Board Changes: Who has new roles and who recently joined? P. 5 Texas economy gets as boost from pension benefits p. 7 There’s a new website to gain core trustee training. p. 18 THE OFFICIAL MAGAZINE OF THE TEXAS ASSOCIATION OF PUBLIC EMPLOYEE RETIREMENT SYSTEMS | VOL. 1, 2023
Managing Partner Partner Partner Partner Partner Partner Partner Partner Partner Partner Partner Partner Partner Partner Partner Partner [email protected] www.facebook.com/gilbert.andrew.garcia www.twitter.com/Gilbert_Garcia_ www.instagram.com/gilbertandrewgarcia www.linkedin.com/in/rubymunozdang/ For moreinformation,pleasecontact: Ruby MuñozDang 713-853-2359 [email protected] www.garciahamiltonassociates.com J a n n a H amilto n G a r y Mo n tgomer y N a n c y Rodriguez Bet h McWilli ams Do n Else n broc k K a re n T a ss, CF A Rub y Mu ñ oz D a n g Ma r k Del a n e y , CF A Y v ette Due ñ a s Step h a n ie Roberts Jeffre y Detwiler, Cf a Ma rcus Smit h K e v i n Lu n d a y Morg a n Do y le Be n j ami n Mo n k iewicz O V E R $18 B ILLION HIGH-QU A LITY FIXE D INCOME A SSETS UND E R MANA GEMENT* *Data asofFebruary 28,2020 CERTIFIED MBE/HUB FIRM Gilbert A . G a rci a , CF A
CONTENTS 20 22 OUTLOOK 2023 According to a WilliamBlair global strategist, equities may do well this year if the United States can avoid geopolitical tensions while the Federal Reserve reaches a neutral monetary policy stance. Find out what else she has to say. RETIREMENT COMMUNICATIONS 22 A new report says there is an art to retirement communications. Find out how your fund should message age groups through language and imaging. TEXPERS Associate, Actuary, and Consultant members are invited to contribute articles from their thought leaders to this publication. To learn more, use your phone to scan the code below or email [email protected]. MEMBERS: WANT TO CONTRIBUTE? HERE'S HOW. BALANCING ACT Thought leaders at Ortec say illiquid assets have become more critical to pension fund investors during the last 20 years, but they come with risks. Luckily, technology platforms can help manage them. PRB WEBSITE TRAINING The state agency has created a new website offering minimum educational training. Find out what is offered and how to get started. 18 MANAGEMENT 08 A new form, W-4P, effective Jan. 1, 2023, is being issued by the IRS to assist newly retired pension recipients with withholding taxes on their retirement income. Find out how one TEXPERS System Member is handling the situation. Cover Feature: TEXPERS is debuting a new online platform to help members plan their day, access documents, get in touch with other attendees and speakers, and stay up to date on last-minute changes to sessions for its 2023 Annual Conference to be held April 2-5 in Austin, Texas. Inside our special coverage, you'll learn more about the Conference App, find out details regarding conference plans, read about the venue, and gain tips to get around the host city. Also, inside, you'll gain a few networking tips and find a preliminary schedule. Pgs. 9-17 DIRECTOR'S NOTE 04 While the last year may have been painful for many, now is the time to come together and figure out what it all means for pension plans and investors in 2023. There's no perfect time to do that than during TEXPERS' Annual Conference, says the Association's executive director, Art Alfaro. CHANGES 05 There have been some shifts in titles on TEXPERS Board of Directors as one member resigns and another is appointed to fill his seat. Also, say hello to a new Board member appointed to fulfill an unexpired term left vacant. NEWS BRIEFS 06 One of TEXPERS' Associate Advisor Members makes strides in its minority broker program. Did you know the Texas 88th Legislative began on Jan. 10, and both chambers filed base budget bills on Jan. 18? Find out why it matters. We've got several new members, too! See who they are. RESEARCH 07 According to a new study, over $19 billion in pension benefits were earned by 786,862 Texas residents in 2020. That's only one of the interesting numbers in the latest report on the impact public employee retirement benefits have on the economy. TEXPERS PENSION OBSERVER www.texpers.org | 1
OurBoard. President Sherry Mose Houston Municipal Employees Pension System 1st Vice President Jose Cavazos Dallas Area Rapid Transit Retirement Plan & Trust 2nd Vice President Tyler C. Grossman El Paso Fire & Police Pension Fund Treasurer Larry Knott Dallas Area Rapid Transit Retirement Plan & Trust Secretary Carla Brewer Dallas Employees' Retirement Fund Board Member Terry A. Bratton Houston Police Officers' Pension System Board Member Paul R. Brown Big Spring Firemen's Relief & Retirement Fund Board Member Ken Haben Dallas Police and Fire Pension System Board Member John D. Jenkins Dallas Employees' Retirement Fund Board Member Larry Reed San Antonio Fire & Police Pension Fund Board Member David Stacy Midland Firemen's Relief & Retirement Fund Contact Information The TEXPERS Pension Observer C/O Texas Association of Public Employee Retirement Systems P.O. Box 201960 Austin TX 78720 Telephone: 713-622-8018 E-mail: [email protected] OurStaff. Executive Director Art Alfaro Director of Conferences & Events Carolyn Butterworth, CMP Membership & Finance Supervisor Lena Terrell, CAP Director of Communications & Event Marketing Allen Jones Member Services Specialist Samantha Polsgrove Copyright © 2023. TEXPERS Pension observer is the official magazine of TEXPERS, published quarterly. Contributions to TEXPERS Pension Observer are welcome, but the right is reserved to select material to be edited and published. Publicationofanyarticleisnottobedeemedanendorsementof the views expressed therein, nor shall publication of any advertisementbeconsideredanendorsementoftheproductor serviceinvolved. AboutUs. The Texas Association of Public Employee Retirement Systems is a voluntary nonprofit association that provides education and legislative advisory services to the trustees, administrators, professional service providers, and employee groups that manage the retirement money of police officers, firefighters, and municipal and district employees in cities across Texas. TEXPERS has 68 member pension systems that manage $32.7 billion in retirement assets for 57,728 active members and 60,737 retirees and beneficiary annuitants. Any public employee retirement system of Texas is eligible for membership and encouraged to join. TEXPERS’ past and present membership has consisted of police and fire departments, municipal employees, airport authorities, hospital districts, regional planning commissions, river authorities, transit authorities, community colleges, and university medical centers. TEXPERS membership also includes investment and brokerage firms, actuaries, and general businesses that provide services to pension funds as permitted by association bylaws. It is important for trustees and administrators to voluntarily give their time to strengthen and enhance their pension fund management skills. As such, TEXPERS supported HB 13, enacted by the 83rd Legislature, and participated in the Pension Review Board working committee that developed the Minimum Education and Training Program. The MET Program has been approved by the PRB and was effective January 1, 2015. In turn, TEXPERS developed the Basic Trustee Training class, which fulfills the requirements of the Program, and offers it at least twice yearly prior to our conferences. TEXPERS is dedicated to making high-quality, low-cost and convenient training available to our members. We believe that it is critical to advancing the excellence of Texas public fund management and the public’s confidence in trustees and administrators to manage their retirement systems prudently. TEXPERS conducts an Annual Conference each spring and a Summer Educational Forum in August each year. Along with the Basic Trustee Training class, we offer additional focused workshops designed around the current topics or trends focused on public fund management and investment issues. We also conduct various seminars, workshops, and field trips throughout the year. TEXPERS education and training provides one avenue to assist trustees with maintaining their knowledge of state-of-the-art pension fund management techniques and changes in the law or court decisions concerning pension funds. In addition, they serve as a focal point for the exchange of ideas and best practices among participating members across the state. 2 | www.texpers.org TEXPERS PENSION OBSERVER
