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Singleton Legislation to Conduct Pension System “Stress Tests,” Monitor Investment Management Fees Advances

Legislation sponsored by Assemblyman Troy Singleton to monitor the long-term health of the state’s numerous public employee pension systems and track fees paid to outside investment managers gained approval from an Assembly panel on Monday.

“There are many obvious reasons why we should be performing routine ‘health’ checks on our pension systems,” said Singleton (D-Burlington). “The record number of credit downgrades we’ve received over the last eight years was due in no small part to the insolvency of our pension systems. Fees paid to outside investment managers have also skyrocketed in that time. A stress test analysis, particularly one that is forward-looking, is a wise move and will prove enormously beneficial in detecting potential crises on the horizon that we may need to address.”

The bill (A-4704) would require the boards of trustees for the Teachers’ Pension and Annuity Fund, the Judicial Retirement System, the Public Employees’ Retirement System, the Police and Firemen’s Retirement System, and the State Police Retirement System to conduct and report regular stress test analyses of their state-administered retirement systems.

The stress test analyses must provide a forward-looking projection, which considers the effects of long-term conditions and patterns of behavior of the investment market, to assess how well each of the state-administered retirement systems is likely to perform in periods where market returns are significantly above or below baseline assumed returns.

The stress test analyses must include past investment performance data for each state-administered retirement system for a minimum period of 25 years, including investment returns, both gross and net of fees, and returns by asset class. The Division of Pensions and Benefits would be required to post this on its website.

The bill would also require the State Investment Council (SIC) to report the fees charged by external managers for the investment of pension funds under their supervision. The SIC would require the external manager to disclose the rate and amount of fees charged, including performance-based earnings and carried interest. This would be reported to the pension boards and to the Division of Pension and Benefits, which would post the report on its website.

The bill is modeled after the Virginia Commission on Employee Retirement Security and Pension Reform’s recommendations and subsequent proposed legislation to require a regularly published stress test analyses to evaluate investment and contribution risks. This particular recommendation was based on work done in 2014 by the Society of Actuaries’ Blue Ribbon Panel on Public Pension Plan Funding.

The Virginia Commission also recommended that data be published online, including the disclosure of private equity carried interest costs and the pension plan investment performance over the past 25 years.

California and Washington currently have this routine analyses on their pension plans to assess fiscal sustainability in various investment scenarios.

The legislation was approved by the Assembly State and Local Government Committee, chaired by Singleton. It would take effect immediately upon enactment.