalize when stock prices disconnect from fundamentals.

History as our guide

I fully acknowledge that there are very real risks to globalization today. But as an equity manager with a global perspective, I still believe in trade liberalization and its ability to lift both developing and developed countries. Statistics from the World Trade Organization show a longer-term trend of rising international trade following the conclusion of WWII between 1950 up until the Global Financial Crisis. There may be setbacks along the way, but I think the slowing pace of trade liberalization and rising protectionism rhetoric is unlikely to completely reverse globalization.

Ultimately, globalization is driven by four key factors: cross-border capital flows, trade, migration, and the free-flow of ideas and communication. Capital flows and trade may have hit a speed bump, but migration and the exchange of ideas and knowledge continue unabated. In fact, the era of digital globalization (the vehicle of increased knowledge-sharing) is still in its infancy. A 2016 report from McKinsey Global Institute asserts that in contrast to slowing international trade in recent years, digital flows are showing no signs of abating. Cross-border bandwidth “has grown 45 times larger since 2005,” and “is projected to grow by another nine times in the next five years,” according to the report. All of this is boosting participation in the global economy and suggests that globalization is not reversing.

Risks remain

Yet, in recent years, globalization has resulted in uneven economic growth among nations, as well as disruptions across various sectors of the economy. This is the reality, and it may be fueling the recent rise of populism and nationalist rhetoric. There has been heightened talk of protectionism, and, surprisingly, much of it is emanating from the West. This includes rumblings from the new U.S. administration of a 45 percent tariff on Chinese goods, or a border adjustment or “mirror” tax for goods produced in Mexico. No doubt about it, if enacted, these types of protectionist measures could create short-term pain for global investors.

Once protectionism grabs hold, it runs the risk of spawning new tariffs, weakening consumer confidence, and elevating geopolitical tensions. Consumer costs could rise while supply chains are disrupted, resulting in job losses that could continue in a disturbing feedback cycle.

The takeaway

That’s just one possible dystopian economic future, but the likelihood of such a bleak scenario is a long-shot in my opinion. There’s simply too much to be lost on all fronts. In China, for example, the Central Authority must hold up its half of the tacit agreement whereby Beijing continues on a path to economic liberalization (albeit not always as quickly as hoped) in return for stability, peace, and control. The U.S. and other developed economies are also unlikely to launch into full protectionism at the risk of hampering economic growth.

In times like these, it’s incumbent upon investors to retain their longer-term focus and commitment as to why they are allocating to emerging markets. That may be to capture potential higher rates of growth, to diversify return streams, or even to diminish their inherent home-country bias. Moreover, emerging markets often tend to over-react to macroeconomic developments in the short term, and this can provide opportunities for active managers.

As emerging markets investors, we’ve been dealing with challenges for more than 16 years, so we take the latest protectionism “threats” in stride and are confident that we will continue to find ways to uncover opportunities in fast-growing and exciting developing markets.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of Sophus Capital or TEXPERS.

Michael Reynal

About the Author:

Michael Reynal is chief investment officer of Sophus Capital and a portfolio manager of the Victory Sophus Emerging Markets Fund, Victory Sophus Emerging Markets Small Cap Fund, and Victory Sophus China Fund. 

Fill your investment basket with a 
variety of assets to reduce overall risk

Photo: William Potter/iStock

By Rick Rodgers

Guest Columnist

Diversification, which is the process of spreading assets in a portfolio across several different asset classes (investment strategies), is a key to managing risk and helping your money grow over time. The Periodic Table of Investment Returns, below, illustrates the benefits of diversification.

The table above shows the performance rankings of several asset classes for each of the past 10 calendar years. Each asset class is represented by a unique colored box that contains the asset class name and the total annual return for the correlating year. The best performing asset class for each year is ranked in the top row, while the worst performing is listed on the bottom row. In a perfect world, investors would somehow know in advance which asset class will perform the best and allocate to those assets, capturing the largest returns each year. However, in our imperfect world of investing, we are unable to know or consistently predict this information.