DIRECTOR'SNOTE The calendar year 2022 is now in our rearview mirror. Before we dive into 2023, let us take a moment to acknowledge the fact that every pension fund in Texas experienced negative investment returns in 2022. An allocation to commodities undoubtedly helped dampen the pain, but there was nowhere to hide! As of the fourth quarter of 2022, pension systems with sound, robust written investment policies will most likely have concluded investment committee meetings, discussed 4 | www.texpers.org TEXPERS PENSION OBSERVER 2022 IS DONE; LET'S LOOK AHEAD Art Alfaro Art Alfaro, TEXPERS Executive Director [email protected] IN THE MIDST OF THE STATE LEGISLATURE'S SESSION, IT IS VITAL TO KEEP TRACK
TEXPERS PENSION OBSERVER www.texpers.org | 5 UPFRONT JIM SMITH RESIGNS FROM ASSOCIATION'S BOARD, SHERRY MOSE BECOMES PRESIDENT Sherry Mose is the Texas Association of Public Employee Retirement Systems' new board president after James "Jim" Smith resigned from the Association's Board of Directors on Dec. 30, 2022. Smith resigned from the Board due to his retirement from the San Antonio Police Department after 30 years of service. He also resigned as an active trustee with the San Antonio Fire and Police Pension Fund. The TEXPERS Board of Directors elected Smith its president in 2021. Mose moved into the president position for the remainder of Smith's elected term according to Robert's Rules of Order, the standard manual of parliamentary procedure. Privilege and Honor. In his resignation letter to the TEXPERS' Board, Smith thanked them for the "privilege of serving alongside" them. "More importantly, it has been a true honor and privilege of serving our thousands of members, knowing we are safeguarding a secure pension for them and their families' futures," he said. Smith said he leaves knowing TEXPERS is in great hands. Art Alfaro, TEXPERS' executive director, said he thanks Smith for his service on the Association's Board of Directors. Smith served Police Position No. 8 on the TEXPERS Board of Directors since 2014. An appointment recommendation must fill the vacated position by the Association's Board of Directors Police Caucus. The person appointed to fill the vacancy will be up for re-election during the Association's next election cycle, which is scheduled for April 2024. The person who wins the election will serve until April 2026. Now that Mose is serving as President, Robert's Rules requires the Board's second-vice president, Jose Cavazos, to fill the first-vice president role. The Board is now required to elect a new secondvice president. Looking Forward. Mose said it is an honor to serve as president of the Association and that in the role, she will continue the work that Smith had in place. "I am looking forward to working with each and every one of our members," she said in an email to TEXPERS, adding, "It takes a strong village to make a difference in this world." She serves on the TEXPERS Board of Directors in Board Pos. 2 as a Municipal Trustee. She is the plan administrator for the City of Houston Deferred Compensation Plan. To help City of Houston employees understand pensions and retirement planning, she created a Financial Retirement Educational Event in 2006. Over 23,000 city employees have attended the event since it began in 2006. It is in its 16th year. In addition, Mose serves as the chairman of the Houston Memorial Employees Pension System and on the Texas Association of Public Employee Retirement Systems' Board of Directors, where she serves as president. Mose is also on the National Conference on Public Employee Retirement Systems Board of Directors. And she is a member of the Houston Organization of Public Employees. Among her accolades, Mose received the Director's Award for Outstanding Achievement, the City of Houston Communicator Award for excellence in employee communication, and the National Association of Government Defined Contribution Administrators Leadership Recognition Award. And acknowledging her leadership in making a difference for minorities and professional women, she received the Joyce Johnson Award from the National Association of Securities Professionals. Mose was involved in the School-To-Work program with the Houston Independent School District. And as a former member of the Brentwood Baptist Church, she served as president of the New Members Orientation Committee and currently volunteers as a kindergarten associate at River Pointe Church. During her tenure as president of the Board of Directors, Mose plans to continue pension education for the Association's System Members, increase membership, and collaborate more with the Association's "thought leaders" within the investment community. In addition to serving as an appointee to the Legislative Committee and Education Committee, Mose will be replaced on the two committees since presidents are ex-officio members of all committees. Mose said she wants the TEXPERS membership to know that the Association has a great staff and is confident that the transition will be smooth and seamless. "We are strong and I'm looking forward to TEXPERS getting stronger," she said. Additional Appointments. The Board held a special meeting via a Zoom video conference on Jan. 17 to elect a new second-vice president and appoint Board replacements. The Board elected Tyler Grossman to serve as the 2nd Vice President. Also, Terry Bratton verbally resigned from Board Position 6 - Police - Trustee. TEXPERS Board of Directors then unanimously approved a motion appointing Bratton to Position 8 Police - Any, which was vacated by Smith upon his resignation. Bratton is to serve the position until the next biennial election in 2024. In another motion brought before the Board, members appointed Ken Haben to fill Bratton's former position. Haben holds the seat on the Board for the remainder of the term, which expires in 2024. He serves on the Dallas Police and Fire Pension Board as the Police Trustee. He is a member of the board's Investment Advisory Committee. ■ James "Jim" Smith, left, resigned from the TEXPERS Board of Directors on Dec. 30, 2022. The Board officially accepted his resignation during a Jan. 17, 2023, meeting. Sherry Mose is the Board's president. Allen Jones is Director of Communications and Event Marketing at TEXPERS. You can contact him at [email protected].
