The TEXPERS Blog

PRB maps five steps to 'thorough' for independent evaluations

TEXPERS Board member David Stacy provided thoughts on the difficulties pension funds will have with some definitions of an independent firm, at the actuarial committee meeting of the Pension Review Board on Sept. 20 in Austin.

By Joe Gimenez/G3 Public Relations

To comply Senate Bill 322, the Texas Legislature’s latest bill for monitoring pensions, local pension funds will need independent firms to evaluate them. That’s the message Pension Review Board staff delivered to three board members on the actuarial committee Sept. 20 in Austin. 

“We’ve noted basically five elements that we would expect any thorough evaluation to include,” said Kenny Herbold, the PRB's staff actuary. 

Chief among them are reviews of existing investment policies, procedures and practices. A pension fund's report to the PRB must document how it goes about making investment decisions, through both formal and informal processes.

“It should be looking at how the board is operating when it makes investment decisions and all the types of things it is doing,” Herbold said. “It does not just have to include just the investment policy statement. It could be how they conduct their board meetings and the processes they go through in order to make these types of decisions.”

Once that review is complete, a pension fund’s 322 report should compare its processes to industry best practices and then assess whether it is adhering to its policies.

Herbold noted that the pension funds’ introspection should identify strengths and weaknesses of current policies, procedures, and practices, and make recommendations for its improvement. Finally, the PRB staff guidelines say a "thorough" report would describe “the criteria considered and methodology used to perform the evaluation.”

The informal guidelines provided also ask questions about allocations, asset classes, risk measures, expected rates of return and diversification. But far more relate to governance, training, and processes by the Board and staff.

A pension fund’s first 322 evaluation is not due until May 1, 2020 and Herbold urged systems to make the most of the time to turn in a complete report. All systems with more than $30 million are required to perform an evaluation every three or six years depending on size. Systems under $30 million aren’t required by law to conduct an evaluation.

The firms which pension funds select to perform the evaluations may have existing relationships with the pension system so long as they do not directly or indirectly manage the investments of the retirement system.

TEXPERS board member David Stacy asked the PRB to clarify what would qualify as direct/indirect management given that very large investment houses have many operations. Herbold noted that the SEC requires a Chinese wall between different parts of investment firms so that a group directly managing money is not at all connected or in communication with a part of their firm giving advice. The PRB actuarial committee decided to take additional time to work on clarifications to Stacy’s question.

The PRB staff will post the draft guidance to its web page for public comment and further discussion by the full board at its October meeting.

The board will meet from 8 to 11 a.m. Oct. 17 at the Capitol Extension, committee Room E1.012 at 1400 N. Congress Ave. in Austin. Click here for more information.

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