Retirement insights from a Colorado PERA perspective

A distant view shows a mountainous landscape with sloping peaks, green trees in the foreground, and a cloudy sky above.

2022 marks the fifth year Colorado PERA has published its <a href="https://content.copera.org/peras-investment-stewardship-report-turns-five-years-old-2/" target="_blank" rel="noreferrer noopener">Investment Stewardship Report</a>, which highlights how PERA manages and invests the funds that provide retirement benefits for nearly 650,000 members.



Released each year following PERA’s annual report, the Stewardship Report provides insight and transparency into PERA’s investment program and its focus on financial sustainability.



PERA invests with one goal — to pay current and future benefits to members and retirees. For five years, the Stewardship Report has detailed how PERA staff serve as good stewards of assets to ensure the plan can continue to do so.



<h4 class="wp-block-heading">Five years of the Stewardship Report</h4>



“We manage approximately $60 billion in assets on behalf of our members; that’s a big responsibility and it’s one we take seriously,” said Tara Stacy, PERA’s Director of Investment Stewardship. “The Investment Stewardship Report provides a great deal of helpful information on how we serve as stewards of funds, and we hope the report has become even more useful to those with questions about how and why we invest on their behalf.”



Over the years, the Stewardship Report has expanded and adapted as PERA’s investment staff have engaged with various stakeholders interested in how the organization makes investment decisions.



PERA often hears from various groups that would like to see PERA divest — or sell — certain types of investments, as well as groups that would like to see more money invested in certain industries or sectors. PERA’s approach to investment stewardship is straightforward: Seek out investments that are expected to provide the best risk-adjusted returns to PERA’s portfolio over the long term. &nbsp;



“A key takeaway we hope readers get from the Report is that our approach prioritizes financial value, rather than personal values, and supports PERA’s mission to provide retirement benefits while ensuring the financial sustainability of the Fund,” Stacy said.



<h4 class="wp-block-heading">Highlights from this year’s report</h4>


<div class="wp-block-image">
<figure class="alignright size-full is-resized"><a href=""><img decoding="async" loading="lazy" src="https://www.copera.org/peras-investment-stewardship-report-turns-five-years-old-2"" class="wp-image-5159" width="334" height="432"/></a><figcaption class="wp-element-caption">Click to enlarge</figcaption></figure></div>


New in 2022, the Stewardship Report release includes an <a href="https://www.copera.org/peras-investment-stewardship-report-turns-five-years-old-2" target="_blank" rel="noreferrer noopener" class="broken_link">online digital snapshot</a>, which provides an interactive overview of the report’s highlights and key data points.



The 2022 report also includes additional case studies, charts and graphs that help explain various investment philosophies and practices.



The report includes expanded disclosures about how the PERA Board and staff consider climate-related and other environmental, social, and governance (ESG) themes in the management of the portfolio. PERA does not manage the portfolio to target any specific ESG metric or outcome, but staff do take into consideration any financially relevant factors when making investment decisions.<ins></ins>



The Stewardship Report now includes more information on how PERA integrates various financially material factors into its investment decisions, and why PERA chooses to engage with companies through proxy voting and other strategies <a href="https://www.copera.org/divestment" target="_blank" rel="noreferrer noopener">rather than divesting</a>.



The PERA Board <a href="https://peraontheissues.com/proxy-voting-keeping-policy-current/" target="_blank" rel="noreferrer noopener">updated its proxy voting policy in 2021</a>, and the Stewardship Report provides insight into some of PERA’s proxy voting activities, as well as other ways staff engage with companies in which PERA invests. 



For learn more about the Investment Stewardship Report and PERA’s approach to stewardship, visit <a href="https://www.copera.org/investment-stewardship" target="_blank" rel="noreferrer noopener">copera.org/investment-stewardship</a>.



More stewardship coverage over the years:



<ul>
<li><a href="https://peraontheissues.com/burritos-boardrooms-and-ballots-the-story-of-one-shareholder-proposal/">Burritos, Boardrooms, and Ballots: The Story of One Shareholder Proposal</a></li>



<li><a href="https://peraontheissues.com/evaluating-sustainability-in-peras-investment-portfolio/">Evaluating Sustainability in PERA’s Investment Portfolio</a></li>



<li><a href="https://peraontheissues.com/investment-stewardship-considering-relevant-issues-like-esg-factors-in-investment-decisions/">Investment Stewardship: Considering Relevant Issues Like ESG Factors in Investment Decisions</a></li>
</ul>

PERA’s Investment Stewardship Report Turns Five Years Old

In today’s ever-changing world, the ability to adapt is an important ingredient for success. At Colorado PERA, adaptability is key to making sure the Association can continue to meet the changing needs of its diverse membership.