NORTHERN TRUST ASSET MANAGEMENT SELECTS 16 FIRMS FOR MINORITY BROKER PROGRAM Academy Securities Inc. AmeriVet Securities Inc. C. L. King & Associates Inc. Cabrera Capital Markets LLC CastleOak Securities LP Guzman & Company Loop Capital Markets Mischler Financial Group Inc. North South Capital Penserra Securities LLC R. Seelaus & Co. LLC Rice Securities LLC Roberts & Ryan Investments Samuel A. Ramirez & Co Siebert Williams Shank & Co. LLC Tigress Financial Partners NEWS RELEASE - Northern Trust Asset Management, a global investment manager, has selected 16 minority-owned brokerdealers for its Minority Broker Program, an increase from 11 in 2019. The asset management firm has $999.1 billion of investor assets as of Sept. 30, 2022. The firm is an Associate Advisor Member of TEXPERS. Started in 2007, the Northern Trust program comprises firms owned by minorities, women, and disabled veterans. Participating broker-dealers are also utilized by Northern Trust Securities, Inc., the asset management firm's brokerage affiliate, whose growing use of the program led to the increase in firms selected. The program selected each firm for one or more asset classes based on quantitative and qualitative selection criteria, including execution capabilities, technology platforms and performance. The firms are: "We at NTAM take very seriously and are very proud of our long-standing commitment to advancing diversity, equity and inclusion (DE&I)," said Angelo Manioudakis, Northern Trust Asset Management's chief investment officer. "To that end, we are delighted to be expanding our partnership with firms owned by minorities, women, and disabled veterans." The asset management firm's commitment to diversity, equity and inclusion is also part of its Multi-manager Solutions business which has invested approximately $5.7 billion with 21 minorityowned investment management firms through manager-of-manager programs as of June 30, 2022. The assets represent Northern Trust Investments Inc. multimanager accounts. Northern Trust's overall commitment to DE&I has regularly been recognized, as evidenced by the firm having been named a Diversity Champion by InvestmentNews, a leading advisor trade publication, four out of five years since the 2018 inception of its Excellence in Diversity and Inclusion Awards, including this past year. In 2022, NTAM's parent company, Northern Trust Corp., received a 100% score in the "Disability Equality Index of Best Places to Work," a comprehensive benchmarking measure of diversity inclusion. The index is a comprehensive benchmarking tool that helps companies build a roadmap of measurable, tangible actions that they can take to achieve disability inclusion and equality. Each company receives a score on a scale of zero to 100, with those earning 80 and above recognized as "Best Places to Work for Disability Inclusion." A joint initiative of Disability:IN and the American Association of People with Disabilities (AAPD), the DEI is an objective, reflective, forward-thinking and CONFIDENTAL disability inclusion rating tool to assist businesses. This marks the eighth consecutive year NTAM was named to the Index, and the fourth straight year it received a 100% score. Also, in 2022, for the fifth consecutive year, Northern Trust was named to Bloomberg's Gender Equality Index. The index tracks the performance of public companies committed to disclosing their efforts to support gender equality through policy development, representation, and transparency. "We look forward to working with both the new and returning member firms of our Minority Brokerage Program," Manioudakis said. "The application and selection process are quite rigorous, so we have complete confidence that chosen firms will provide the high level of service for which clients have been turning to NTAM for decades." The firms were selected by a group of Northern Trust partners from a group of 28 broker-dealers that responded to a request for information. This is the seventh time that Northern Trust Asset Management has gone through this process since the program's inception in 2007. ■ *This news release is edited to fit TEXPERS' publication criteria. POLL TEXASCAPITOL Texas' 88th Legislative Session began on Jan. 10, 2023. On Jan. 18, the House and the Senate filed base budget bills. Why it matters: The base budget is a starting point in discussions as both chambers begin to discuss and work on the state's funding priorities for the next two years. Go deeper: As of Jan. 18, the budget bills have several similarities including both budget bills as filed projected estimated and budgeted amounts for the 2022-23 biennium are estimated to increase approximately $32.4 billion in all funds. Both bill summaries point out the Supplemental Appropriations recommendations, including the Employees Retirement System of Texas: $1 billion for a onetime legacy payment. ■ UF NEWS BRIEFS 6 | www.texpers.org TEXPERS PENSION OBSERVER
UF RESEARCH Use your mobile phone to scan the QR code to access NIRS' full state report. public pension plans. In 2018, public pension benefit dollars represented between one and three percent of GDP on average in the 2,922 counties in the 43 states studied. Located in Washington, D.C., the organization researches retirement security and its value for employees, employers, and society. TEXPERS is an Educational Sustainer of the Institute, which includes financial services companies, employee benefit plans, trade associations, and retirement service providers. THE INSTITUTE. Located in Washington, D.C., the organization researches retirement security and its value for employees, employers, and society. TEXPERS is an Educational Sustainer of the Institute, which includes financial services companies, employee benefit plans, trade associations, and retirement service providers. ■ www.texpers.org | 7 TEXPERS PENSION OBSERVER Joe Gimenez is a pension fund communications professional contracted with TEXPERS. PENSION BENEFITS ADD $19.1 BILLION TO TEXAS RESIDENTS’ INCOMES IN 2020 A biannual study produced by the National Institute on Retirement Security calculated that $19.1 billion in pension benefits were earned by 786,862 Texas residents in the pandemic year of 2020. The institute refers to its latest study as “Pensionomics,” the wide-ranging economic impacts of deferred income benefits paid from private and public pension plans for public employee retirees, such as municipal employees, firefighters, police, teachers, state, federal, and special district employees. Nationwide, NIRS tallied $1.3 trillion in total economic output, supporting nearly 6.8 million jobs across the nation. Pension spending also added nearly $157.7 billion to federal, state, and local government coffers. “The impact of pensions goes so much deeper than providing financial security to retirees, which we saw in real-time during the global pandemic. In 2020, the U.S. and global economies suffered unprecedented, abrupt, and deeply devastating impacts with the COVID-19 outbreak,” said Dan Doonan, NIRS executive director, and report coauthor. “During this time, pension income was crucial for millions of Americans. Retirees with pensions knew that their retirement income was stable and secure, despite severe economic instability. Pensioners could continue spending at normal rates, which supported millions of jobs across the nation during a time of massive layoffs. In contrast, many retirees relying on individual savings in 401(k) accounts during the height of the pandemic were fearful to spend their savings, which is detrimental to the economy.” THE TEXAS IMPACT. Doonan’s remarks were complemented by Michael Trainer, president of the San Antonio Fire and Police Pensioners Association, with 2,500+ members. “Every month, our San Antonio Fire and Police Pension Fund distributes more than $15 million to our retiree members, most of whom live in or around Bexar County, or around Texas,” Trainer said. “Obviously they use that money for the basics of food, shelter and medicine, but they also use it for their grandchildren, or travel, or otherwise supporting their hobbies or civic activities. They add those pieces of economic activity to our robust Texas economy.” The study found that in 2020 in Texas, $19.1 billion in pension benefits were paid to 786,862 retired Texans, and had the following effects: Benefits support $27.8 billion in total state economic output Supported 165,433 jobs that paid $9.1 billion in wages and salaries Produced $27.8 billion in total economic output Generated $3.1 billion in federal state and local tax revenues, including $1.3 billion in federal and $1.8 billion in state/local taxes Each dollar paid out in pension benefits supported $1.46 in total economic output in Texas. Each dollar invested by Texas taxpayers in the pension plans supported $6.72 in total economic activity in the state. This represents the leverage afforded by robust long-term investment returns and shared funding responsibility by employers and employees The largest employment impacts occurred in the food services, health care, and retail trade sectors. THE RURAL IMPACT. Pension expenditures are especially vital for small and rural communities where other steady sources of income may not be readily found if the local economy lacks diversity. As many small towns and rural communities across America face shrinking populations and growing economic challenges, recent research finds that a positive economic contributor to these communities is the flow of benefit dollars from NIRS released its Pensionomics 2023 study in January. This report calculates the national economic impacts of U.S pension plans, as well as the impact of state and local plans on a state-bystate basis.