Choose an asset class listed in the first column (the calendar year 2007) and follow its return for each of the next nine calendar years. For example, International Stocks was the second-best performing asset class in 2007, with a total annual return of 11.17 percent, a nice return. However, the following year, which was difficult for nearly all asset classes, International Stocks was the worst performing asset class, losing more than 40 percent of its value. As you follow the performance of International Stocks through the remaining calendar years you’ll notice that it moves all over the table. This example illustrates how difficult it is to predict investment performance of a single asset class from year to year.

One of the most common mistakes of individual investors is attempting to choose an investment, or investments, this year based on performance last year or in the past few years. This approach is referred to as “rearview mirror investing” or “chasing past performance.” The investor’s objective is a misguided attempt to increase returns by investing only in what appears to be hot at the time. The problem with this approach is the evaluation of the investment comes after it has already performed well, and the investor believes that the hot streak will somehow continue. While some asset classes may be the best or worst for two or more consecutive years, it is impossible to predict when the streak will begin and how long it will last. 

Markets are cyclical and impossible to accurately predict from year to year. Therefore, a more prudent approach would be to maintain a diversified portfolio, which is illustrated in the “black” boxes in the Periodic Table of Investment Returns. The Diversified Portfolio is never ranked at the top or the bottom of the table. It will never be the best or worst performing, whereas a single asset class may be the best or worst performing investment for a single year or multiple years.

Another benefit of diversification is the ability to manage risk in the portfolio. The two columns on the far right of the table rank the annualized performance (average annual performance for each of the 10 years shown) and risk. You will notice the performance ranking of the Diversified Portfolio is near the middle of the group, while the risk is ranked much lower. The message of the Periodic Table is that diversification can help manage risk and create more consistent returns over the long term. 

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of Innovest or TEXPERS.

Rick Rodgers

About the Author:

Rodgers is a principal and director at Innovest Portfolio Solutions. He is a member of Innovest’s Retirement Plan Practice Group, a specialized team that identifies best practices and implements process improvements to maximize efficiencies for our retirement plan clients. In September 2014, Innovest was named the Retirement Plan Adviser Team of the Year in the nation by PLANSPONSOR. Rodgers has more than 27 years of experience working as a consultant and educator to public and private-sector retirement plans. Prior to Innovest, Rodgers was co-founder and CEO of InSight Employee Benefit Communications, which merged with Innovest in 2014. He also served as director of marketing and client services for the Colorado County Officials and Employees Retirement Association.  He was formerly a managing area director with Nationwide Retirement Solutions and worked with the state of Florida Deferred Compensation Program prior to relocating to Colorado in 1991.  He has earned the Accredited Investment Fiduciary and Accredited Investment Fiduciary Analyst designations from the University of Pittsburgh, Joseph M. Katz Graduate School of Business, and has received formal training in investment fiduciary responsibility assessment. Also, he has earned the Series 65 License (Registered Investment Adviser Representative) through FINRA. He is a member of the National Association of Government Defined Contribution Administrators, California Society of Municipal Finance Officers, Society of Human Resource Managers, and currently serves as Chairman of the Board for the Colorado Public Pension Coalition.

The hidden value in MLP and midstream credit

Investing in Midstream via Credit is Lesser Known, More Difficult

Prop A topic of Oct. 30 town hall

Houston voters are invited to attend a town hall meeting to learn about the city's Pension Obligation Bond measure on the Nov. 7 election ballot.

Governor's office announces administrative changes

By Allen Jones

TEXPERS Communications Manager

For those looking to lobby the Texas governor regarding the merits of defined benefits, there are a few new faces in his administration that public pension trustees and administrators may get to know as his staff transitions to the interim and prepares for the 2019 legislative session to take place.

Luis Saenz

Last month, Gov. Greg Abbott's office announced changes to his senior administration. Top among those changes is his new chief of staff, Luis Saenz, who previously served as the governor's appointments director. The principal and founder of Saenz Public Affairs, he has been involved in politics for more than 25 years, according to a biography provided by the governor's office.