Over the past several years, PERA’s Communications Division has been using data from a survey of members and retirees to identify segments of PERA membership whose needs weren’t being adequately met and to pinpoint other opportunities for improvement.



The survey is a vital tool for PERA to ensure its communications are member-focused and fulfill the Board’s strategic goals, which include elevating PERA’s identity among stakeholders to that of a partner, and improving retirement security outcomes through best-fit products, services and education.



<h4 class="wp-block-heading" id="changes-resulting-from-2019-survey">Changes resulting from 2019 survey</h4>



The member satisfaction survey, conducted in 2019, aimed to assign PERA a rating that would approximate a Net Promoter Score (NPS). An NPS is a simple way of gauging the likelihood of a company’s customers recommending that company to friends and colleagues, with scores ranging from -100 (unlikely) to +100 (likely). The survey responses of nearly 18,000 members established PERA’s NPS as 5, and while that’s a positive score consistent with other member-based financial services organizations, it revealed several important opportunities for improvement.



<h5 class="wp-block-heading" id="more-personalized-tailored-content">More personalized, tailored content</h5>



A major takeaway from the survey results was that PERA has too often taken a one-size-fits-all approach to communications, rather than tailoring content to fit different members’ and retirees’ needs. As a result, PERA’s communications team has been focused on segmenting its website content, emails and other communications by life and career stage — <a href="https://www.copera.org/new-members" target="_blank" rel="noreferrer noopener">new to PERA</a>, <a href="https://www.copera.org/mid-career" target="_blank" rel="noreferrer noopener">mid-career</a>, <a href="https://www.copera.org/ready-to-retire" target="_blank" rel="noreferrer noopener">ready to retire</a>, <a href="https://www.copera.org/retirees" target="_blank" rel="noreferrer noopener">retired</a> — as well as creating more content specifically for those audiences.



<h5 class="wp-block-heading" id="simpler-language">Simpler language</h5>



Similarly, PERA members and retirees have expressed a need for simpler, more accessible language from PERA. Much of the terminology around retirement benefits — and finance in general — can be complex and difficult to understand. PERA staff regularly review and update publications, website content and other communications, and part of that review now includes identifying language that can be made more approachable.



This is an ongoing effort and PERA staff will continue to look for opportunities to simplify the language it uses to explain PERA benefits and services.



<h5 class="wp-block-heading" id="expanded-use-of-social-media">Expanded use of social media</h5>



In an effort to meet more PERA members where they are, PERA has been working to expand its presence on social media to complement its other communications channels. That includes launching <a href="https://www.facebook.com/ColoradoPERA/" target="_blank" rel="noreferrer noopener" class="broken_link">Facebook</a> and <a href="https://www.copera.org/dont-lose-track-of-your-future-benefits" target="_blank" rel="noreferrer noopener">Instagram</a> profiles and using those platforms <a href="https://peraontheissues.com/inaugural-facebook-live-event-attracts-hundreds/" target="_blank" rel="noreferrer noopener">to engage more directly with PERA members and retirees</a>.



<h5 class="wp-block-heading" id="website-updates">Website updates</h5>



PERA’s website is a vital tool for its members, retirees, and other stakeholders, and it was a clear area of opportunity to make some improvements. PERA staff used feedback from the survey to build a redesigned website that’s more user-friendly, including an updated account dashboard that displays a member’s account balance, estimated monthly benefit, and more. The new site <a href="https://peraontheissues.com/pera-launches-redesigned-website-with-better-navigation-other-improvements/" target="_blank" rel="noreferrer noopener">launched in mid-January</a>.



<h4 class="wp-block-heading" id="preparing-for-the-next-survey">Preparing for the next survey</h4>



A key step in assuring PERA meets its member expectations is to measure the effectiveness of the various changes and initiatives that have taken place since the first survey.



Planning is underway for a follow-up NPS survey, which will take place this spring. From that survey, PERA will be able to formulate an updated score and determine not only whether those changes are working, but also identify areas where staff should continue to focus their efforts in the future.<ins></ins>



“We hope everyone who receives the survey will participate, so we can get an accurate measure of how we’re doing and whether we’re meeting member expectations,” said PERA Senior Director of Communications Patrick von Keyserling. “We look forward to seeing the results and continuing to evolve based on your feedback.”

