August 2017 Board Meeting Summary

The August 28, 2017 meeting of the Public School and Education Employee Retirement Systems of Missouri (PSRS/PEERS) Board of Trustees convened at 9 a.m. at the Retirement System offices in Jefferson City, Missouri. In attendance were Board members Aaron Zalis, Yvonne Heath, Beth Knes, Jason Hoffman, Scott Hunt and Jason Steliga. Also present were PSRS/PEERS Executive Director M. Steve Yoakum; Assistant Executive Director, Investments, Craig Husting; Assistant Executive Director, Operations, Dearld Snider; General Counsel, Alan Thompson; Chief Financial Officer, Anita Brand; Director of Employer and Member Services, Omar Davis; Director of Legislation and Policy, Maria Walden; Internal Auditor, Jeff Hyman; Chief Technology Officer, Bill Betts; Director of Administrative Planning and Design, Nicole Hamler; and various other PSRS/PEERS staff members.

System Operations

Minutes

The open minutes from the June 12-13, 2017 meeting were approved by a unanimous vote with Beth Knes abstaining.

Order of Business

Dr. Aaron Zalis changed the order of items on the agenda during the management report. He moved item E. (change 10/30/17 Board meeting date) to after G. CPI Update/COLA Review.

Other

Dr. Aaron Zalis welcomed Ms. Beth Knes to the Board of Trustees. Ms. Knes was appointed on August 22, 2017 by Governor Greitens. Her biography can be found on the PSRS/PEERS website here - https://www.psrs-peers.org/Board/Beth-Knes

Investment Report

Fiscal Year 2017 Performance and Attribution

Mr. Craig Husting introduced two new consultants from Willis Towers Watson (WTW) who will be working with the Systems in the future. Jim Neill will act as the lead consultant for PSRS/PEERS, with Michael Patalsky as the secondary consultant. Jim is a director with WTW and the Pennsylvania investment leader, while Mike is a senior investment consultant. Both Jim and Mike are based in the WTW Pittsburgh office.

Mr. Husting and Mr. Neill provided a detailed presentation on the PSRS/PEERS fiscal year 2017 investment performance. The presentation included the following: (1) A review of the Systems' investment principles, objectives and philosophy, (2) A summary of fiscal year 2017 performance, (3) PSRS/PEERS' performance relative to expectations and relative to a peer group, (4) Attribution for fiscal year 2017 performance, (5) A review of fiscal year 2017 objectives and a description of fiscal year 2018 objectives, (6) A market outlook and update on fiscal year 2018, and (7) An update on the search process for a general consultant.

Mr. Husting reported that the fiscal year 2017 (July 1, 2016 through June 30, 2017) estimated investment return for PSRS/PEERS was 12.48%, or 12.30% net of all fees and expenses. The Systems outperformed the passive benchmark, which returned 11.02% for the year. The PSRS/PEERS internal investment staff and external investment managers added value above the policy benchmark of over $500 million, net of all fees and expenses, for the year. The outperformance in 2017 was due to portfolio construction and tactical asset allocation decisions by internal investment staff (overweighting and underweighting asset classes around targets) as well as active management on the part of external managers.

Mr. Husting also reported that the five-year estimated annualized return for the Systems for the period ending June 30, 2017 was 9.53%. The five-year PSRS and PEERS investment return exceeded 65% of the peer group as defined by the Wilshire TUCS universe of public pension plans with assets in excess of $1 billion. The Systems generated the investment return while taking less risk than approximately two-thirds of comparable public funds.

Mr. Husting also reported that staff is in the process of conducting a search for a general investment consultant. An RFP was issued on July 10, 2017 to 27 potential candidates. The Systems received responses from nine firms on August 11, 2017. Staff will review the RFPs and conduct meetings with several of the respondents in September, October and November. A recommendation will be presented to the Board at the December 11, 2017 Board meeting.

Safe Assets Program Review

Mr. Frank Aten and Mrs. Jessica Wilbers from the PSRS/PEERS investment staff reviewed the Systems' Safe Assets portfolio including program objectives, guidelines and long-term results. The five-year annualized estimated return for the Safe Assets composite for the period ended June 30, 2017 was 0.8%.

Hedged Assets Program Review

Mr. John Tuck from the PSRS/PEERS investment staff reviewed the Systems' Hedged Assets portfolio including program objectives, guidelines and long-term results. Mr. Tuck discussed the role of Hedged Assets within the Public Risk asset composite. Specifically, he discussed the unique characteristics of Hedged Assets versus other Public Risk Programs. The five-year estimated annualized return for the Hedged Assets composite for the period ended June 30, 2017 was 7.0%.

Management Report

Appointment of NCTR Delegates

Ms. Yvonne Heath, Mr. Chuck Bryant and Mr. Steve Yoakum were nominated by a unanimous vote to serve as delegates, with Mr. Dearld Snider as the alternate, at the annual National Council on Teacher Retirement Conference being held October 2017.

Amendments to Regulations

Senate Bill 62 was passed by the Missouri legislature during the 2017 regular legislative session and signed by the governor. The bill amends sections 169.141, 169.560, and 169.715, RSMo., and affects PSRS/PEERS in three ways. The divorce pop-up provision, death/divorce re-marry provision, and working after retirement for a third party or as an independent contractor provision (PSRS only).

Pursuant to the statutory changes, PSRS/PEERS staff is recommending amendments to its existing regulations. These amendments were approved by unanimous vote and will be filed with the Secretary of State, go through the rule making process and be published in the Missouri Register.