Saenz is replacing Daniel Hodge, who is transitioning to the private sector, according to a news release issued by the governor's office Sept. 18.

"I have been privileged to have Daniel Hodge by my side dating back to my tenure as attorney general, bringing excellence to the organizations in which he has served," Abbott says. "I am truly grateful for his commitment and service to the State of Texas."

In the news release, Abbott also thanks his staff for their work to "enact conservative policies and preserve the freedom that Texans hold dear."

Saenz is among nine people announced to the governor's staff. Abbott says that while they have "big shoes to fill," he is confident his new team is up to the task.

"There are big ideas I plan to tackle in the upcoming session, and this team will be integral in spearheading those efforts," Abbott says. "We have already started working to ensure a smooth transition, and we will continue our work to keep Texas the beacon of opportunity."

Here is the complete list of the staff changes, from the news release, which took effect Oct. 1:

Luis Saenz will serve as Governor Abbott’s Chief of Staff. Saenz is currently the Principal and Founder of Saenz Public Affairs and has been actively involved in conservative politics at all levels of government for over 25 years. Saenz began his professional career at The Heritage Foundation in Washington, D.C. He previously served as Appointments Director for Governor Abbott and has also served in senior staff positions for Texas Governor Rick Perry, was Chief of Staff to former Texas Comptroller Carole Keeton Strayhorn and has worked as an aide to former U.S. Senators Phil Gramm and Kay Bailey Hutchison, and former Congressman Henry Bonilla. Saenz is a native of Carrizo Springs, TX, and he is a graduate of St. Mary’s University in San Antonio.

 Steven Albright will serve as Governor Abbott's Senior Advisor for State Operations. Albright previously served as the Governor's Budget Director. Prior to joining the Office of the Governor, he served eight years as Chief of Staff in the Texas Senate for Senator Robert Nichols, as well as Policy Director for the Texas Senate Committee on Transportation. Albright also served as a legislative director and Chief of Staff in the Texas House of Representatives. He has more than 16 years of experience in the legislative and executive branches of Texas government, including 22 regular and special legislative sessions focusing on natural resources, transportation and finance-related policy. Albright graduated from The University of Texas at Austin and received a Master’s in Public Administration from Texas State University.

 Reed Clay will serve as Governor Abbott’s Counselor and Chief Operating Officer. Clay currently serves as the Governor’s Deputy Chief of Staff. He has worked alongside Governor Abbott for 8 years, having previously worked at the Texas Attorney General’s office prior to transitioning to Governor Abbott’s gubernatorial administration in 2015. Clay has also served as a litigator for the U.S. Department of Justice. He holds a bachelor’s degree from Wake Forest University and masters and law degrees from Duke University.

 John Colyandro will serve as Governor Abbott’s Senior Advisor and Policy Director. Colyandro currently serves as the Executive Director of the Texas Conservative Coalition Research Institute, and the Executive Director of the Texas Conservative Coalition, a legislative caucus.  He previously served as Director of Policy and Research for Greg Abbott's campaign for Governor (2014), and as Director of Policy for Greg Abbott's campaign for Attorney General (2002).  He is a graduate of the University of Texas at Austin.

 Walter Fisher will serve as Governor Abbott’s Legislative Director. Fisher previously served as Texas State Senate Parliamentarian from 1996-2014. Prior to this, he served as Assistant Parliamentarian for the Texas House of Representatives. Most recently he was Senior Advisor to Lieutenant Governor Dan Patrick in 2015. Fisher is a graduate of the University of Texas.

 Sarah Hicks will serve as Governor Abbott’s Budget Director. Hicks is currently the Assistant Vice Chancellor and Director of State Relations at the Texas A&M University System. She previously served as the Committee Director of the Texas Senate Committee on Finance and was a legislative aide to former State Senator Steve Ogden. Hicks holds a bachelor’s and master’s degree from Texas A&M University.

