South Carolina embarks on major overhaul

The South Carolina Retirement System Investment Commission should rehab governance and investment processes to better manage the state's $29.9 billion in retirement assets, a fiduciary performance audit found.

Even before the final report from the legislatively mandated audit was presented May 1 to the Columbia-based panel, commissioners were reviewing the 124 recommendations made by Funston Advisory Services LLC and planning to implement the most critical changes.

“This is a work in progress,” said Reynolds Williams, commission chairman, in an interview.

Among the significant changes recommended by Funston: adding an executive director; moving control of the pension fund's custodian to the commission; increasing the number of commissioners to nine from seven; and removing commissioners from the manager due diligence process except for educational purposes.

Some of Funston's most important recommendations are about increasing and improving the commission's investment oversight, including developing the board's first statement of investment principles and turning commissioners' attention to the pension fund's asset class approaches more than once per year, and providing strategic guidance over investments, rather than advising about specific money managers and due diligence.

Others — such as the executive director and increasing the size of the commission — are designed to improve the commission's working relationships. There has been tension for two years between state Treasurer Curtis M. Loftis Jr. and the other six commissioners and the commission staff.

The fiduciary performance audit, commissioned in November by Patrick J. Maley, state inspector general, was released April 18.

Of the 124 recommendations in the audit report, 108 can be addressed by the commission directly. Of those, 38 require board action; 12 require action by the South Carolina Legislature; and four require action by the office of the state treasurer, according to Funston's presentation at the May 1 commission meeting.

Many of Funston's recommendations address issues dating back to the investment commission's creation on Oct. 1, 2005, by legislation that endowed it with exclusive authority to invest state retirement plan assets. Previously, the state's Budget and Control Board approved recommendations of an investment panel.

The commission had few staffers in the early years, and commissioners had to provide operational assistance, such as investment manager due diligence.

“Unfortunately, infrastructure did not keep pace with investment strategies ... as initial back office and risk management procedures and support systems were often weak, manual and ad hoc,” according to Funston's final audit report.

With a much larger staff — 42 at last count — significant infrastructure improvements were made, freeing commissioners to step up oversight of the investment strategy, said Frederick “Rick” D. Funston, managing partner of the Bloomfield Hills, Mich.-based fiduciary consultant.

“Asset allocation is the most strategic decision commissioners can make to help investment staff prudently manage the assets of the state retirement fund. The commission really must refocus and concentrate on creating workable investment beliefs, asset allocation and capital market assumptions,” Mr. Funston said in an interview.

“Assumptions often are the greatest source of risk and opportunity for a pension fund,” he added.

At least one recommendation — to broaden the commission membership — is in motion.

The South Carolina Senate will consider legislation this year to add two commissioners to represent active and retired state employees, according to an April 2014 report from the Senate Finance Committee's Subcommittee to Review the Investment of State Retirement Plans.

Other recommendations were swiftly picked up by an ad hoc planning committee and approved at the commission's March 13 meeting to develop a strategic implementation plan with RSIC staff. Planning committee members are Mr. Williams and commissioners Rebecca Gunnlaugsson and Ronald Wilder.

So far, the committee has identified five priorities from among the Funston suggestions.

Three were approved at the commission's May 1 meeting: eliminating commissioner involvement in investment manager due diligence; discontinuing informal asset class assignments for commissioners; and reducing the review period for money manager hires to three business days from 30, according to a webcast of the meeting.

The committee also proposed creating the executive director position that Funston had recommended, as well as changes to the roles of some senior commission staffers. The committee also presented the commission's first set of investment principles, but approval was postponed in order to provide time for comment by May 15.

Commissioners' initial reaction to adding an executive-level position was broadly favorable.

Mr. Loftis complimented the commission planning committee's work in defining the role of the executive director.

“Y'all have done very good work,” he told Ms. Gunnlaugsson, who chaired the planning committee. Mr. Loftis predicted “we probably all will vote for this in June,” according to the meeting webcast.

The planning committee “came up with a good recommendation. ... It will be (the executive director's) job to change structure. If it needs changing, then change it,” Mr. Reynolds said on the webcast.

Senior commission staffers also favored additional executive oversight.

“I've never worked in an organization that didn't have a person with whom the buck stopped,” said W. Greg Ryberg, chief operating officer, according to the meeting webcast.

“It's not practical to expect that a part-time commissioner can head this organization” effectively, Mr. Ryberg said, noting that “this change is inevitable.”

Hershel Harper, the chief investment officer, said on the webcast that he was in favor of adding an executive director, but he cautioned it is “critical to carefully define the roles” of the executive director and the CIO.

“This organization will change under a new director. This (will be) a defining moment for the commission,” Mr. Harper added.

Mr. Williams said in an interview that the commission will consider the executive director's post and the investment principles at its June 16-17 meeting, unless he decides to call a special meeting later this month. n