UF NATIONAL 8 | www.texpers.org TEXPERS PENSION OBSERVER The Internal Revenue Service is urging newly retired pension recipients to pay the right amount of withholding taxes on their retirement benefit income and has issued a new form W-4P, effective Jan. 1, 2023, for more accurate calculations. The goal, from the IRS’ perspective, is to help pensioners properly estimate the taxes they will pay so that underpayment penalties will not be applied. “We are urging our newest retirees to contact their tax advisors about filling out these forms with the goal of paying them the right amount for their monthly living needs,” said Christina Ramirez, the deputy executive director of the El Paso Firemen and Policemen’s Pension Fund. “Current retirees won’t need to fill out the new forms and worksheets, but if they have underpaid or overpaid in the past, it might be a good idea for them to use the revised worksheets, with their tax advisors, to come up with better estimations.” NOTIFIYING FUND MEMBERS. The El Paso pension fund shared the IRS form change information with their members through a newsletter that it published before the New Year, Ramirez said. And, she added, they were planning to post some notices on their Facebook page to raise member awareness. The Tax Cuts and Jobs Act, enacted in December 2017, changed the way tax is calculated for most taxpayers including retirees. Among other reforms, the new law changed the tax rates and brackets, increased the standard deduction, removed personal exemptions and limited or discontinued certain deductions. As a result, many taxpayers may need to raise or lower the amount of tax they pay during the year. CALCULATE IT. For retirees who receive a monthly pension or annuity check, this may mean changing the amount of federal income tax they have withheld. The IRS provides a Withholding Calculator available at https://www.irs.gov/individuals/tax-withholding-estimator. Though primarily designed for employees who receive wages, this useful online tool can also be helpful to those who receive pension or annuity payments on a regular schedule, usually monthly or quarterly. To use the Withholding Calculator most effectively, users should have a copy of last year’s tax return at hand. In addition, knowing or having a record of the total federal income tax withheld so far this year will also make the tool’s results more accurate. After filling out the Withholding Calculator, the tool will recommend the number of allowances a pension recipient should claim. Pension recipients can make a withholding change by filling out Form W-4P, available on IRS.gov, and giving it to their pension fund benefits administrator. This form is similar to the more familiar Form W-4 that employees give to their employers. To give payors time to apply any required withholding changes to as many payments as possible, the IRS urges retirees to submit revised Forms W4P to their payors as soon as they can. ■ Joe Gimenez is a pension fund communications professional contracted with TEXPERS. Use your mobile phone to scan the QR code to access the IRS Tax Withholding Estimator calculator.
STRENGTHEN PENSIONS PERSONAL DEVELOPMENT It's an opportunity to strengthen fiduciary skills and build investments governance at TEXPERS' Annual Conference April 2-5 in Austin, Texas. TEXPERS PENSION OBSERVER
LEARN, DISCOVER NEW IDEAS, NETWORK AND SUCCEED The Texas Association of Public Employee Retirement Systems' 2023 Annual Conference will be held April 2-5 in Austin. This year's theme, “Strengthen Pension: Together We Can,” highlights the Association’s mission to unite its members in professional development with the goal of securing retirement for dedicated public employees. Registration opens Jan. 3, 2023. The Annual Conference offers state-mandated training programs and sessions regarding topics important to public employee retirement management. During the four-day event, attendees can learn about industry trends, gain new skills, and establish new connections. "We want to help you reach your goals," says Art Alfaro, TEXPERS' executive director. "Our focus is helping members become more valuable to their funds and stakeholders." Members will attend as the Texas legislature is in session. “Anytime we get the chance to host an event in our state’s capital, we get excited,” Alfaro says. "Austin is a special place because of its people. It’s a foodie’s paradise. Musicians and artists make this city unique. None of what makes Austin special; however, could be accomplished without the work of dedicated public employees.” The Annual Conference offers state-mandated training programs and sessions regarding topics important to public employee retirement management. During the four-day event, attendees can learn about industry trends, gain new skills, and establish new connections. Schedule at a Glance. This year's conference features a networking golf tournament, membership receptions, keynote speakers, a motivational speaker, breakout panel discussions, a members' event, and roundtable discussions during which members will get to discuss pressing topics with peers and experts. An early-morning golf tournament kicks the conference off on Sunday, April 2. The rest of the day is free until a 4:30 p.m. welcome reception. TEXPERS' pension funds may attend the association's Annual Business Meeting at 4 p.m. The conference continues Monday, April 3, with general sessions starting at 8 a.m. A members’ event will be held that evening at Punch Bowl Social, an Austin “scratch-to-table dining and couture gaming” destination. General sessions continue from 8:30 a.m. to 4:30 p.m. on day three of the conference, Tuesday, April 4. There will be a reception at 5 p.m. The last day of the conference, Wednesday, April 5, features a Register Scan this code with your phone's camera to access the TEXPERS' 2023 Annual Conference event website to register. Visit the site to see an updated schedule of events and a list of the conference sponsors. ■ Last year's Annual Conference was held in Fort Worth, Texas. 10 | www.texpers.org TEXPERS PENSION OBSERVER Keynote Speaker Jeff Mueller, Portfolio Manager & Analyst, Large Company Growth, Polen Capital Richard Bernstein, CEO/CIO, Richard Bernstein Advisors Tyler Bond, Research Manager, National Institute on Retirement Security Luncheon Speaker Andre Brandford, Slam Poet/Author/Speaker, S.C. Says Poetry ■ Some of Our Speakers This year's conference will cover topics such as governance, fiduciary duties, and investments. As our agenda forms, our thoughtleaders come from a variety of backgrounds. Here are just some of the experts that we've signed up so far:
You can follow TEXPERS on Twitter as well as learn more about the annual conference using the hashtag #TEXPERS2023. During the conference, tag us with @TEXPERS1. Each April, TEXPERS holds its annual conference, which is the Association's most attended event. In August, it holds its Summer Educational Forum. TEXPERS PENSION OBSERVER www.texpers.org | 11 half-day of general sessions. Basic and Advanced Trustee Training. TEXPERS members looking to fulfill state-mandated Basic and Advanced training requirements may do so the day before the Annual Conference starts on Saturday, April 1. Basic Trustee Training is for new trustees and provides seven hours of training over seven content areas from 8 a.m. to 4 p.m. The registration fee is $225 for TEXPERS member retirement systems and employee group members and is $325 for non-member retirement systems. Advanced Trustee Training is for more seasoned trustees who have taken Basic Trustee Training or another training program covering the same content. Advanced Trustee Training is different every time it is held and offers a deep dive into various topics. The April 1 class runs from 8:30 a.m. to 1:45 p.m. This is just a peek at what's on the program for TEXPERS' 2023 Annual Conference. A more detailed schedule is coming soon. "There's no more affordable or convenient way to access education, training, subject matter experts, and retirement system colleagues than the TEXPERS Annual Conference," Alfaro says. ■ Plan their day based on the agenda Access documents and slides shared by speakers Get in touch with others who are going to this event Organize social events such as a morning run, coffee hours, or meetups with fellow attendees. Stay up to date on last-minute changes to sessions from the organizers ■ Conference App TEXPERS is using a new online platform called Whova for its April event. After registering for the conference, event organizers will send an email to attendees inviting them to download the app that enables users to:
1 0 | w w w . t e x p e r s . o r g T E X P E R S P E N S I O N O B S E R V E R T his y e a r, T E X P E R S m e m b e r s wil l g a t h e r a t t h e A u s tin M a r rio t t D o w n t o w n, 3 0 4 E. C e s a r C h a v e s S t r e e t in A u s tin, Texas. The 30-floor hotel features more than 600 guest rooms, a rooftop pool, and a conference center offering plenty of room for TEXPERS members to gather for the Annual Conference. Attendees won't find anything more convenient to acce s s t h e c o n f e r e n c e t h a n s t a yin g o n - sit e. T h e h o t e l is t h e h u b o f c o n f e r e n c e a c tivitie s. It's a q uic k t rip t o g e t t o s e s sio n s, provides opportunities for networking. makes it easy to return to rooms and is near pre- and post-conference h o u r a c tivitie s. The Ma r rio t t f e a t u r e s a t w o - s t o r y l o b b y b a r, a sig n a t u r e r e s t a u r a n t, C o rin n e, a n d Z a n zib a r, a n is l a n d - lik e r o o f t o p b a r wit h tiki d rin k s. For Conference a t t e n d e e s l o o kin g t o r e c o n n e c t wit h industry peers or conduct one-on-one meetings with potential clients, the hotel offers comfortable, shared lounge spaces around every corner. At The M Club, Marriott Bonvoy Elite members enjoy access to a lounge featuring views of the city and seatin g a r e a s a c c o m m o d a tin g t h o s e w h o w a n t t o g e t s o m e p e r s o n a l w o r k d o n e o r w a n t t o t a k e a b r e a k a n d r e l a x. Those staying at the hotel can access Studio, Hospitalit y, and Presidential Suites, including some rooms offering views of the Austin skyline. The hotel fitness center is on the seventh floor and features the latest equipment. It is open 24 hours a day, seven days a week. Lady Bird Lake is steps away from the hotel. Guests can enjoy paddleboarding, kayaking, canoeing, and more at th e l a k e. A s k t h e h o t e l s t a f f t o a s sis t wit h a c tivit y r e s e r v a tio n s a n d r e c o m m e n d a tio n s. A l s o, t r ail s, p a r k s, liv e m u sic, a n d r e s t a u r a n t s a r e n e a r b y. After registering for t h e c o n f e r e n c e, a c o n fir m a tio n e m ail wil l in c l u d e a lin k a l l o win g r e gis t r a n t s t o m a k e r e s e r v a tio n s a t t h e A u s tin M a r rio t t D o w n t o w n. T h o s e w h o r e s e r v e a r o o m a t t h e b y M a r c h 1 0 r e c eiv e a r e d u c e d r o o m r a t e. ■
GETTING AROUND HERE ARE SOME TIPS FOR FINDING YOUR WAY AROUND AUSTIN Traveling to Austin can be one of the parts of attending TEXPERS' upcoming Annual Conference. Getting the most out of your conference travel involves a few suggestions: AIRPORT MATTERS The event venue, Austin Marriott Downtown, is roughly 6.5 miles from the Austin-Bergstrom International Airport, located at 3600 Presidential Boulevard. The phone number is 512-530-2242. TRANSPORTATION Transit/bus service through Austin's public transportation provider, CapMetro is open as is MetroRail. Passengers traveling to the airport can take Capital Metro's high-frequency Route 20. For information, visit www.CapMetro.org or call 512- 474-1200. Use your phone to scan the QR code to access Capital Metro's website for buss and train schedules and maps. Taxi and rideshare services are available at the airport, including Lyft, Uber, and Wingz. TEXPERS Annual Conference attendees who have downloaded our Whova App can arrange rides from the airport. To find a rideshare, make sure you've downloaded the Whova App (an email with download instructions will be sent to you after you register) and go to the "Airport Ride Sharing" channel under the "Community" tab. Use your registration email to sign up or log into the App. Fill out the online form to specify your arrival date and time. Use your registration email to sign up. PARKING Those who drive to the conference or rent a car from the airport can take advantage of the hotel's $49 daily valet parking rate. DINING Cafe Blue, 340 E. 2nd Street, is a classic seafood and oyster bar just a few steps from the TEXPERS' event venue, Austin Marriott Downtown. The menu features coastal cuisine from around the world and steaks for those diners still craving meat. Casual dress is appropriate at the restaurant. For American cuisine, Corner Restaurant Bar offers Texas-inspired food in a casual environment. Located at 110 E. 2nd Street at the corner of Congress Avenue, the popular eatery is known for its Taco Bar and outdoor patio. A pub can make a great place to network over drinks or simply catch up with peers, and Cedar Door offers an extensive beer menu to do just that. The pub is located at 201 Brazos Street, near the conference venue, and provides a relaxing patio. It offers a dining menu including homemade items with a southwest influence. At 110 E. 2nd Street, Dean's Italian Steakhouse is within walking distance from Austin Marriott Downtown. A relatively new addition to the area, the restaurant boasts its "authentic housemade pasta," as well as prime cuts of beef, including 100% American Wagyu. And for those looking for a more intimate spot to chat, check out the restaurant's The Veranda, which serves "a pared-down signature menu, drinks, and generous happy hour specials." Swift's Attic features craft cocktails and small bites in a "hidden" upstairs spot. Located near the conference hotel venue at 315 Congress Avenue, Swift's features an eclectic, casual atmosphere. Consider making a reservation for this popular Austin spot. Those looking to get their fingers sticky with barbeque sauce, look for Coopers BBQ for pitsmoked meats, classic sides, and a full bar. It is located in a historic building at 217 Congress Avenue. Mimosas, wheat beer, and pinot grigio are must-tries at Stella San Jac, a casual restaurant located at 310 E. 5th Street. But check out the food menu, too. The relaxed environment features upscale cuisine such as Ora King Salmon and Brush Creek Braised Wagyu. ■ Looking for lunch or dinner options? Here are a few nearby spots: TEXPERS PENSION OBSERVER www.texpers.org | 13
NETWORKING AUSTIN'S FOUNDER OFFERS TEXPERS MEMBERS TIPS TO MAKE THE MOST OF GATHERING TEXPERS is a group of peers who share a common goal - providing retirement benefits for public employees. Through TEXPERS, members can form professional relationships and interact with colleagues. TEXPERS organizes events that allow members to advance their careers. Through networking opportunities, new members gain insight to the pension industry, while long-term members gain a new perspective on governance. The TEXPERS staff strives to give members plenty of time to meet with peers and potential new vendors and investment firms. A draft conference schedule in this publication lists a few of the networking opportunities members have between sessions, during a round of golf, and during the conference's member receptions. Jim McCullick, who founded Networking Austin after the global economic recession of the early 1980s, says networking allows people within a common profession to exchange information and ideas. It isn't easy, and like any other skill, it takes practice. "When I started the networking group, I didn't know what I was doing, but we hammered it out," McCullick says. "My businesses were okay during the recession, but I knew people whose businesses were suffering. I was in a position to help the community, and that's what I did with Networking Austin." He didn't start out knowing all the ins and outs of networking. Over the years, his networking group organically formed a relationshipbased approach. TEXPERS interviewed McCullick in 2021 before the Association's 2021 Annual Conference to gain a few networking pointers. "First and foremost," he says, "networking is about forming Start by introducing yourself and then ask about the person you are talking to rather than discussing the pension industry. Learn to listen. Getting to know the person you are conversing with is crucial to forming a professional relationship. Find out about their background, marriage, and children. Ask where they went to school. Find out what interests them outside of the office. You could bond over something in common. You've spent time getting to know someone new. Send them a text, an email, or better yet, call them. If possible, invite them out to coffee or lunch. relationships, not making a sale or snagging a new client. Members host parties and go to lunch or grab coffee together. Their job is to get to know people, not to ask for business." Networking Austin's members use the relationships they have formed to grow their businesses, mainly through referrals. And the effort is paying off. "The members are tapping over a billion dollars in business since the group started over a lot of years," McCullick says. "Our members genuinely go to-bat for each other." Networking Austin's founder offers three tips TEXPERS members can utilize to improve their networking skills while in Austin for our Annual Conference: 1. 2. 3. According to McCullick, "people want to do business with someone they know and trust rather than someone giving an elevator pitch." To learn more about Networking Austin, visit www.networkingaustin.com. ■ - AJ 14 | www.texpers.org TEXPERS PENSION OBSERVER
