Thursday, January 30, 2014

A Suggestion for the new NCRS Investment Fiduciary Governance Commission

I applaud Treasurer Cowell in creating your committee and look forward to hearing your recommendations.  I wanted to share my thoughts.  I see no reason to start from scratch, but perhaps it might be best to essentially copy another state plan that seems to perform well with great transparency. 

The Minnesota State Retirement System (MSRS) and the Minnesota State Board of Investments (MSBI) could serve as a model for what North Carolina Retirement System should aspire to emulate.  Minnesota's pension is one of the largest in the country and has produced the best 3-year returns among state pension funds and second best for 10-year returns. NCRS pension returns have lagged behind the median pension significantly for these same periods and ranked 5th from last and 4th from last among states reporting for the 10-year and 3-year returns, respectively.

Not only has MSBI produced great returns, but they have also won awards for their excellent and timely financial reporting.  MSBI actually produces a Comprehensive Annual Financial Report (CAFR) that focuses ONLY on the state pension (North Carolina does not).  The MSBI CAFR actually includes real financial statements with detailed expense accounting and asset reporting (North Carolina does not).  The CAFR includes an audit opinion from the Minnesota Office of the Legislative Auditor.  MSBI has achieved all of this with an investment staff of just 22.

With an investment staff of 26, the NCRS poor relative investment performance compared to other state funds will not be solved by adding staff.  MSBI's good returns are due to a healthy 60% allocation to equities and less than 15% alternative investments (including real estate) and a focus on expense control (less than 30 bps of assets vs. NCRS over 50 bps).

The MSBI pension is slightly lower funded than North Carolina, but don't let that fool you.  It appears Minnesota employees only contribute 5% of their pay (up from just 4.25% a few years ago) and a full employer actuarial required contribution has not been made in the last 10 years. Meanwhile, NCRS participants contribute 6% (or more) of their pay to the pension, and our general assembly has been much better than Minnesota at making annual required actuarial contributions.  So, while MSBI is not as well "funded" as NCRS, I believe you will find it is much better "managed" and has better reporting transparency.

I urge the North Carolina Investment Fiduciary Governance Committee to read the MSBI CAFR and compare it to the North Carolina State Treasurer's Annual Report.  The treasurer's annual report includes information about the pension, but also other information that is irrelevant to the pension.  NCRS participants must read the treasurer's annual report, but also must know to look for and find the Government Investment Operations Report to find any expense reporting of the pension.  In addition, NCRS participants must know to look for the Investment Advisory Committee reports and minutes to discover more details on investments and actuarial data.  Finally, an NCRS participant must know they can find further pension details in the State of North Carolina CAFR.  This CAFR is some 300 pages and covers the ENTIRE state of North Carolina.  Of the 300 pages, only a handful pertain to the state pension and these pages are scattered throughout the 300 page document.  NCRS participants and North Carolina tax payers need a single CAFR dedicated to the pension plans that summarizes everything that is currently scattered haphazardly across several reports.  

Even after combining all the above-mentioned reports, you will find North Carolina's reporting woefully inadequate and returns alarmingly lower compared to Minnesota.  The MSBI CAFR also outlines how they structure their functional staff and oversight boards and committees.  The MSBI CAFR can be viewed by clicking here.

Also, South Dakota and North Dakota both have independent CPA firms that audit the retirement system CAFR each year (instead of another government entity). Additionally, while North Dakota's level of expenses and returns are nothing to brag about, their reporting is something to brag about as ND  publicly reports the investment performance of each and every external manager in addition to assets managed and fees paid.  Perhaps copying what works in Minnesota and adding a few tweaks to add more transparency like North and South Dakota could be a good place to start for your committee.

Thank you for your commitment to improving the NCRS pension fund.

1 comment:

  1. North Dakota discloses every investment manager's performance and assets under management as well as investment manager fees (by investment asset class) in the investment section of the CAFR (begins on page 64) The report can be found here: