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At its September meeting, the TRS board of directors adopted a revised compensation plan for the investment staff, the second such proposal within a year. The proposed package made headlines in newspapers across the state and generated numerous comments from retired and active educators because of the significant potential bonuses included for top investment employees. Also of concern was a move by the board to give investment staff more leeway in making individual investments without specific board approval. This policy and the overall investment strategy were addressed in a letter to TRS members from TRS Board Chairman Jarvis Hollingsworth.

The Investment Strategy

The TRS board approved a revised investment policy that would allow more investments in alternative assets. Alternative assets include real estate, hedge funds, and private equity. The individual investment types that have been authorized are generally considered riskier than the current investment categories, but the argument is that because those investment types act "differently" than the general market, they will help diversify the fund in a way that actually reduces risk overall.

The new chief investment officer (CIO), Britt Harris, believes that he can increase the fund's returns by at least one percentage point over the market. Currently, TRS performs as does the market – typically, if the market is up 8 percent, TRS is up 8 percent. Using that example, theoretically the revised investment policy would bring in at least 9 percent. More importantly, if predictions are accurate, this new policy could help protect the fund in a down market. If the market was down 3 percent, for example, TRS might be down only 2 percent.

Note that one additional percentage point on a fund worth more than $100 billion is more than $1 billion, so 1 percent represents a significant amount of money. Of course, whether the investment staff and board are correct in their predictions remains to be seen.

Some media reports have noted near-disastrous results experienced by other public pensions that invested heavily in hedge funds (BusinessWeek; Can Retirees Afford This Much Risk?). It is important to note, however, TRS is limited to placing no more than 5 percent of the fund into that particular category.

What TCTA is doing: what you can do

TCTA is keeping a very close eye on this situation, and we have asked the appropriate legislative committees (Senate State Affairs and House Pensions & Investments) to oversee/monitor the revised investment strategy and its implementation. We are also communicating with key legislators to get their take on the issues and express our members’ concerns.

For now TCTA is wary, but not yet ready to sound the red alert. TRS staff members point out that while decisions seem to be happening quickly, the actual changes in the investment strategy will take place over a number of years. If that is the case, we will have some time to evaluate its effectiveness. The TRS staff has also scheduled a meeting with TCTA and other interested parties, and we hope to get some of our questions answered at that time.

We are pleased to note that legislators are very aware of what's going on at TRS, and it may be useful for them to hear from their constituents about their concerns. You can find contact information for your legislators on this web site.

Staff bonuses approved at September board meeting

The TRS board also approved a new compensation plan for investment staff. TRS employees noted the agency has had relatively high turnover in its investment personnel – including seven chief investment officers in the last 10 years – which is at least partially attributed to higher compensation available at both public and private sector funds.

Harris proposed the new compensation structure to reward employees if the TRS fund outperforms expectations and other public funds. Harris and board members explained that the new investment strategy would require new personnel, and recruiting such staff from the private sector would require a different compensation structure. Projections that Harris could potentially earn over $900,000 if all targets were met were reported in news stories across the state.

Harris pointed out at the committee meeting that the maximum bonuses under the proposed plan are substantially harder to achieve than under the current compensation structure. However, more employees would be eligible for the bonuses, and the potential payouts would be higher, under the new plan.

According to information provided at the meeting, the highest possible total payout under the fund would be $9.4 million divided among 105 employees (with upper-level employees earning the bulk of that). In order for that maximum payout to occur, the fund would have to increase investment income by at least $1.1 billion more than current investment earnings, and TRS would have to outperform every other public pension fund in the nation. Harris commented, as an aside, that the millions of dollars under discussion are considerably less than the amount of money the fund would earn in one hour if the investors were to perform as assumed (assumptions would have the fund earning $8 billion to $10 billion per year, or around $40 million/day).

Trustees Greg Poole and Mark Henry (representing active school employees) and Philip Mullins (representing higher education) expressed concerns about the content and timing of the plan, noting in particular the negative perception that could be created by approving this plan before it is known whether retirees will receive a modest increase in benefits (their first in six years). Trustees hinted at the likelihood that active member contributions would have to be increased in order for the TRS fund to afford a 13th check benefit increase for retirees, though actual figures to be used in making that decision will not be available until the board’s November meeting.

Retirees should be aware that the new investment strategy and compensation plan will have no bearing on whether a 13th check is approved this year. That decision will be based on the fund’s status as of August 31, 2007. Of course, the fund’s performance will be crucial to the possibility of future benefits.

At the urging of TRS staff, the committee and board agreed to move forward with the plan, citing concern about the need to continue current recruitment efforts that have been stalled in the absence of an improved compensation plan.

The compensation plan was adopted by the full board September 13. The first bonuses under the new plan would be paid in February 2009. More details are available on the TRS web site.

Posted: 09/21/07