MONTPELIER, Vt. - The money manager lineup for the $701 million Vermont State Employees' Retirement System could change next month if trustees adopt recommendations to pare the system's domestic stock allocation and double its exposure to domestic bonds.
Trustees may decide to move money among managers, drop some managers, or even add managers. "The board is going to sit down and decide whether to adopt the recommendations or not," said Michael Smith, a spokesman for State Treasurer James H. Douglas.
Trustees also must figure out whether to abandon the fund's global mandate for many of its equity managers, Mr. Smith said. The fund also has a global mandate for a fixed-income manager - Morgan Grenfell Capital Management Inc., New York - which allows it to invest up to 40% in non-U.S. bonds.
The fund's new consultant, Wilshire Associates, Santa Monica, Calif., recommended: decreasing domestic stocks to 33% of assets from 50%; increasing international stocks to 20% from 17%; increasing domestic bonds to 32% from 15%; eliminating international bonds (now at 5% of assets); boosting alternatives to 5% from 3%; and keeping real estate at 10%. Wilshire also recommended the state pension fund keep 40% of its domestic equities portfolio in a passive strategy, up from 11% at present.
Except for Alliance Capital Management L.P., New York, which runs $40.1 million in a Standard & Poor's 500 Stock Index fund, and $41.5 million in an international stock portfolio, all of the other equity managers have a global mandate that allows them to invest up to 25% of their portfolios in international stocks.
The four equity managers with a global mandate are Baring Asset Management Inc., which runs a $96.2 million portfolio; Brinson Partners Inc., Chicago, $88.1 million; Delaware Investment Advisers, Philadelphia, $156 million; and Lazard Asset Management, New York, $79.7 million in equities.
The fund has two fixed income managers: Loomis, Sayles & Co., which has $86 million in domestic bonds, and Morgan Grenfell, with $60.4 million in global bonds.
Additionally, the fund has $500,000 in venture capital invested with Green Mountain Venture Capital Corp., Hyde Park, Vt.; $1 million with Vermont Venture Capital, Burlington, Vt.; $3.6 million with Wachovia Timber, Winston Salem, N.C.; and 10% in real estate with six managers.
The Vermont Municipal Employees' Retirement System is expected to go through a similar exercise when its new consultant, Hewitt Associates, reviews its asset allocation this fall, Mr. Smith said.
As of March 31, the municipal system, with approximately $101 million in assets, had 47.7% of its assets in domestic equities vs. a target of 48.3% and 4.8% in foreign equities, against a 6.3% target. The fund also had 27.2% in domestic bonds vs. a 28.3% target, and 8.8% in non-U.S. bonds vs. a 6.3% target. The fund also had 0.9% in in-state investments, against a 4% target, 4% in real estate against a 7% target, and 6.7% in cash.
The state also retained State Street Bank & Trust Co., Boston, as custodian for the state employees' fund, the municipal employees' fund and the $776 million State Teachers' Retirement System.
Also, State Treasurer James H. Douglas wants the three plans to increase in-state investing. At the end of March, the teachers' and employees' funds each had about $2 million in local investments; the municipal fund had about $1 million.
Meanwhile, Mr. Douglas will make a recommendation by January to the Legislature whether to shift the employees' and teachers' fund to cash balance or traditional defined contribution plans. His recommendation will be based on a two-phased study by The Segal Co., New York. The most recent phase outlines the implications of converting the plans.
The first phase, delivered last August, said regardless of which design the state chooses, the new plan will be more expensive than the existing defined benefit plans.
Mr. Douglas said trustees of the teachers' fund already voted to oppose any conversion, "based on current information." But they left open the option to reconsider.
No matter which new plan the state would choose, participation would be mandatory for new employees. Current employees could remain in the current system or convert to the new. The initial account balance would be equal to the present value of accrued benefits earned to date for those who elect to convert.
According to the Segal study, participants transferring to a defined contribution plan could lose a few key defined benefit provisions, including automatic cost-of-living increases, survivor income provisions and disability provisions.
The study noted funding of the existing defined benefit plans will depend on how many participants transfer to the new plan.
According to the study, the funded status of the employees' and teachers' plans - based on current salaries - is 112% and 99%, respectively. But using projected salaries, the funded status is 65% and 53%, respectively.
The study presents several income replacement estimates based on various state and employee contribution levels, age, salary, prior service and rates of return. Under most of the options, the defined contribution plan would provide income replacement several percentage points lower than under a defined benefit plan.
The income replacement level under a cash balance plan - essentially a defined contribution plan with some defined contribution features such as individual account balances - would be closer to the current traditional defined benefit plan.
The income replacement illustrations "indicate that for many employees, the expected benefits from the defined contribution plan may fall short of producing benefits that are equivalent to the defined benefit program," the report said.
But the report noted that "including an estimate of future earnings increases in the establishment of the initial account balance will help mitigate this imbalance in expected benefits."
The cash balance option appears to be preferable, the report says.