Make sure you mark your calendar! You could print out this agenda online or ... *The schedule is preliminary and subject to change. TEXPERS PENSION OBSERVER www.texpers.org | 15
Don't forget to bring business cards!!! 16 | www.texpers.org TEXPERS PENSION OBSERVER You could tear out these pages to take with you to Austin ...
G Do o w e n a l s o y on yourself. event ad our new app! - AJ TEXPERS PENSION OBSERVER www.texpers.org | 17
QUESTIONS&ANSWERS 18 | www.texpers.org TEXPERS PENSION OBSERVER PENSION REVIEW BOARD CREATES NEW WEBSITE FOR MINIMUM EDUCATIONAL TRAINING The Pension Review Board recently launched a new Minimum Educational Training website, according to a memo the state agency distributed to Texas public pension trustees and administrators on Jan. 9. The PRB is mandated to oversee all Texas public retirement systems at the state and local levels in regard to their actuarial soundness and compliance with state reporting requirements. TEXPERS invited the state agency to submit a list of common questions about its new website. Q: What inspired the PRB to create a new website for the minimum educational training (MET) courses? A: Since the launch of the PRB’s MET courses in 2016, the agency has used SoftChalk, an eLearning content authoring software. The software allowed the agency to develop courses and post them online through SoftChalk Cloud without operating a Learning Management Software (LMS). As the MET program grew, so did the need for increased functionality. Furthermore, users were consistently experiencing issues with the software; for example, the agency commonly received requests to issue certificates through our MET Specialist because the software was unable to generate them. The agency decided to transition to using LifterLMS, an LMS that integrates with WordPress and allows the agency to create interactive courses and maintain them on the PRB’s own website. The new LMS and main website combined have more features available to users that the PRB hopes will improve the overall user experience, including the generation of certificates of completion. The new website can be found at www. education.prb.texas.gov. Q: How does the new website and learning platform differ from the previous one? A: A major difference between the new website and LMS compared to SoftChalk Cloud is that users will have their own individual accounts and a personalized dashboard. The dashboard will show what courses the user is enrolled in, their progress in the course, their date of enrollment, and their certificates of completion. The content within the core courses is largely the same, with some reformatting done to complement the new website and software. The agency is currently in the ongoing process of updating core courses to ensure that the information within them is consistent with current best practices and statute. What the State Agency Has to Say About the Program
Q&A Use your phone to scan the QR code to access the new website. Q: Are users able to see all the courses they previously completed on their dashboard? Or courses from other sponsors? A: At this time, users are only able to see PRB-sponsored courses that have been completed using the new website. Course completion will still need to be reported to the PRB by submitting PRB2000. These forms are due annually on Sept. 1 for training taken between Aug. 1 of the previous year and July 31. The form may be found on the main PRB website at www.prb.texas.gov/planreporting-and-compliance/forms-andtemplates/. TEXPERS PENSION OBSERVER www.texpers.org | 19 one assistance with the website. The PRB also welcomes questions by phone at 512- 463-1736 or by email at [email protected]. Q: What are the long-term goals for the new website? A: The agency has received many requests to create continuing education offerings and we look forward to continuing to develop new timely courses for trustees. We will be using this website to further utilize different methods of presenting information and user interactivity. The ultimate goal is to help trustees and administrators access high quality educational resources. Q: How can users retake courses and receive new certificates? A: Course enrollments on the new website are active for two years. During that time, a user may retake a course as many times as they would like, but they will not receive an additional certificate through the website. If for some reason a new certificate is needed sooner than once every two years, please contact the PRB directly. ■ Texas Agency Has 43-year History Reviewing Pension Plans The Texas Pension Review Board has been operating since 1979, reviewing state and local government retirement systems. House Bill 1506, Government Code Chapter 801, established the PRB as an independent agency during the 66th Legislature. Later, the PRB was mandated to oversee the actuarial soundness and compliance of public employee retirement systems with state reporting requirements under Chapter 802 of the Government Code. The PRB's mission is to ensure that its public retirement systems, which have billions in assets, are actuarily sound, have equitable benefits, reduce tax expenditures while still providing for employees, and improve education for public retirement system leaders. The 83rd Legislature required the PRB to establish a Minimum Educational Training program for trustees and system administrators of Texas retirement systems, including providing online training. TEXPERS supported House Bill 13, enacted by the Legislature, and participated in the PRB working committee that developed the MET Program. After being approved by the PRB, the MET Program went into effect on January 1, 2015. TEXPERS is a MET Program Accredited Sponsor authorized to conduct training. TEXPERS developed its Basic Trustee Training class, fulfilling the requirement of the MET Program, and offers it at least yearly before its Annual Conference, usually held in April. For additional information, visit www.texpers.org. MET requirements have two types: core and non-core. The core covers the basics of public pensions, so trustees and system administrators can successfully perform their duties. Non-core topics go beyond the basics, so trustees and administrators can gain further expertise. Under the MET, new trustees and administrators are to gain a minimum of seven hours of training within their first year of service. The seven hours must include training in seven core content areas: Fiduciary Matters, Governance, Ethics, Investments, Actuarial Matters, Benefits Administration, and Risk Management. For full details, visit www.prb.texas.org. ■ - AJ
