The Virginia Retirement System beat the stock market this year and now its investment staff are reaping the rewards.
The VRS Board of Directors on Tuesday approved incentive compensation of more than $7.85 million for 52 members of its internal investment staff as additional compensation for a 27.5% return on investment during the last exercise. The return swelled the pension trust fund for public employees to $101.8 billion – the first time it has topped $100 billion.
The council also responded to critics who say the pension system could earn more for civil servants’ pensions by investing in indexed funds for stocks and bonds instead of paying in-house investment staff to manage its assets.
“These excess returns would not have been possible under passively managed investment strategies,” VRS Chairman O’Kelly McWilliams said ahead of the board’s unanimous vote to approve the incentive compensation program. .
A year ago, the pension system was not singing. It had ended the fiscal year on June 30, 2020, with an investment return of 1.4% – well below the annual investment return of 6.75% it assumes when setting the government’s contribution rates to pay the long-term pension obligations of state employees, teachers, law. officers and judges, and many local government employees. (VRS awarded $3.35 million in incentive compensation to its investment professionals last year.)
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The dramatic turnaround in the last fiscal year, which ended June 30, reflected big gains in private equity stocks – part of a highly diversified investment portfolio that some critics have blamed for leaving potential equity gains on the table – and public stocks that typically fuel the stock market. VRS has earned returns of 54% on its investments in private stocks and 41% on public stocks, compared to nearly 39% for the S&P 500 Index.
VRS created the “Investment Professionals Compensation Plan” to attract and retain employees of the system’s internal investment division, which manages approximately one-third of its assets. The plan bases incentive compensation on the performance of VRS investments against third-party benchmarks over three and five years.
Over the past fiscal year, VRS investments have returned 2.2% more than the system would have expected under its asset allocation policy, which aims to diversify where it puts its money. .
“VRS’s approach, consistent with industry best practices, is to manage a broader set of opportunities, beyond U.S. stocks and bonds,” spokeswoman Jeanne Chenault said Tuesday.
Last year’s gains are expected to reduce the cost of paying future pension obligations in the next two-year state budget, which will reflect contribution rates the VRS board will recommend to employers next month. from states and local governments to be paid from July 1, 2022, through June 30, 2024.
Gov. Ralph Northam, who will propose a new budget in December before leaving office next month, told lawmakers in August that a stock market rally had been “profoundly good for the Virginia Retirement System, which funds police retirements.” , teachers and public servants all over Virginia.
Separately, an annual external study by CEM Benchmarking found that VRS administrative costs were $33 lower per active member of the pension system than last year’s average for other public pension systems considered its peers. VRS costs were $72 per member in 2020, compared to $105 per member for peers.
The board awarded a 2.5% bonus to administrative employees, including those who support the investment division, for meeting performance criteria, as well as merit pay increases of 2% to 4% for those whose performance exceeds standard or excellent. The combined cost is approximately $1.2 million.
The board also approved a 5% bonus for VRS director Trish Bishop, about $10,000, as well as a $75,000 payout in December to bring her total compensation closer to that of her peers in other systems. of retirement. He also approved a 7% bonus worth $12,382 for Jennifer Schreck, the director of internal audit.