We Heard You: Responding to Member Feedback

In this story:



<ul>
<li>PERA Board meeting in September to hear updates on strategic plan, investments, member service</li>



<li>PERA staff continue efforts to fulfill Board’s vision of innovation in service delivery</li>



<li>Member Education’s transition to remote webinars just one example of this work</li>
</ul>



<hr class="wp-block-separator has-css-opacity"/>



When the COVID-19 pandemic struck the United States in early 2020, PERA joined offices around the country in transitioning to remote work. While disruptive, the pandemic also provided opportunities to speed up work that was already underway to improve the ways PERA provides service to members and retirees.



<h4 class="wp-block-heading">Fulfilling PERA’s mission and vision</h4>



PERA’s stated vision is “to innovate and build on a tradition of service by being a trusted partner in order to meet the changing needs of our diverse membership.” At its annual <a href="https://www.copera.org/pera-on-the-issues/pera-board-continues-to-press-for-innovation" target="_blank" rel="noreferrer noopener">planning session</a> — taking place Sept. 15 to 17 — the Board of Trustees will hear updates on how various departments within PERA have been working to fulfill that vision.



A big part of that effort is taking advantage of technology to meet people where they are. In the past year and a half, PERA has made moves to increase transparency and accessibility by live streaming Board meetings on <a href="https://www.youtube.com/user/ColoradoPERA" target="_blank" rel="noreferrer noopener">YouTube</a> and providing additional ways to connect to <a href="https://peraontheissues.com/thousands-participate-in-peras-interactive-town-hall-meetings/" target="_blank" rel="noreferrer noopener">PERA’s annual town hall meetings</a>.



In addition, efforts have been underway to reduce the amount of mail PERA sends to members and retirees and increase the use of digital communication channels like email, social media and video conferencing.



<h4 class="wp-block-heading">Improving efficiency, accessibility of member education</h4>



PERA’s Field Education team — now called Member Education — was already working to adapt some of its educational offerings into an online format when the pandemic began. With the sudden shift to remote work, the team was well-positioned to kick that process into high gear and reach more PERA members than ever before.



“We’ve been able to have higher attendance at fewer meetings,” said Carissa Cummins, a Member Education Representative. “You can join from your couch; you can join anywhere. We are offering webinars at all sorts of times of the day.”



Member Education <a href="https://www.copera.org/members/webinars" target="_blank" rel="noreferrer noopener">hosts free Zoom webinars</a> every weekday on a variety of topics, from benefit basics for new members to purchasing service credit and preparing for retirement. With the added flexibility of conducting meetings remotely, the team has been able to develop four new webinars in the past year.



Member Education continues to find and develop new ways to connect with PERA members, including utilizing live streaming on <a href="https://facebook.com/ColoradoPERA/" target="_blank" rel="noreferrer noopener" class="broken_link">PERA’s Facebook page</a>. They’ll be using that platform and Zoom webinars to help retirees navigate <a href="https://www.copera.org/peracare" target="_blank" rel="noreferrer noopener">PERACare</a> open enrollment in October.



“I’m really excited for the next Facebook Live,” Cummins said. “We do work really hard to engage the audience…we really try to get them involved in the process and the experience.”



<h4 class="wp-block-heading">Feedback from webinar attendees</h4>



As the Member Education team gathers feedback from webinar participants, many of them appreciate having the ability to attend virtually rather than in person.



“It allows people an opportunity to attend a session that they would never be able to schedule and attend in person,” one attendee said.



For others, the format of the meeting isn’t as important as what they gained: “I have a better understanding of what it takes to retire, even if it is further down the road. Now I know how to prepare for the future,” another attendee said.



To view PERA’s webinar offerings and sign up for a session, <a href="https://www.copera.org/members/webinars" target="_blank" rel="noreferrer noopener">click here</a>.

PERA Board Continues to Press for Innovation

In this story:



<ul>
<li>Committee members heard from PERA leaders, external auditors and actuarial consultants</li>



<li>External auditors gave PERA’s 2020 annual report a clean audit with no issues</li>



<li>PERA gets a “green light” on its funding progress</li>
</ul>



<hr class="wp-block-separator has-css-opacity"/>



PERA leaders and actuarial consultants appeared before the Colorado General Assembly’s Legislative Audit Committee on Aug. 18. The purpose of the hearing was to review PERA’s <a href="https://content.copera.org/how-its-made-peras-financial-report/" target="_blank" rel="noreferrer noopener">2020 Comprehensive Annual Financial Report</a>, released earlier this summer, and to review the findings of an external audit of the report. Committee members also heard an update from PERA’s actuarial consultants on PERA’s funded status and had the opportunity to ask questions.



