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VRS Investment Professionals' Compensation

VRS Investment Professionals' Compensation

-- VRS response to FCTA's Charles McAndrew, 10/10/2014

From: Cynthia Comer [mailto:ccomer@varetire.org]
Sent: Friday, October 10, 2014 5:49 PM
To: Charles McAndrew
Cc: 'district32@senate.virginia.gov'; 'DelJLeMunyon@house.virginia.gov'; 'DelTRust@house.virginia.gov'; 'DelKPlum@house.virginia.gov'; 'DelBComstock@house.virginia.gov'; 'DelDAlbo@house.virginia.gov'; 'DelTHugo@house.virginia.gov'; Robert Schultze
Subject: VRS Investment Professionals' Compensation-Response to Charles McAndrew

Dear Mr. McAndrew:

Senator Howell asked me to respond to your email concerning recent news articles highlighting the compensation of Virginia Retirement System investment personnel. I believe that the points below help to illustrate the value added to the VRS trust fund by its investment professionals and the need to continue incentives to retain and attract superior talent to these positions. The contributions made by VRS professional investment staff significantly add to the financial health of the VRS trust fund and help to ensure the payment of benefits to our retirees and beneficiaries.

VRS ranks as the 21st largest pension plan in the U.S. and the 49th largest in the world, with investment assets totaling approximately $66 billion as of June 2014. A large plan like this needs to attract and retain the most talented investment professionals to ensure the plan's financial security for current and future retirees and beneficiaries.

Approximately two-thirds of all retirement benefits paid to retirees and beneficiaries are funded by investment earnings. Thus it is important for the VRS trust fund, and for its retirees and beneficiaries, to employ highly qualified professionals entrusted to manage the assets and to retain superior investment talent with the skills needed for the job.

VRS must compete with large investment firms and college endowment funds that pay much higher salaries to attract and retain investment professionals. The VRS Board of Trustees designed the Investment Professionals Pay Plan to attract, motivate and retain skilled investment professionals by offering competitive compensation. A major national compensation consultant that works with other large pension plans updates the plan every two years. The Board of Trustees recently undertook a year-long review of the Investment Professionals Pay Plan with JLARC participation and input. The revised plan, which ties compensation to investment performance, was discussed in detail in JLARC's July 2013 Semi-Annual Investment Report (http://jlarc.virginia.gov/reports/Rpt442.pdf). The pay plan calls for regular compensation surveys conducted by a third-party firm. The Board uses these surveys to measure VRS investment compensation against two peer group targets:

  1. VRS Base Salaries are targeted at the 75th percentile of leading U.S. public pension funds; and
  2. VRS Total Cash Compensation (Salary Plus Performance Incentive Pay) is targeted at the median of a blended peer group weighted 75 percent to leading public funds and 25 percent to a broad range of private firms (insurance companies, banks, investment firms, corporate pension plans, and college endowments).

Based on the results from the latest survey using peer data as of 2013, against the target for base salaries, VRS was 7 percent below target. Against the second target for total cash compensation, VRS was 5 percent behind. Assessing the survey results, the Administration and Personnel Committee of the Board concluded that the VRS pay plan for investment professionals was generally in line with the peer targets and that no change in the compensation plan is needed at this time.

While these payments are large by public employee standards, they are quite modest for money managers in the investment world. In addition, the $5.9 million in incentive payments represent a small fraction of the $310 million of average annual excess returns earned above the policy benchmark for the previous 10 years.

Approximately one-third of the portfolio (over $20 billion) is managed internally by VRS staff at considerable cost savings. The remainder is invested by external managers, subject to supervision by VRS staff. According to an outside study, the skill exhibited by VRS in performing these functions in comparison with their public fund peers saves the portfolio about $31 million annually in fees.

I hope that this information is of assistance in putting the VRS investment professionals' compensation in context and in offering some background on what it takes to administer a $66 billion trust fund.

Sincerely,
Cindy Comer

Cynthia Wilkinson Comer
Virginia Retirement System
Policy, Planning and Compliance Director
Phone: (804)344-3146
Email: ccomer@varetire.org