BALANCESHEET As we look out to 2023, the U.S. Federal Reserve has reached its “neutral” monetary policy stance, and the European Central Bank is not far behind. Europe has moved fast to secure fossil fuel supply away from Russia, even at higher—but stable—prices. U.S. consumer price inflation is moderating. Asynchronous reopening, with China’s consumers set to rejoin the post-COVID economy, is likely to mean more inflation volatility next year. Even so, if we can avoid geopolitical pressures escalating meaningfully from current levels (which are already uncomfortably high), can the world’s biggest demand centers pivot toward a multiyear cycle of modest but sustainable growth? If so, equities may not be a bad place to be in 2023. Slowflation—economic slowdown combined with rapidly rising inflation fueled by energy supply disruptions— proved a tough backdrop for financial markets in 2022. In the past two decades, only 2008 recorded worse returns for equities, while fixed-income investors have not had to contend with the likes of the year’s declines even in the depths of the Global Financial Crisis (GFC). On an absolute basis, both equities and fixed income were down about 14% to 18%. The post-COVID economic transition back to something “more normal” proved volatile and is complicated further by rising geopolitical conflicts. None of the major economic powers have surpassed their pre-COVID output trajectories. The U.S. economy is the closest: by the end of the third quarter of 2022, its output was about 1.5% lower than it might have been in the absence of the pandemic. Euro area and Japanese output is more than 3.5% lower. And in larger EM economies, such as China, Brazil, and Indonesia, output ranges from about 5% to 7% lower. Latest expectations, as embedded in consensus estimates, suggest that economic observers do not expect major economies to regain pre-COVID levels of output next year (See chart on next page). Energy Prices Should Ease. Open warfare between Russia and Ukraine amplified tensions between the world’s largest consumers of fossil fuel energy and its producers. Although the world has plenty of oil and gas, natural gas spot prices in Europe spiked to about seven times higher in 2022 compared to just one year prior. No economy can adjust to a cost shock of this magnitude in the space of a few quarters. Indeed, purchasing managers indices were already suggesting in the autumn of 2022 that the European economy is likely to enter a recession. Although the outlook for fossil fuel energy supply in Europe remains unusually volatile, the risks are balanced. The Organization of the Petroleum Exporting Countries (OPEC) sought to limit crude supply by cutting daily production by 2 million barrels, just as Europe and the United States are implementing the next round of sanctions on Russian barrels (in part by barring Western firms from insuring Russian cargo). Simultaneously, Germany has all but replaced importing capacity equivalent to its gas supply from the Nord Stream I pipeline. The government chartered five socalled floating storage and regasification units (FSRUs), which will be able to process 25 billion cubic meters of gas per year, roughly equivalent to half the capacity of the Nord Stream I pipeline. Meanwhile, the country’s first liquified natural gas (LNG) import terminal, in the port of Wilhelmshaven, is expected to be completed in early 2023—commissioned and built in less than a year. A glut of LNG-carrying vessels destined for Europe, together with rapidly increasing capacity to process this supply, suggests that the meteoric rise of LNG prices and its dramatic drag on European inflation may be a story left in 2022. What is more, within a few years, Qatar and the United States should expand their respective LNG export capacity, and Europe should build enough proper import terminals. Today’s high 20 | www.texpers.org TEXPERS PENSION OBSERVER
BS TEXPERS PENSION OBSERVER www.texpers.org | 21 prices may well lead to tomorrow’s low prices, and tomorrow may arrive sooner than many feared. But Central Banks Can’t Wait. Yet the world’s leading central banks have signaled that they will not wait. Perhaps one of the biggest surprises in 2022 was the speed with which the Fed moved its main policy rate toward a neutral stance. Assuming annual domestic inflation returns to a 2% to 3% range by the end of 2023, a neutral policy rate— where real rate is around 1.5%—is somewhere in the neighborhood of 3.5% to 4.5%. The federal funds rate—the Fed’s main policy instrument—currently stands at 4.50%. Further rate increases tilt the U.S. monetary-policy stance toward restrictive. When the Fed intends to stop lifting its benchmark rate is a matter of not only domestic economic concern. Rapidly rising interest rates impact global liquidity conditions. We have already seen macroeconomic stress in Sri Lanka, a near credit event of sorts in the United Kingdom, and a blowup in the cryptocurrency markets. So far, these stresses have not spilled into broader markets, but interest-rate increases impact financial conditions nonlinearly. Debt payments of all sorts, and especially housing payments the world over, are linked directly to prevailing interest rates; when these rise rapidly, the possibility of financial and economic stress rises, too. 2023 Growth Depends on Inflation. Asynchronous reopening is set to bedevil the global economy for at least another year. We believe economic growth in the United States and Europe will depend largely on how quickly inflation abates. This, in turn, depends on when and how China reopens its economy. A full or significant reopening in China is likely to impact tourism flows in Asia and further afield, especially in Europe and North America. This should buoy local domestic demand and may fuel services-related inflation in the affected jurisdictions. It should also support current accounts and local currencies from Thailand and Japan all the way to Europe. China’s reopening is likely to make inflation readings in the United States and Europe more volatile and thereby complicate the Fed’s job of cooling domestic demand. In the absence of Chinese consumers, there are mounting reasons to believe that annual inflation of 3% toward the end of next year is attainable. Since the second half of 2022, housing and rental prices, continued improvement in supply chains, and domestic wage gains all point to accelerating moderation in annual inflation. Let’s start with housing. The price of shelter accounts for nearly 40% of the Consumer Price Index (CPI); it is thus the single biggest—and stickiest—component of the U.S. basket of prices used to calculate national inflation. As 30-year fixedrate mortgage rates passed 5% and then 6%, housing activity decelerated precipitously: sales of new builds are at the 2017- 2019 average, while sales of existing homes are at decade lows and still falling. Where transactions lead, prices follow: annual housing price inflation peaked in May 2022 and has been falling consistently since then. Private-sector measures of rentals point to outright price declines in the monthly data. Shelter inflation is notoriously difficult to convert into monthly CPI estimates, and we believe it will remain a drag on overall inflation for months to come, but broad housing market activity during much of 2022 suggests that we will see well-behaved shelter prices before the end of 2023. Goods prices reversed two decades of outright declines and grew strongly in the pandemic years. Supply-chain disruption proved difficult to remedy quickly, but as we enter 2023, spot price of a typical 40-foot shipping container is down some 80% from peak, purchasing manager surveys point to input price normalization, and suppliers’ delivery times are within reach of 2018-2019 averages. Annual goods price inflation peaked last February and has been declining steadily ever since. Lower-value-add, high-touch services do not see much in the way of productivity gains. It is difficult—and maybe even undesirable—to increase the speed of a haircut or improve the efficiency of waitstaff beyond a certain point. For this reason, the Fed worries about wage inflation in services feeding directly into consumer price inflation. Yet, in the second half of 2022, services wage gains have decelerated from four-decade highs. So, if the Fed reaches its neutral monetary policy stance and the ECB is not far behind; if fossil fuel supply away from Russia is secured, even at higher (but stable) prices; if consumer price inflation is moderating fast and the Fed does not overtighten into a major credit event somewhere; and crucially, if geopolitical pressures do not escalate meaningfully from their current uncomfortably high levels—then the world’s biggest demand centers may be able to pivot toward modest growth. If so, risk assets may not be a bad place to be in 2023. ■ Olga Bitel, partner, global strategist at WilliamBlair, distills macroeconomic and geopolitical developments into actionable insights for global equity portfolios within a multifaceted strategic framework. WilliamBlair is an Associate Advisor of TEXPERS.
