Ohio State Teachers Retirement System, Columbus, is showing signs that social media-driven pressure to overhaul the pension fund’s investments by moving to all index funds and jettisoning private markets may be fizzling in the face of economic and fiduciary realities.
The $97.7 billion pension fund’s board unanimously approved a new asset allocation that included a slight increase to its exposure to private markets and significant drops to public equities at its March 19 meeting following the completion of an asset-liability study.
Among the actions taken by the board was increasing the target to private credit to 10% from 7%, lowering the real estate target to 8% from 10% and maintaining the existing target to private equity at 9%.
The vote came nearly a year after a series of board elections gave a majority of seats to a group of self-proclaimed reformers. Those reformers campaigned with platforms that included proposals to reduce costs by cutting investment staff bonuses, moving to passive investments and eliminating alternatives in order to restore cost-of-living adjustment benefits lost after a pension reform law was passed in 2012.
Those elections came as a result of social media-driven outrage by retirees led by advocacy organization Ohio Teachers for Retirement Association that ballooned after the STRS board voted not to award COLAs every year between 2017 and 2022. The board had previously cut the COLA to 2% from 3% for five years beginning in 2012. Before 2012, when the reform law took effect, retirees automatically received an annual 3% COLA.
One of the law’s major moves was to remove the automatic COLA and give the STRS board the authority to reward COLAs on an annual basis provided the pension fund’s actuarial consultant calculated doing so would not impair the fiscal integrity of the pension fund. As of June 30, 2012, STRS' funding ratio was 56% and the amortization period for its unfunded liabilities became infinite. Because of the actuary only approving limited benefit changes in the past 12 years, the pension fund's funding ratio was 82.8% as of June 30, and the amortization period is less than the statutorily required 30 years.
The board being granted the authority by the state legislature to set the level of benefits is unusual for a public pension fund, said Keith Brainard, research director for the National Association of State Retirement Administrators. Traditionally, state and local legislative bodies have had the ultimate authority to set benefit levels, including granting of COLAs.
“That seems to have become a major factor at STRS Ohio, because you’ve got a lot of retirees who are very unhappy about the COLA going away, and then the small COLAs that have been authorized since,” Brainard said.
Contradictory roles
By giving the board the authority to set the level of benefits, Brainard said the board has been given two potentially contradictory roles.
“One is the role of administrative oversight, and the other is a policy role over the level of benefits. When you have trustees who are elected, that can create a challenging mix, which I think is what we’re seeing play out,” said Brainard. "When trustees are running for office based on modifying benefits, a responsibility that is traditionally the bailiwick of the governing body — the legislature — that can create a lack of clarity with regard to the board’s duties.”
Those two sets of duties can be potentially contradictory, as the board faces pressure to enhance benefits in the short term while at the same time trying to ensure the sustainability of the plan for the long term so it can pay the benefits that already are promised, Brainard said.
It was in 2021 when retiree anger led to the election of three reform-minded trustees and the eventual ascension of those reformers to the majority of the 11-member board in the spring of 2024.
The board consists of seven trustees elected among STRS participants and four trustees appointed by state officials. Of those seven elected trustees, six — all elected since 2021 — identify themselves as reformers, many of whom were vocal in their desire to restore a permanent annual 3% COLA that was in place before a 2012 pension reform law gave the board discretionary authority to determine a COLA every year based on the recommendations of actuaries.
Rudy Fichtenbaum, a retired professor of economics at Wright State University who was one of the original three reform trustees elected in 2021, was elected as chair of the board by the new majority in May 2024.
On his Facebook page, Fichtenbaum has been a vocal critic of both active management and private equity since joining the board. In a July 5, 2022, post, he said “public pensions should give up active investing and adopt index investing. Active investing benefits investment staff, consultants and Wall Street at the expense of pension members,” and in a Feb. 2, 2023, post sharing an op-ed by David Sirota critical of private equity stated “this is an excellent article that shows the real problems with opaque private equity ‘investments.’”
Despite the apparent split between reformers and “non-reform” trustees, Fichtenbaum and the entire 10-member board (one state official-appointed seat is currently vacant) unanimously approved the new asset allocation.