Below is a summary of information presented at the hearing. To listen to an audio recording of the full hearing, <a href="https://sg001-harmony.sliq.net/00327/Harmony/en/PowerBrowser/PowerBrowserV2/20210824/67/12036#info_" target="_blank" rel="noreferrer noopener">click here</a>.



<h4 class="wp-block-heading">Results of PERA’s annual audit</h4>



Every year, the Office of the State Auditor hires an independent auditor to review PERA’s financial status and fiscal controls. CliftonLarsonAllen LLP has been auditing PERA’s annual statements since 2015.



For the year that ended Dec. 31, 2020, the auditors gave the annual report a clean audit, with no significant issues or outstanding recommendations.



<a href="https://leg.colorado.gov/sites/default/files/documents/audits/copera_legislative_audit_report_dec_2020.pdf" target="_blank" rel="noreferrer noopener">Click here</a> to read the full audit report.



<h4 class="wp-block-heading">PERA gets a ‘green light’</h4>



As part of its annual financial reporting, PERA enlists actuarial consulting firm Segal to issue an assessment of PERA’s funding progress called Signal Light Reporting. The report uses a simple color-coded system similar to a traffic signal — shades of green, yellow and red — to give a clear representation of whether PERA is on track to eliminate its unfunded liability.



Segal simulates thousands of possible scenarios to test the effects of different variables — like investment returns and public employer payroll changes, for example — on the likelihood of PERA reaching its target of full funding by 2048. The projected results range from dark green (fully funded ahead of schedule) to dark red (insolvent within 20 years). As of Dec. 31, 2020, all five division trust funds were in “green” or “dark green” status, meaning they are expected to be fully funded by 2048.



<figure class="wp-block-image size-large"><img decoding="async" src="https://content.copera.org/pera-receives-clean-audit-positive-funding-assessment-at-committee-hearing/"" class="wp-image-4626"/></figure>



<a href="https://content.copera.org/pera-receives-clean-audit-positive-funding-assessment-at-committee-hearing/" target="_blank" rel="noreferrer noopener">Click here</a> to read the full Signal Light report.



The Legislative Audit Committee is one of several legislative committees and subcommittees that PERA reports to regularly. Others include the Joint Budget Committee, Joint Finance Committee, Pension Review Subcommittee, and Pension Review Commission. These regular meetings with lawmakers allow for robust oversight and transparency into the state’s largest public employee retirement system.

PERA Receives Clean Audit, Positive Funding Assessment at Committee Hearing

On May 23, Colorado PERA filed a motion to join a
lawsuit to ensure that investors continue to have the right to sue companies
that have engaged in illegal behavior. &nbsp;



The decision is consistent with PERA’s commitment to
its fiduciary duties and to investment stewardship and transparency. The case in
question aims to force the multinational company <a href="https://content.copera.org/pera-joins-a-lawsuit-to-defend-transparency-and-shareholder-rights/">Johnson&#038; Johnson</a> to allow its shareholders to vote on whether
all lawsuits brought against the company for corporate wrongdoing should be
handled through mandatory arbitration, rather than in court. The lawsuit, which
is being heard before the U.S. District Court for the District of New Jersey, could
effectively end shareowner security class action cases against Johnson &amp;
Johnson. 



The
lawsuit was filed by a single Johnson &amp; Johnson shareowner, and the company
opposes the measure. Colorado PERA and the <a href="https://www.calpers.ca.gov/">California
Public Employees’ Retirement System (CalPERS)</a> filed a joint motion on behalf of shareholders and in
support of Johnson &amp; Johnson’s opposition. The pension funds and the
company contend that forced arbitration illegally denies shareholders the right
to protect their investments in court, and would reduce transparency by limiting
public disclosures of settlements. 



In
contrast to forced arbitration, class action securities litigation is a
fundamental right that enables shareholders to seek judicial remedies when a
company has committed securities fraud. Securities fraud is an illegal practice
covering a wide range of financial market manipulation and deception of investors
who are making purchase or sale decisions based on false information.