Update to the PSRS/PEERS Sunshine Law Resolution

Mr. Alan Thompson, General Counsel, provided an updated Sunshine Law resolution to reflect the Systems' correct, full entity name and address. The resolution appoints the General Counsel as custodian of records of PSRS/PEERS. It specifies the time period for a response to a request, along with the fees associated with all requests. The updated Sunshine Law resolution was approved by a unanimous vote. A copy of the full resolution is on file.

Member Services Report

Mr. Omar Davis, director of employer and member services, presented statistics for the 2016-2017 fiscal year regarding the number of retirements, deaths, refunds and member education meetings, as well as other projects in the member services department over the last year.

Mr. Snider also provided an update regarding the fraudulent activity detected on our website. Web Member Services accounts were recently created in an attempt to redirect members' retirement benefits. Our people and processes stopped the attempt and prevented any financial impact to our members. Approximately 720 members were affected. All were contacted immediately by PSRS/PEERS by phone and/or by mail, as were authorities in the St. Louis area, the FBI and U.S. Postal Service inspectors, all of whom are currently investigating the incident. Mr. Snider reiterated PSRS/PEERS was not the source of the stolen information. Based on the distribution of those affected, we believe a St. Louis area entity providing services for the education community recently experienced an information security breach.

CPI Update/Cost-of-Living Adjustment (COLA) Review

Mr. Yoakum reviewed PSRS/PEERS continuous goals: 1. Provide for the security and financial stability of the Retirement Systems, 2. Maintain the contribution rates of both Systems at or below current levels, and 3. Maintain retiree purchasing power by providing a consistent cost-of-living adjustment for PSRS/PEERS retirees.

He reviewed a new interactive map on the PSRS/PEERS website, which provides a comparison of all 15 state teacher retirement systems whose members do not contribute to Social Security. The results indicate that PSRS is one of, if not the best-funded retirement system in the nation. A link to the map on the website can be found here: https://www.psrs-peers.org/About-Us/The-Missouri-Model  

Mr. Yoakum also discussed the Consumer Price Index for Urban Consumers (CPI-U) as calculated by the Bureau of Labor Statistics (BLS). The CPI-U is the measure of the change in prices of goods and services purchased by urban consumers between any two time periods. PSRS/PEERS' regulation requires that the time period for the CPI-U calculation be from June to June. Based on the values provided by the BLS, the CPI-U, which is used for COLA calculations, is up 1.6% through fiscal year 2017.

However, the CPI-U is negative -0.07% through July 31, 2017, which is the first month of fiscal year 2018.

Mr. Yoakum reviewed the remaining timeline for the full COLA analysis:

• August 2017: PSRS/PEERS Board meeting – annual legislative meeting
• November 2-3, 2017PSRS/PEERS working session and Board meeting
• Actuarial valuation draft results presented by Pricewaterhouse Coopers (PwC) actuaries
• COLA options reviewed
• COLA set for January 2018
• Contribution rate set for 2018-2019 school year
• November 2017: Actuarial valuation reports finalized by PwC
• December 11, 2017: PSRS/PEERS Board meeting – Audit by Williams Keepers
• Comprehensive Annual Financial Report (CAFR) prepared

The different COLA scenarios that will be fully analyzed by the Board in the fall of 2017 prior to setting the COLA for January 2018 were reviewed:

1. Scenario A (Current Policy)
• CPI-U between 0-2% = 0% COLA, CPI-U between 2-5% = 2% COLA, CPI-U 5% or more = 5% COLA
2. Scenario B (Actual CPI-U Between 0%-2%)
• CPI-U between 0-2% = Actual % COLA, CPI-U between 2-5% = 2% COLA , CPI-U 5% or more = 5% COLA
3. Scenario C (2011 Funding Stabilization Policy)
• CPI-U between 0-5% = 2% COLA, CPI-U 5% or more = 5% COLA
4. Scenario D (Pre-2011 COLA Policy)
• CPI-U between 0-5% = Actual % COLA, CPI-U 5% or more = 5% COLA
5. Scenario E (1% COLA Between 0%-2%)
• CPI-U between 0-2% =1% COLA, CPI-U between 2-5% = 2% COLA, CPI-U 5% or more = 5% COLA
6. Scenario F (2% when CPI-U reaches Cumulative 2%)
• 2% COLA when CPI-U is between 0%-2% and cumulatively 2% or more, CPI-U between 2-5% = 2% COLA, CPI-U 5% or more = 5% COLA
• Resets cumulative calculation after a 2% COLA is provided
• Cumulative period would include CPI for fiscal year 2016 and 2017.
7. Scenario G (2% when CPI-U reaches Cumulative 2%)
• Same as Scenario F, however cumulative period would start with fiscal year 2017.
  • Cost analysis requested by Scott Hunt, Board member, in addition to A-F

All the scenarios will be analyzed at various discount rates ranging from 7.25% to 7.75%, and all calculations will be based on fiscal year 2017 investment returns, the 2017 actuarial valuation and the funding goals. The analysis will include costs to enact the changes, the funded ratios of the Systems and contribution rates for employers and employees.

Board Meeting Schedule Update

Following discussion and a unanimous vote, the October 30, 2017 Board of Trustees meeting was moved to November 2-3, 2017. November 2, 2017 will be an afternoon working session for the Board to review actuarial valuation draft results presented by PricewaterhouseCoopers (PwC) and the results of the different COLA scenarios under various assumed rates of return. November 3, 2017 will be the PSRS/PEERS Board meeting in which the COLA for January 2018 and the contribution rate for the 2018-2019 will both be set.  

Public Comment

None

Closed Session

The Board went into closed session at 12:45 pm

Adjournment

The Board adjourned at 2 pm

This summary is not official minutes of the PSRS/PEERS Board of Trustees Meeting. The official minutes will be approved at the next PSRS/PEERS Board of Trustees meeting and will posted to our website at that time.