Investment Losses Lead STRS Ohio to Review Allocation, Pay Practices

Noting that October 2008 was undoubtedly one of the worst months in STRS Ohio’s history, investment staff reported a total fund investment return of -13.4% for the month, according to an STRS news release. The fiscal year 2009 return-to-date on the total fund, from July 1-October 31, 2008, stands at -21.4%. The market value of STRS Ohio’s investment assets on October 31 was $54.5 billion.

The news release said John Osborn from Russell Investment Group, which is the board’s investment consultant, advised Board members that the most important investment decision it makes is how assets are allocated among the various investment options.

The current target asset allocation is 42% domestic equities, 25% international equities, 20% fixed income, 9.5% real estate and 3.5% alternatives. A Board asset allocation study calls for it to review this mix and the outlook for long-term returns from each asset category and determine if any adjustments need to be made, with any recommendations presented in March 2009.

Paying Investment Staff

Adam Barnett from McLagan, which provides compensation consulting for investment staff, presented an overview of the STRS Ohio Performance-Based Incentive (PBI) Program and its significance in the current market. Following the McLagan presentation, the Board voted to assign a detailed review of the PBI Program to its Staff Benefits Committee to explore compensation options and develop recommendations for the entire board’s consideration, according to the news release.

Under the STRS Ohio PBI Program, eligible Investment associates are able to receive an additional percentage of their base salary through a PBI payment, depending on both total investment fund performance and their individual goals over the previous fiscal year. In 2005, McLagan recommended that total compensation (salary plus incentives) for STRS Ohio’s investment staff focus on the 25th percentile of the private sector, but that higher performance standards also be met for associates to achieve the maximum payment. These recommendations were adopted by the board.

At the October 2008 STRS Ohio Board meeting, outside actuary PricewaterhouseCoopers (PwC) presented a first look at the annual "snapshot" of the actuarial position of the retirement fund as of July 1, 2008. It showed an increase in the funding period to 28.3 years and a decrease in the funded ratio to 80.1%, due in part to investment losses as well as lower-than-expected increases in teacher payrolls and shifts in retirement patterns.

An STRS news release said the three changes having the biggest impact on the pension fund were assumptions about retiree mortality, payroll growth, and salary increases. The five-year experience review showed that, not only are STRS Ohio members living longer, but also that STRS Ohio member life expectancy is longer than that of the general population. This finding along with the fact that payroll growth was also adjusted downward lengthened the funding period.

The current funding level is nearly the same as it was when researchers from the Thomas B. Fordham Institute released a report saying the Buckeye State pension system 'faces immense and growing fiscal challenges" and needs an immediate overhaul (See Report: Ohio STRS a 'Ticking Time Bomb').