“Colorado
PERA members rely on PERA’s trust fund and its investment earnings for their
future financial security, and we must protect that financial security by holding
corporate wrongdoers accountable,” said Adam Franklin, General Counsel for
Colorado PERA. “It is imperative that investors retain a proper mechanism to
correct corporate fraud in a judicial forum. Shareholder rights are not
adequately protected by mandatory arbitration—its inherent lack of transparency
fails to serve as a deterrent for future wrongdoing.”&nbsp; 



CalPERS and Colorado PERA together manage more than $400 billion and both hold significant investments in Johnson &amp; Johnson. In joining this suit, the pension funds are protecting their respective stakes in the company while also helping to set a legal precedent that will make it more difficult for other corporations to require forced arbitration. PERA officials previously expressed their opposition to mandatory arbitration in a <a href="https://content.copera.org/advocating-for-investors-benefits-pera-members-and-retirees/">June 2018 letter</a> to SEC Chairman Jay Clayton.



Joining
this lawsuit is <a href="https://content.copera.org/how-pera-advocates-for-responsible-business-practices/">just one example</a> of how Colorado PERA engages with
companies to ensure they adopt responsible business practices and act in the
best interest of their shareholders. Each year, Colorado PERA participates in
more than 6,000 annual and special meetings and actively votes its proxies as a
way to ensure the accountability of public companies in which the fund invests.
PERA’s <a href="https://content.copera.org/pera-joins-a-lawsuit-to-defend-transparency-and-shareholder-rights/">proxy voting policy</a> is unique to the organization and
furthers the goals of promoting performance, transparency, and sound corporate
governance in ways that align with PERA’s fiduciary responsibility. PERA believes
that advocating for best business practices is a critical way to promote the
financial sustainability of the Fund. 



A timetable for the case has not been announced. For more information about Colorado PERA’s approach to <a href="https://content.copera.org/how-pera-advocates-for-responsible-business-practices/">stewardship</a>, visit copera.org.

PERA Joins a Lawsuit to Defend Transparency and Shareholder Rights

PERA staff are committed to providing regular, transparent updates to state legislators about the status of the PERA trust funds and the economic impact of the public employee retirement plan across Colorado.



Currently, four different legislative committees have oversight responsibility of PERA. Each committee held hearings this fall where PERA staff provided <a href="http://coga.prod.acquia-sites.com/sites/default/files/html-attachments/i_pensionrevew_2018a_20180815t100058z1__hearing_summary/Attachment%20B%20-%20PERA%20Presentation.pdf" target="_blank" rel="noreferrer noopener">general updates</a> as well as specific information tailored to the needs of the different committees. Recent presentations to reporting committees in 2018 included:



<ul>
<li><a href="http://leg.colorado.gov/sites/default/files/images/lac_agenda_august_13-14_2018_.pdf" target="_blank" rel="noreferrer noopener">Legislative Audit Committee</a>, held on August 14</li>



<li><a href="http://leg.colorado.gov/content/ipensionrevew2018a2018-08-15t100058z1-hearing-summary" target="_blank" rel="noreferrer noopener">Pension Review Commission</a>, held on August 15</li>



<li><a href="http://leg.colorado.gov/sites/default/files/images/joint_finance_smart_act_agenda_1.pdf" target="_blank" rel="noreferrer noopener">Joint Finance Committee</a> (SMART Act hearings), held on November 26</li>



<li><a href="https://leg.colorado.gov/sites/default/files/fy2019-20_perahrg.pdf" target="_blank" rel="noreferrer noopener">Joint Budget Committee</a>, held on December 4</li>
</ul>



Led by Colorado PERA Executive Director Ron Baker, PERA staff presented information about PERA’s status and impact as well as major developments in 2018.



PERA continues to have significant economic impact around the state. Contributions to the Colorado economy come from $4.1 billion in total Colorado distributions, creating $6.5 billion in economic output. PERA provides retirement and other programs to one in every 10 Coloradans, paying benefits in every Colorado county, including over 25 percent of payroll in some of the state’s most rural counties.



The investment program continues to meet benchmarks through a diverse asset allocation and a long-term investment time horizon, while maintaining low costs by managing more than half of its portfolio internally, saving approximately $40 million annually in investment fees.



Senate Bill 200 (SB 200) significantly improved PERA’s funded status and every division is expected to reach full funding within the next 30 years. Major provisions of the <a href="https://content.copera.org/pera-staff-keep-legislators-prepared-for-2019-legislative-session/" target="_blank" rel="noreferrer noopener">legislation</a>, approved during the 2018 legislative session, include increased contributions, modified benefits, and an <a href="https://www.copera.org/pera-staff-keep-legislators-prepared-for-2019-legislative-session" target="_blank" rel="noreferrer noopener">automatic adjustment provision</a>.



