A pension fund starting with $20 billion in assets is so new it still is recruiting for a chief investment officer, searching for an investment consultant and even still deciding where to locate its office.
The National Railroad Retirement Investment Trust is starting from scratch in every respect but the assets - it will rank among the 50 largest pension funds in the country. That huge amount will start arriving soon from the U.S. Railroad Retirement Board's account, which has been overseen by the U.S. Department of the Treasury.
"It is a unique and interesting and complicated challenge to serve a brand-new pension trust that will start with so much money," said John J. Salmon, counsel to the new trust, speaking of the work awaiting the person chosen as chief investment officer. Mr. Salmon is a partner in Dewey Ballantine LLP, Washington, which is working with trustees of the new organization and has long worked on railroad issues.
The NRRIT is so new it has yet to name the seventh and final trustee to round out its new board. Trustees, however, made an offer last week to one finalist, identified as a retired plan sponsor executive.
The six trustees in place now are:
* searching for a chief investment officer. The trustees hired Russell Reynolds Associates, New York, to do the recruiting, which is still under way.
* conducting an asset-liability study. The trustees retained Watson Wyatt Investment Consulting, working with its consultants in Washington, Atlanta and New York.
* selecting an auditing firm. The trustees are evaluating the responses received from the four major auditing firms that were sent requests for proposals. Mr. Salmon declined to name the firms.
Russell Reynolds also conducted the search for the seventh trustee, an independent member of the board as required by the law that set up the trust. Mr. Salmon said the trustees want to have the full seven-member board in place before beginning to evaluate CIO candidates.
After getting these immediate concerns taken care of, the trustees next intend to:
* search for an investment consulting firm to help implement an asset allocation;
* search for investment professions to staff the new trust;
* decide on a location for the trust's office;
* search for a custodian for the trust; and
* search for investment managers.
"This is really unusual," said Debra Brown, managing director at Russell Reynolds, speaking of the searches for such a huge, new pension fund. She and Susan Fowler, also managing director, are leading the recruiting effort for the trustee and CIO.
"That's the beauty of this, for someone who loves this business," Ms. Brown said. "It's an opportunity to conceive and build an investment team and the investment structure."
"Basically, this is a blank sheet of paper," she said.
Russell Reynolds is still seeking CIO candidates. Ms. Brown said the first round of interviews could begin May 15, although evaluation is contingent on having the seventh trustee.
The other six trustees - three representing railroad companies and three representing railroad unions - were appointed in January and held their first meeting in February.
Both Mr. Salmon and Ms. Brown expect the seventh trustee will be able to take up board duties right away.
But they expect the CIO, once hired, might take until June or July to begin work at the trust, as that person likely will need time to wind down his or her existing duties.
Brian Hersey, investment director at Watson Wyatt in Atlanta, said the firm is doing an asset-liability study and will develop a long-term strategic asset allocation for the trust. Carl Hess, global head of asset allocation, in Watson Wyatt's New York office, is leading the allocation work.
"This is a very special assignment," Mr. Hersey said.
The trust will start receiving the money as soon as trustees have the basic organization in place, including a custodian bank. Mr. Salmon said the trustees will move money to the trust from the Treasury in a prudent fashion as they develop an investment strategy. A timetable hasn't been set.
The trustees will have complete latitude on investing the assets, tempered only by prudent investment standards, Mr. Salmon said. The trust doesn't come under the Employee Retirement Income Security Act, although Mr. Salmon said trustees will be subject to reporting and fiduciary standards similar to those of ERISA.
Mr. Salmon said trustees have consulted a wide range of pension fund executives in organizing the trust.
The board won't begin hiring investment professionals until the CIO is hired, to give him or her latitude in deciding on staff. Mr. Salmon declined to say how much of a budget the trust has for staffing, saying the figure isn't broken out. But he said pay will be competitive with the ranges in the pension investment marketplace. The trust will bear the expense of managing the money, he said.
How the fund will begin to manage money is still undecided. "With $20 billion under management, there are economies of scale for a fund this size," Ms. Brown said. "But I'd be surprised if they started with any internal management."
Annual contributions to the fund could be about $2 billion to $5 billion. The funding status of the railroad benefits wasn't immediately clear from officials, but Obie O'Bannon, senior vice president-government affairs with the Association of American Railroads, a Washington-based industry group, and one report noted it has $36 billion in liabilities, which would make it underfunded by $16 billion.
No decision on the location of the office has been made, although Mr. Salmon said it could be in Washington.
The NRRIT was created as part of railroad retirement legislation signed into law in December by President Bush.
The U.S. Railroad Retirement Board, a Chicago-based agency of the federal government, administers railroad workers retirement benefits, financed by direct taxes on railroad companies and employees. The RRB was restricted to investing its assets in special issue, non-tradable Treasury securities, Mr. O'Bannon said. He said the NRRIT has an expected projected return of at least 8% on its investments, in contrast to the 6% the RRB received from the Treasury securities. The two-percentage-point advantage is enough to reduce one type of taxes imposed on railroads to finance the RRB benefits by a projected three percentage points over the next three years.
The legislation created the NRRIT, explicitly giving it complete latitude in investing to boost returns, allowing for a reduction in the tax rates to railroads and an increase in benefits for workers.