 Matt Hirsch will serve as Governor Abbott’s Deputy Chief of Staff and Communications Director. Hirsch currently serves as Governor Abbott’s Communications Director, a role he has held since the Governor announced his gubernatorial campaign in 2013. He has previously worked in various communications roles on Presidential, U.S. Senate and Governor campaigns. Hirsch is a graduate of the George Washington University.

 Peggy Venable will serve as Governor Abbott’s Appointments Director. Venable is currently serving as a Senior Visiting Fellow for the Texas Public Policy Foundation.  She has worked at the highest levels of government, having previously served in the administrations of Presidents Reagan and H.W. Bush. Upon coming back to Texas, Venable worked on public policy and grassroots campaigns, serving 20 years as the Texas director for Americans for Prosperity and its predecessor, Citizens for a Sound Economy. Venable is a graduate of Texas State University and has a master’s degree from Baylor University.

 Tommy Williams will serve as Governor Abbott’s Senior Advisor for Fiscal Affairs. Williams currently serves as the Vice-Chancellor for Federal and State Relations for the Texas A&M System. Prior to working in the TAMU System, Williams was a Texas State Representative from 1997-2003, and a Texas State Senator from 2003-2013. While in the Senate, he served as Chairman of three different committees: the Administration Committee, the Transportation and Homeland Security Committee, and the Finance Committee. During his legislative career, Williams was a respected leader on budget, education, transportation and tax issues. He graduated with a BBA in Accounting from Texas A&M.

Allen Jones

About the Author:Allen Jones is the communications manager for the Texas Association of Public Employee Retirement Systems. Email him at allen@texpers.org or call 713-622-8018.

Notes from the Oct. 13 PRB Actuarial Committee Meeting

TEXPERS Staff Report

Here are a few note from the the Actuarial Committee Meeting of the Pension Review Board held Oct. 13 in Austin:

• Board chair Josh McGee asserted to Fort Worth officials that the legacy costs involved in maintaining a system while enrolling new employees in the Texas Municipal Retirement System were "accounting problems" and not real. Committee member and PRB board vice chair Keith Brainard disputed that, as did TEXPERS' board member David Stacy at the end of the meeting. Of course McGee has written in past that legacy costs are not concerns and therefore fail as a reason not to convert defined benefit plans to defined contribution plans.
• McGee asked PRB staff to add a 10th actuarial review test – the 10-year actual investment return of systems versus their discount rate. Brainard disputed the value of this test and committee member Robert May supported Brainard. The matter is tabled for now. McGee positioned the additional metric as possibly offering a red flag, saying, roughly, that if a pension system hasn’t been successful meeting its discount rate in the last 10 years there’s little reason to believe that it will do so going forward. Discussions about market anomalies ensued.
• The Texas legislature authorized PRB staff to spend $90,000 on creating an online pension dashboard, which staff has started. Stacy and Julie Higgins of the Houston Firefighters' Relief and Retirement Fund expressed concern regarding comparisons of systems that pay Social Security and those that don’t. Also, plan size was discussed.  

Union honors pension advocate for 

labor causes, minority rights support

By Allen Jones

TEXPERS Communications Manager

Longtime pension advocate Rep. Roberto Alonzo, D-Dallas, was recently recognized by an industry union for his work in support of labor causes and minority rights during the state’s recent legislative session.

Rep. Roberto Alonzo, D-Dallas

During the 85th legislative session, Alonzo filed House Bill 285, seeking to raise the minimum wage to $15 an hour, a push he says would have improved the lives of 2.4 million Texans. In addition to pushing to create what he terms as a “livable wage,” Alonzo continued his defense of public pensions as vice-chairman of the House Pensions Committee. He also filed a bill designed to set up a state-administered retirement savings program for all private sector employees. Despite his effort to see House Bill 3601 passed, it didn’t make it out of the committee for a floor vote.