The automatic adjustment provision in SB 200 is designed to keep each division on schedule to full funding by 2048, with three components that include employer contributions, employee contributions, and the annual increase that can be adjusted over time if PERA falls behind or moves ahead of schedule to reach full funding. The direct distribution from the State’s budget could also be adjusted but cannot exceed the current funding level of $225 million. The first eligible year for any needed adjustments would be on or after July 1, 2020.



No legislative agenda items have been identified by the PERA Board for the upcoming 2019 legislative session.



In addition to the general overview, PERA staff offered more specific information for the various committees. For example, a PERA audit response plan for the Legislative Audit Committee detailed a process of examining current procedures in place for the review of actuarial reports and a review of controls over financial reporting. For the Joint Budget Committee, staff responded to several questions, such as looking for more detail about the automatic adjustment provision of SB 200 and how funded status might trigger an adjustment in the future.



At each hearing, PERA staff reminded legislators of their willingness to serve as a resource during the 2019 session as retirement security and the financial stability of Colorado’s largest public employee retirement plan continue to be priorities.



Stay up-to-date by following <a href="https://www.copera.org/pera-on-the-issues" target="_blank" rel="noreferrer noopener">PERA on the Issues</a> and <a href="https://www.copera.org/pera-staff-keep-legislators-prepared-for-2019-legislative-session" target="_blank" rel="noreferrer noopener">subscribing to our newsletter</a> for insights throughout the First Regular Session of Colorado’s Seventy-second General Assembly, convening on January 4, 2019.

PERA staff keep legislators prepared for 2019 legislative session

In recent years, “transparency” has become a buzzword among those—citizens, political candidates, advocacy groups—who want a more informed view of what really goes on behind doors that have long been closed to public eyes.



It’s a logical request. The ubiquity of the internet has made information more widely available and digestible, so it’s only natural that people would want to extend that privilege of access into boardrooms and statehouses. Having more visibility into these processes, the theory goes, would help people make more informed decisions about how to cast a vote, choose a career, or invest their money.



In the world of public pensions, lately the transparency requests have focused on private equity (PE) fees, the payments made to investment managers (aka General Partners or “GPs” in private equity parlance) to invest in private companies. These charges are typically higher than fees for public markets, and in some jurisdictions, people have begun demanding more information about where their tax dollars and pension contributions are going, and whether there’s a more economical investment option.



These are worthy discussions to have. But for all the good intentions behind these appeals, there’s a point at which unchecked transparency into PE fees becomes bad business.



Take California and its public pension funds, CalPERS and CalSTRS, which are by far two of the largest in the country. <a href="https://www.institutionalinvestor.com/article/b1505pghn17t4s/private-equitys-other-transparency-problem" target="_blank" rel="noreferrer noopener">New and well-intentioned disclosure rules</a> related to improving transparency have heightened the scrutiny around what these funds pay in investment fees. But as more people become aware of these terms, they’ve raised objections to the expenditures, particularly when/if investment returns have fallen short of expectations.



What’s more, the new laws have made some private equity GPs reluctant to share their information—which they regard as valuable trade secrets—causing the California funds to <a href="https://www.copera.org/why-enhanced-investment-transparency-creates-a-new-set-of-risks" target="_blank" rel="noreferrer noopener">miss out</a> on several potentially lucrative investment opportunities. (Something similar recently unfolded in Kentucky, where a prominent Wall Street hedge fund <a href="https://www.copera.org/why-enhanced-investment-transparency-creates-a-new-set-of-risks" target="_blank" rel="noreferrer noopener">stopped taking the state pension fund’s business</a> after the state enacted new and more stringent transparency requirements.)



The PERA Board of Trustees has always tried to provide as much transparency as is legally allowed, and the recent passage of <a href="https://content.copera.org/2019-proposed-legislation-status/" target="_blank" rel="noreferrer noopener">Senate Bill 200</a> by the Colorado General Assembly—which established a legislative oversight committee focused on PERA—will increase the visibility into the fund and its investment practices. PERA also was an early backer of the <a href="https://ilpa.org/about/" target="_blank" rel="noreferrer noopener">Institutional Limited Partner Association</a> (ILPA), a private equity trade organization that aims to increase transparency and investor reporting.



