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Pension Funds

South Carolina Retirement System Investment Commission nearing end of governance overhaul

Hard work nearly complete; highlights include investment delegation, relationship work

The South Carolina Retirement System Investment Commission, Columbia, is nearing the end of a three-year overhaul of its governance structure and investment processes.

The overhaul was based on the 124 recommendations of a fiduciary performance audit conducted in 2014 by Funston Advisory Services LLC, Bloomfield Hills, Mich.

The 2014 fiduciary audit was mandated by the South Carolina Legislature and implemented by Patrick J. Maley, state inspector general.

Some of the Funston report's most important recommendations were about increasing and improving the commission's investment oversight, but others were designed to improve the commission's working relationships. There had been tension during the previous two years between state Treasurer Curtis M. Loftis Jr. and the other six commissioners and the commission staff.

The RSIC was created by legislative mandate on Oct. 1, 2005, with exclusive authority to invest the now $28.8 billion South Carolina Retirement Systems, Columbia. Previously, the state's Budget and Control Board approved recommendations of an investment panel.

Through internal procedural changes and enabling legislation, the RSIC has made almost all of the significant changes recommended by the Funston report, including:

  • The executive director role was created.
  • Commissioner oversight was shifted to provide strategic guidance over investments from an advisory role focused on investment manager selection and due diligence.
  • Investment principles were adopted.
  • Custody of state pension fund assets was moved to the plans' administrator, the South Carolina Public Employee Benefit Authority, Columbia, from the state treasurer's office.
  • The RSIC assumed management of custodial operations on behalf of the Public Employee Benefit Authority.
  • Reporting of performance and investment management fees was standardized.
  • The number of RSIC commissioners was increased to eight from seven, making the PEBA's executive director a non-voting member.
  • The state treasurer can't serve on the RSIC and must appoint a qualified individual to serve as a commissioner.
Pension reform legislation passed in April and effective July 1 increases employer and employee contributions to the retirement plans in order to shorten the amortization period for reducing South Carolina Retirement Systems' unfunded liability ($45.4 billion as of June 30, 2016) to 20 years from 30 years over the next 10 years.

The new law also lowers the retirement plans' annual assumed rate of return to 7.25% from 7.5%. The investment commission and the benefit authority now have more power to change the plans' assumed rate of return; previously, only the state Legislature could change the rate.

Michael Hitchcock, the RSIC's executive director, said the reform "was a major piece of legislation that addresses the plans' unfunded liability," noting a joint House and Senate committee for pension reform hammered out many of the tough issues, resulting in a comparatively smooth passage of the bill.

'A math problem'

RSIC and PEBA officials "went to the joint committee and explained that the pension liability issue is a math problem. There are only two levers that can be pulled to increase plan assets: increase contributions into the fund or achieve higher investment returns. The latter is not likely, and the committee understood that the other lever had to be pulled in order to address the funded status," Mr. Hitchcock said.

The RSIC's last task in the restructuring of its governance platform is deciding how to delegate investment authority to investment staff, said Geoffrey Berg, chief investment officer.

The 2017 reform legislation "creates the right bifurcation in decision-making between the commission — which should operate at more of a corporate level, reviewing asset class-level issues — and the investment staff, which will make more investment decisions autonomously than in the past," Mr. Berg said.

The RSIC investment staff will work with commissioners to decide "what investment delegation looks like, how it will work in practice and when the commission needs to be involved," Mr. Berg said.

Meketa Investment Group Inc., Chicago, the commission's newly hired investment consultant, will survey public pension plans in all 50 states about the structure and operations of their investment delegation and will assist staff in presenting a proposal for the RSIC's investment authority in September, Mr. Berg said. The expectation is that the new investment decision-making process will be approved by the commission at its December meeting.

"Mike and I are shoulder-to-shoulder in expanding and developing the investment process and supporting the governance process," Mr. Berg said.

"We are setting a new direction for the organization," Mr. Hitchcock stressed.