CHARLESTON, W. Va. - The $3.3 billion West Virginia State Board of Investments, Charleston, has started work on a bill that would create a new investment standard that mirrors ERISA's prudent man rule, said Craig Slaughter, executive director.
Mr. Slaughter hopes to get legislation introduced soon to relax standards and restrictions governing investments for the pension fund. The board is restricted to investing in fixed-income products.
"This is always a controversial thing for the Legislature," he said. "It won't be easy to change that, but I think there is an opportunity this year."
But the board's efforts may get stymied by the outcome of a pending state Supreme Court hearing questioning whether the state can ever invest in equities.
Right now, the state cannot allow the pension fund to invest in equities because the state constitution bans equity investment by the state. The board wants to adopt the prudent man rule so it can decide what investments, including equities, would be the best for the fund, Mr. Slaughter said. Also, a state statute limits the board to a specific list of domestic, A-rated or better bonds in which to invest; the statute also limits the fund to a maximum equity investment of 20%, which some say conflicts with the constitution. The constitution overrides state statutes.
Mr. Slaughter said the board will have a tight schedule trying to sell the legislation. The West Virginia Legislature went into session Jan. 12, and will wrap up its session 60 days later, March 11. The board hopes Gov. Gaston Caperton will introduce the bill.
But before the board can start persuading the Legislature to change pension investment law, it must convince the state attorney general and the state Supreme Court that it is allowed to invest in equities.
The issue went before the court Jan. 18; a response is not expected for a few weeks, Mr. Slaughter said.
State Attorney General Darrell V. McGraw Jr. said the state as a fiduciary cannot allow the pension fund to invest in equities because of the ban contained in the constitution.
But Mr. Slaughter disagrees. The pension fund belongs to the plan participants and not the state, he said. Therefore, the fund should be allowed to invest in equities.
"That money belongs to participants," Mr. Slaughter said. "It's clear that the constitution doesn't apply."
If the state Supreme Court does not agree with Mr. Slaughter, the board will not pursue the pension legislation, he said. Instead, the board will put out a full-force education effort to push the Legislature into calling a referendum to amend the constitution.
In the meantime, the board is trying to drum up support to get lawmakers to loosen investment restrictions.
The reference tool to help get legislation passed is a report recently issued by Bear Stearns Fiduciary Services Inc., Washington. The board commissioned Bear Stearns to evaluate its investment practices. Bear Stearns' primary recommendation was to give the board more investment authority.
Bear Stearns said the Legislature should drop the investment list, and suggested the Legislature adopt the prudent person rule.
The governor and the Legislature have "appointed a board that's experienced," said Francis X. Lilly, president of Bear Stearns Fiduciary Services. "They've appointed them to run the fund prudently, at the lowest cost and at the least risk. Enactment of the prudent man rule would enable them to do this with less of a burden on the Legislature."
The Bear Stearns report said the trend to adopt a prudent person standard and to drop "legal lists" is growing. Since 1990, seven states have done so. In addition, the National Conference of State Legislators in late September said the ERISA prudence standard provides a solution to guide pension investments.
What's more, limiting fund investment to fixed income and to a low percentage in equities actually raises portfolio risk, Mr. Lilly said. For the past 10 years, the pension fund did well because interest rates were low. But in 1994, interest rates rose and the value of the fund decreased.
But even if the fund maximized its 20% equity investment cap, it would have earned an average annual return of 7.17%, just shy of the 7.5% goal, the report said.
Given the fund's investment parameters, the board has done well, Mr. Lilly said. For the five-year period ended June 30, the $1.7 billion Public Employees Retirement System, which is part of the state board, had a 9.07% return, the report said.