PERA has been making investments in privately held companies since 1982, and these assets have long been a key part of the PERA portfolio; an internal analysis showed for the 10-year period ending December 2017, the PERA fund added about $3.1 billion from private equity investments to its bottom line. PERA has accomplished all this by limiting costs wherever possible, and by seeking the most promising deals.



As the pension fund that directly affects one out of every 10 Coloradans and indirectly affects the entire state economy, PERA has the fiduciary responsibility to maximize its investment returns. In order to ensure the retirement security for about 580,000 of the state’s educators, safety officers, and other public servants, PERA regularly must make complex investment decisions and will always share a reasonable amount of information about its business practices. But while improving investment transparency is a desirable goal in general, once it starts to compromise the fiduciary duties of any public pension fund, it risks becoming too much of a good thing.



See also:



<a href="https://content.copera.org/pera-board-meeting-notes-setting-peras-portfolio-mix/" target="_blank" rel="noreferrer noopener">Asset class in-depth: private equity</a>



<a href="https://www.copera.org/we-hear-you-pera-and-private-equity-2" target="_blank" rel="noreferrer noopener">PERA’s Private Equity Portfolio</a>

Why enhanced investment transparency creates a new set of risks

Earlier in June, PERA Interim Executive Director Ron Baker sent a letter to Colorado’s Congressional delegation asking that they withhold support from potential legislation that could undermine public pension recovery efforts and recent pension reforms in Colorado and around the country.



Over the past eight years, Rep. Devin Nunes (R-CA) has introduced legislation known as the <a href="https://www.copera.org/pera-corrects-the-record-about-proposed-federal-legislation-2" target="_blank" rel="noreferrer noopener">Public Employee Pension Transparency Act (“PEPTA”)</a>. Rep. Nunes recently asked each member of Congress through a “Dear Colleague” letter to co-sponsor similar PEPTA legislation this session.



In his letter, Baker outlines a number of reasons why PEPTA is concerning for public pension plans in general and for Colorado PERA specifically.



<ul>
<li>The legislation would require public employee plans, including PERA, to report their pension liabilities and assets using an assumption that their investments will only earn the U.S. Treasury bonds interest rate. PERA’s $49 billion trust fund is a diversified portfolio of stocks, bonds, real estate, private equity and other assets. Historically, these investments have earned a <a href="https://content.copera.org/pera-corrects-the-record-about-proposed-federal-legislation-2/" target="_blank" rel="noreferrer noopener">rate in excess</a> of the legislation’s artificial benchmark. Any states and local governments associated with public plans that did not comply with this requirement would be stripped of their ability to issue federally tax-exempt bonds.</li>



<li>PEPTA is based on an assumption that many state and local retirement plans are headed toward insolvency and don’t share meaningful information about their financial condition. Each year, PERA produces a Comprehensive Annual Financial Report, a voluminous data source available online. Further, PERA reports to three (soon to be four) legislative oversight committees during the interim session and the regular legislative session.</li>
</ul>



The letter also notes that PEPTA would not lower taxpayer costs, increase transparency, expand accountability, or improve understanding of state and local government retirement plans.



PERA staff will continue to monitor the progress of PEPTA and other federal legislation that could impact public pension plans or PERA members. PERA’s letter to Colorado’s Congressional Delegation is available <a href="https://peraontheissues.com/wp-content/uploads/2018/06/No-PEPTA-Letter-to-Congressman-Lamborn_06-20-2018.pdf" target="_blank" rel="noreferrer noopener">here</a>.

PERA corrects the record about proposed federal legislation

PERA CIO sends comments to the SEC to improve transparency in equity trading and research after MiFID II impacts European markets



New government regulations are rarely thought of as transformational, but a recent regulatory change out of Europe is proving the exception. New rules for the investment community have increased transparency and, ultimately, fairness for investors – including the members and retirees who belong to PERA.



PERA staff work diligently to stay aware of the latest trends in investment markets and to advocate for increased <a href="https://www.copera.org/pera-advocates-for-increased-transparency-at-the-federal-level" target="_blank" rel="noreferrer noopener">shareholder rights</a>, transparency in <a href="https://www.copera.org/retirement-roundup-long-1-million-last" target="_blank" rel="noreferrer noopener">investments</a>, and <a href="https://www.copera.org/pera-advocates-for-increased-transparency-at-the-federal-level" target="_blank" rel="noreferrer noopener">strong corporate governance</a>. Recently, PERA Chief Investment Officer (CIO) Amy McGarrity wrote to the Securities and Exchange Commission (SEC) asking for guidance that would increase pricing transparency in investment research.