BS Illiquid assets have become increasingly important to institutional investors and pension fund managers over the past two decades. These investors are looking for long-term, steady returns and illiquid assets – instruments like private equity, private debt, infrastructure equity and debt, real estate and natural resources, for example – can offer opportunities to provide just that. Pension fund managers may also see illiquid assets as a means of enhancing their yields and diversifying their portfolios. Illiquid assets are attractive because they tend to offer a return premium. In part, this reflects their illiquid nature: by definition, these types of assets can’t be sold without significant financial implications (usually in the form of a ‘haircut’). Illiquid assets also require much more expertise and investment sophistication and therefore, not every investor has the capabilities or the resources to invest in illiquid assets. The Fluid World of Illiquids. While these assets may seem ideal for the patient long-term investor, the reality is that illiquid assets carry significant risks. Cash flows to and from illiquid assets can be estimated but are uncertain – managers may call capital at any time and the timing of disbursements are often unpredictable. If you are managing a mature pension plan, the liquidity issue could be a significant risk, because the cash needed to fund these requirements may not be available. Even when managing a younger fund, cash calls may prove unpredictable and unwelcome. A second challenge relates to allocations. Firstly, institutional investors need to assess what proportion of illiquid assets to target. A decision is typically informed by the risk appetite of the stakeholders, asset characteristics but also by qualitative arguments and liquidity. Once a suitable allocation is defined it can be challenging to navigate how much cash to commit each year to achieve the target allocation. The market may move against you which can lead to significant under or over exposures relative to the Strategic Asset Allocation (SAA), and that is challenging because illiquid assets can’t easily be rebalanced. Consider two different (yet plausible) scenarios for the future: In one, the current levels of economic stress subside, allowing valuations of illiquid assets to rise relative to the liquid portfolio. In this scenario, some managers may find themselves overexposed to illiquid assets versus their SAA. In the second scenario, economic stress flares up even further leading to falling valuations of illiquids. In this situation managers may need to increase their commitments to meet their SAA. Neither scenario is ideal for a pension fund manager. Not Seeing the Full Picture. Given the potential of volatile market circumstances to significantly change funding positions, allocations and available liquidity, pension fund managers should be focusing on doing whatever they can to better understand and manage these risks. Insight into the potential for significant under or overexposure and for liquidity risk in changing market conditions is a key component of sound risk management. It is the manager's responsibility to assess the attractiveness of an illiquid asset class (risk/return characteristics and correlations) and to conduct a holistic scenario analysis like an Asset-Liability Management (ALM) or SAA. In many cases, this approach is appropriate. This approach incorporates qualitative considerations about illiquidity, internal capabilities, and costs. This practice leaves considerable risks from illiquids unquantified. With modest exposures to illiquid assets, younger pension funds and other investors do not face a significant threat. The impact of illiquid assets on the asset allocation weights of a pension fund and liquidity at a total balance sheet should not be ignored or stopped at simple estimates for mature pension funds and those with significant exposures to illiquid assets. The risks associated with funding large capital calls in illiquid portfolios must be understood and quantified by portfolio managers. They need to assess cash flows and allocations based on potential scenarios. A holistic model should be used to analyze these risks, including liquid and illiquid investments and cash flows. Managing pension funds also involves zooming in and out to quantify adverse scenarios' probability and severity. A New Approach. Using technology platforms like ours, we can manage illiquid asset cash flows with sophisticated asset lifecycle management capabilities. Platforms like ours enable pension funds to assess and manage risks effectively since they can analyze their entire balance sheet quantitatively and comprehensively. Fund managers can analyze the impact of illiquid asset investments on asset allocations and quantify liquidity risk on their balance sheets. Ortec Finance's Economic Scenario Generator, for instance, lets pension managers see what's going on with illiquid assets and capital calls across thousands of other markets. Using the platform, pension fund managers can understand how their illiquid asset portfolio will develop over time and how that will impact their cash flow. The platform helps users identify liquidity constraints and circumstances that could result in overexposure or underexposure. The fund could also calculate how much capital it needs to commit to reaching its target exposure. A Better Way. Several pension fund managers use illiquid assets to manage their pension funds, but they come with challenges. Particularly in market volatility, pension fund managers should understand liquidity risk well. Pension fund managers should assess their illiquid asset portfolios holistically. ■ Tom Hazenberg is a Senior Consultant Pension Strategist and Koen de Reus and a Senior ALM Consultant with Ortec Finance. Ortec is a Vendor Member of TEXPERS. 22 | www.texpers.org TEXPERS PENSION OBSERVER
BESTPRACTICES The Art of Retirement Communications TEXPERS PENSION OBSERVER www.texpers.org | 23
BP For additional information and the full report, use your phone to scan the code. 2 4| www.texpers.org TEXPERS PENSION OBSERVER
The TEXPERS Pension Observer c/o Texas Association of Public Employee Retirement Systems P.O. Box 201960 Austin, TX 78702 Telephone: 713-622-8018 E-mail: [email protected]