April 24, 2014

Panel recommends overhauling way NC pension fund makes investment decisions

A bipartisan commission hand-picked by state Treasurer Janet Cowell is recommending that she and future treasurers share high-level investment decisions for the state’s $87 billion pension fund with a board of trustees.

A bipartisan commission hand-picked by state Treasurer Janet Cowell is recommending that she and future treasurers share high-level investment decisions for the state’s $87 billion pension fund with a board of trustees.

However, the proposal, which was approved by voice vote Thursday, was far from unanimous. The recommendation will be accompanied by a minority report, signed by four of the 11 commission members, that advocates tweaking the current system rather than overhauling it.

The majority contend the current system, under which the treasurer is the sole fiduciary with final authority over pension fund investment decisions, is working but could nonetheless be better. North Carolina is one of just four states where the treasurer has sole authority on investment decisions.

“The North Carolina pension plans has always been viewed as one of the strongest in the country,” said Michael Kennedy, the commission’s chair as well as a senior partner at Korn/Ferry International and chairman of the Federal Retirement Thrift Investment Board, the nation’s largest pension fund.

“The sole fiduciary model has actually worked very effectively in North Carolina,” he added, “so there is nothing, from my perspective, that is actually broken.”

The minority are mostly advocating an if-it-ain’t-broke-don’t-fix-it approach, but they also see some areas that could be improved.

Despite the divided opinions, the fifth and final meeting of the Investment Fiduciary Governance Commission was rancor-free.

“The key is, there was more we agreed on, on the issue of transparency, on the issue of the necessity for professional compensation (of investment staff) and additional professional staff for the treasurer,” Rep. Rick Glazier, a Cumberland Democrat and a member of the minority, said after the session.

The next step is up to Cowell, who appointed the commission in January and deliberately did not attend its meetings – except for one where she was asked to share her thoughts about the current structure.

Schorr Johnson, spokesman for the Treasurer’s office, said Cowell will review the majority and minority reports “and send a proposal to the General Assembly before the beginning of the session.” The legislature convenes May 14.

Outside political pressure for change also is being brought to bear. The State Employees Association of North Carolina, an ardent critic of Cowell, has been pushing for pension fund investments to be handled by a board of trustees.

9-member board proposed

What’s at stake are high-level decisions such as setting overall investment policy; allocating how much money to plow into different types of investments, such as stocks, bonds and private equity; and hiring outside money managers.

Today those decisions are made by Cowell in consultation with an Investment Advisory Committee.

The majority report recommends creating a nine-member board of trustees, with each member eligible to serve a maximum of two four-year terms. That board would be chaired by the treasurer, but each member would have an equal vote and would share fiduciary responsibilities.

In addition to the treasurer, the commission recommends the board consist of: one member each appointed by the governor, the leaders of the Senate and House, and the treasurer. The remainder would be appointed by the board itself.

A draft version of the majority report states that “the increasing level of complexity in institutional investments is best addressed through requiring the involvement of individuals with different perspectives and the right mixture of professional expertise.”

Board member Sen. Floyd McKissick, a Durham Democrat who supports the majority report, said a board-of-trustees model would protect the pension fund if a treasurer lacking a strong financial background was ever elected.

“While we may have had a succession of good, strong treasurers in North Carolina ... there is no telling who we will elect in the future,” he said.

Politicization a concern

The draft minority report calls for a strengthened Investment Advisory Committee.

“We strongly believe adopting a wholly new governance model introduces a risky, less nimble and transparent, and politically unwise level of change,” it states.

Rep. Rick Glazier, a Cumberland Democrat who signed the minority report, said that although the makeup of the board proposed by the majority is a sound one, it could look very different after lawmakers get through with it.

“It is the politicization of this process and the board that scares me the most,” he said. “Certainly the majority has a point ... about what happens with a different treasurer, but I believe we have created a Frankenstein times nine.”

Glazier also said he was concerned how quickly a board could act, an important consideration in an era “when nanoseconds can cost tens of millions of dollars to investors.”

Both the majority and minority said they’d like to see the treasurer have expanded authority over investment staff compensation and size. Increasing the investment staff would enable reduced reliance on outside money managers and lower overall investment fees, which is something SEANC has been pushing for as well.

Kennedy said after the meeting that there is “a huge gap” between the size of North Carolina’s investment staff and that of other states with similar-sized pension plans.

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