That new allocation is the final result of an asset-liability study begun in May 2024 by new general investment consultant Meketa Investment Group.
In an April 3 email, Fichtenbaum said the main objective of the study was “to help the board select an asset mix that would give the highest probability of restoring the benefits lost by STRS Ohio members.”
The pension fund uses a framework it calls the Sustainable Benefit Plan, which is an annual review by the board and its actuary (currently Cheiron) to determine whether there are sufficient funds in the budget to allocate for benefit changes, and the study emphasized creating an allocation that had the highest probability of providing those sufficient funds.
Colin Beebe, managing principal and consultant at Meketa, addressed the investment committee at its March 18 meeting with two similar asset allocations from which the committee would select for recommendation to the board.
He said in a webcast of the meeting that asymmetry was one of the primary components in the asset allocations that were recommended.
“I always use this line: The bad times hit harder than the good times (at STRS),” Beebe said. “This is directly related to your demographics, your net cash flows and your contributions going in. This is why we went through this whole study. We had so much discussion and analytics around downside risk, so if something bad happens, what does that look like for you from that point on going forward? And how bad could it actually be?”
Reform-minded activists have repeatedly cited the S&P 500 index performing better than the pension fund's overall portfolio during the record-setting bull market in the 15 years following the global financial crisis.
“We can’t actually look in the rearview mirror and see ‘the S&P 500 is up X% and you should have done that,’ because there is a lot of risk in just U.S. equity alone, so (Meketa designed) a well-diversified portfolio that’s really designed to help mitigate those downside scenarios because that’s when stuff gets really hard and directly related to that is the concept of fragility," Beebe said.
The primary goal of the new asset allocation is to reduce the risk of volatility going forward, which will enhance the potential budget for the sustainable benefit plan, Beebe said at the board meeting.
While private markets is ticking up very slightly, other asset classes will experience more significant changes, including the renaming of the hedge funds asset class to liquid alternatives.
Outside of private markets, the board approved increasing targets to core-plus fixed income to 21.5% from 17%, liquid alternatives (formerly hedge funds) to 7% from 3%, intermediate Treasuries to 5.5% from 5%, as well as creating a new target of 3% to long Treasury bonds.
Targets being decreased are domestic equities to 19.3% from 26%, international developed markets equities to 12.6% from 17.6%, and emerging markets equities to 3.2% from 4.4%.
Targets that remain unchanged are 9% private equity and 1% cash equivalents. The total exceeds 100% due to rounding error.
“If you think about these two portfolios in the most simplistic terms,” said Beebe at the meeting, “right now we’re selling public equity to purchase fixed-income assets and liquid alternative assets (and) not a lot of change to the private capital market, so given where the market is right now, we have an opportunity to sell the higher-volatility asset classes at a point in which their projected capital markets returns are lower, we have an opportunity to purchase fixed income when the returns are relatively high, and an opportunity to design a liberal portfolio that will be probably higher returning than fixed income, but also a bit more volatile.”
The board’s approval of the new asset allocation stands in stark contrast to comments reform trustees have made earlier. NASRA’s Brainard suggested one reason why the asset allocation adjustment has differed from what some trustees suggested during their election campaigns.
“Ohio is among the states that has a trustee training and continuing education requirement,” said Brainard. Each new board member must complete an orientation program within 90 days of taking their board seat and attend a continuing education component at least twice a year with topics including ethics, governance, actuarial soundness, investments and fiduciary duties.
"The fact that the board has set an asset allocation that seems to be different than what was the basis of the popular election of some of the trustees suggests that perhaps some of this continuing education is hitting its mark," Brainard said.
Board chair Fichtenbaum knows the work is far from done in attempting to secure benefit changes in the future.
“Looking forward, we are focused on increasing the employer contribution rate, since the Board fully understands that while investment returns are critical, the primary issue facing the pension system is insufficient employer contributions,” Fichtenbaum said.
While the 2012 pension reform law increased employee contributions to 14% from 10%, employer contributions remained at a fixed rate of 14%, a level STRS officials have repeatedly cited as one of the lowest in the nation. School districts are seen as unlikely to support such a measure, however, as a new battle may be brewing in a state where public school funding may suffer significant shortfalls in current state budget proposals.