However, it is his fight to support hard-working Texans that motivated United Latinos of the United Food and Commercial Workers Union to recognize Alonzo with an award of gratitude. The organization promotes labor interests for Latino workers in the union, according to its website.

In a Sept. 26 newsletter to constituents, Alonzo’s office announced the representative’s receipt of the award.

“The United Commercial Food Workers is a union family that fights every day,” according to the newsletter. “Representative Alonzo fights every day, too. Not only as a state representative, nor as immediate past president of the National Labor Caucus, but as a proud union member.”

The group issued the award to Alonzo Sept. 14.

The representative is to take part in a panel discussion during Texans for Secure Retirement’s Fourth Annual Symposium Oct. 19 in Austin. Alonzo joins Rep. Justin Rodriguez, D-San Antonio, and Houston City Controller Chris Brown in discussing the current state of pensions in politics. Vicki Truitt, a former state representative and owner of governmental relations firm VTruitt LLC, will moderate the panel discussion. The panel convenes at 10:15 a.m. and is part of a day of discussions focused on pensions and retirement issues. The symposium opens with welcoming remarks at 10 a.m. and closes with closing comments at 2:45 p.m. TEXPERS executive director Max Patterson serves as president of the nonprofit TSR, a secure retirement advocacy group. Patterson is scheduled to provide concluding remarks.

The symposium is open to TSR members and will be held at Dimensional Fund Advisors, 6300 Bee Cave Road in Austin. TSR members who would like to attend the symposium should notify Lena Terrell, TEXPERS’ membership manager, at 713-622-8018 or lena@texpers.org. For more information, visit www.texansr.org.

To become a member of TSR, visit www.texansr.org/become-a-member. Applications are available for public employee groups and investment professionals.

Allen Jones

About the Author:

Allen Jones is the communications manager for the Texas Association of Public Employee Retirement Systems. Email him at allen@texpers.org or call 713-622-8018.

Research finds defined benefits play important role in 

teacher recruitment, retention, and productivity

By Allen Jones

TEXPERS Communications Manager

Robert Marrs is in his 40th year teaching with the Cypress-Fairbanks Independent School District and says he seriously considering retiring at the end of the current school year. The 61-year-old’s pension is his only form of retirement savings.

Robert Marrs

Leaving the profession he has spent four decades working in isn’t an easy decision for him to make, but he says having a secure retirement makes going less scary. After all, being a public educator allowed him to build up a secure nest egg.

“I will rely mainly on my pension for the remainder of my life,” he says. “If I retire this year, I will draw 92 percent of my top three salaries.”

Marrs is planning to meet with the Teachers Retirement System of Texas soon to start planning his departure from public education. He has already been giving the prospect of leaving his job some thought.

In Marrs' situation, he is divorced and his pension will impact no one but himself. However, because he will only be 62 by the time he retires, Marrs is sure he will want to obtain some sort of part-time job.

Several of his closest friends have already retired, and he often discusses with them what life will be like when he leaves the public education system behind. Their primary concern had to do with insurance, which Marrs is sure it will be his concern as well. All of his associates, however, feel good about their defined benefits, he says. He is already sure of that, too.

“Not having to worry if my portfolio is going to go crazy the wrong way kept me feeling safe over these years,” he says.

Another thing he is confident of is the career he chose for himself more than 40 years ago. Marrs received his Bachelor of Arts in Teaching from Sam Houston State University in 1978 and began teaching Texas history at Campbell Junior High School in Cypress-Fairbanks ISD that same year. During his time with the school district, he has been a seventh grade Texas history team leader and served as a social studies department chair, until that job converted to a content curriculum instructional specialist.

“I declined that role as it would take me out of the classroom, something I had no desire to do,” he says.

The educator says he has never considered leaving the teaching profession because he loves sharing the history of “the great state of Texas” and teaching is his passion. Knowing he will have a defined benefit retirement to live on made his decision to remain a teacher that much easier, Marrs says.

And staying in the teaching profession for four decades, he says, has improved his effectiveness as a teacher. His time in the classroom has taught him how to better deal with parents, many of whom he taught in earlier years, and helped him adopt a flexibility to deal with the annoyances and chaos that often comes in dealing with seventh graders.

Chairita Franklin, Cypress-Fairbanks ISD’s assistant superintendent of human resources, says defined benefits are significant to retaining high-performing teachers, such as Marrs. And having teachers like him, she adds, has a direct correlation to students receiving quality first-time instruction.

Her opinion mirrors that of a new research brief that indicates defined benefits play an important role in teacher recruitment, retention, and productivity. The research brief, “Revisiting the Three Rs of Teacher Retirement Systems: Recruitment, Retention and Retirement,” is published by the National Institute on Retirement Security and authored by Ilana Boivie, a senior policy analyst with the DC Fiscal Policy Institute.

“The reality we face is that the nation’s schools continue to struggle with a growing shortage of teachers and that teachers are paid on average as much as 60 percent less than similarly educated professionals across the globe,” says Diane Oakley, NIRS executive director in a news release announcing the research brief’s findings. “Pensions play an essential role in recruiting and retaining our best and most experienced teachers. It’s critical that states continue to leverage the magnetic effect of pensions to help students achieve at their highest potential.”

Public employees prefer pensions over 401(K)-type or defined contribution plans and that Americans strongly support teacher pensions to help address recruiting problems and the broad wage gap, according to the NIRS report. Also, the report finds:

•    The more retention among midcareer teachers, the more the average productivity within a school increases.

•    Teacher turnover doesn’t just impact a school district financially. It affects a school district’s productivity.

•    The availability of defined benefits is a tool to recruit high-quality teachers and keep them employed and productive longer compared with defined contribution savings plans that force educators to act as their own investment brokers.

•    According to data, in 2009, DB pensions helped to retain an additional 30,000 teachers throughout the United States. More tenured teachers produced more productive and efficient teachers, and that increased the overall quality of public education.

•    But, as DBs help keep teachers in classrooms, reducing the profession’s turnover rates, school districts save money. In 2009, districts nationwide saved between $131 million and $284 million in costs usually associated with teacher turnover.

The NIRS study also looked at state teacher attrition rates, the percentage of those who left the teaching profession in Texas during 2009. The state’s attrition rate that year is 7.3 percent, which is higher than the national average of 6.8 percent. The Alliance for Excellent Education provided the data. Turnover costs for Texas were between $100 million and $250 million.

Those numbers could have been a lot higher, if not for DBs, according to the NIRS report. Texas saved between $14 million and $30 million in teacher turnover costs. And if the state would have had a 401(k)-like DC plan, the attrition rate is projected to have been 8.2 percent. Instead, according to the NIRS report, DBs are estimated to have prevented 3,235 teachers from leaving the profession that year.

There are about 1.5 million members in the Teacher Retirement System of Texas. The number includes both active and retirees. The largest public retirement system in the state, members include teachers and non-classroom public educators such as bus drivers, administrators, and cafeteria workers, for example. The TRS has assets of about $146 billion.

Marrs, the Cypress-Fairbanks ISD teacher, is considering retirement right at the average age of TRS members who retire, 61 years old. All TRS members become vested in retirement benefits after five years of service.

Rebecca Merrill, TRS’ chief strategist, certainly sees some correlation between retirement benefits and longevity in public education. She says TRS data doesn’t indicate how many teachers leave the retirement system before being fully vested. However, upwards of half of all new system members drop out of the system before reaching the five-year vestment period. Once members reach vestment, though, the dropout rate dramatically declines to 10 to 20 percent.

“Maybe after five years in the classroom they are comfortable and committed or maybe they are vested and feel they better stick around,” she says. “But there is a correlation of those who have been here five years; they stick around.”

Allen Jones

About the Author:Allen Jones is the communications manager for the Texas Association of Public Employee Retirement Systems. Email him at allen@texpers.org or call 713-622-8018.