McGarrity wrote the letter in part as a response to the regulation known as <a href="https://mifidii.thomsonreuters.com/en/what-is-mifid-ii.html" target="_blank" rel="noreferrer noopener" class="broken_link">MiFID II</a>. On January 3, 2018, the Markets in Financial Instruments Directive came into effect impacting the UK and European markets. The intent is to provide greater transparency and protection to investors in various asset classes, including the equities, bonds, and currencies in which Colorado PERA invests. While the new rules directly apply to European investors, banks, asset managers, and other market participants, McGarrity’s letter was a direct result of the impact of MiFID II on the investment landscape across the globe.



PERA is particularly interested in sections of MiFID II related to the distribution of investment research and how such research is compensated. Why is PERA focused on this area? PERA invests a significant portion of Fund assets “in house,” including the internal management of approximately 70 percent PERA’s stock investments. In their active asset manager roles, PERA analysts use broker-generated research to help explore investment ideas in detail. This research can range from data in specific industries to company-specific research that would be burdensome and redundant for PERA to replicate.



Traditionally, investment research generated by brokers has been paid via a “bundled” relationship. That is, when PERA would need to trade stocks, the broker or investment bank that executed the trade would then allow PERA access to their research products. MiFID II prohibits this bundling of trading and research. Instead, trading must be compensated for on its own merits, as must research. Consequently, in Europe, research is now paid for primarily by asset managers out of their profits. Similarly, trading relationships must rest solely on the best, or most cost-effective, execution of stock trades.



The benefits of this disruption of the status quo are being felt. Direct payment for research has already greatly improved the transparency of research service pricing, as specific research charges are negotiated. In the bundled model, research pricing has been opaque, with banks avoiding any discussion of explicit costs, thus limiting the ability of investors such as PERA to determine if they have been paying an appropriate amount for the product. MiFID II also has liberated the trading side of the equation by making the choice of transacting broker clearly based on execution skill, rather than unrelated research quality and access. Again, when bundling, trading decisions are less transparent given that the research product cost must be considered.



In the letter from PERA to the SEC, McGarrity recommended that the SEC increase pricing transparency by providing clear guidance that would allow U.S. investors to pay directly for research, rather than receiving research as part of a bundle of services paid for by commissions. PERA’s Equities Division is already in the process of negotiating clear, specific research arrangements with a variety of providers, and form of payment remains a topic of debate. While many of PERA’s research relationships will accept a check from PERA, others have interpreted the latest SEC guidance as limiting the ability of investors to directly pay for research due to on-going regulations.



PERA will continue discussions with the “holdout” brokers still requiring trade commissions to access research, while also engaging with the SEC on the issue. In the meantime, PERA will set firm expectations with research providers, pay for research directly where permitted, and create as much transparency as possible where bundling remains. These efforts will continue to ensure that investment costs are low, ultimately benefiting the PERA membership and Colorado taxpayers.



Read PERA Chief Investment Officer’s <a href="https://content.copera.org/pera-advocates-for-increased-transparency-at-the-federal-level/" target="_blank" rel="noreferrer noopener">letter to the SEC</a>.

PERA advocates for increased transparency at the federal level

Report Marks 5th Consecutive Year for Clean Audit



For the fifth consecutive year, the Colorado Public Employees’ Retirement Association (PERA) received a <a href="https://content.copera.org/colorado-pera-2015-financials-receive-clean-audit/">clean financial audit</a>. Auditors did not find any significant deficiencies or material weaknesses in PERA’s financial reporting or controls. Nor did their report make any recommendations for best practices improvements.



Every year, the Office of the State Auditor contracts with an independent accounting firm that reviews the financial operations of PERA. The findings of the 2015 audit were released today after receiving approval from Legislative Audit Committee of the Colorado General Assembly. The audit was conducted by national firm <a href="http://www.claconnect.com/">CliftonLarsonAllen</a>. PERA’s actuary, <a href="http://cavmacconsulting.com/">Cavanaugh Macdonald</a>, also provided information about the funded status of the state’s largest retirement system.



In addition to reviewing and approving the audit, the Legislative Audit Committee also reviewed PERA’s implementation of a new reporting methodology designed to communicate PERA’s financial health. PERA’s use of this new “signal light” technology, developed by <a href="http://pensiontrusteeadvisors.com/">Pension Trustee Advisors</a> in accordance with Senate Bill 14-214, showed the PERA trusts to be in the yellow category, meaning that the trusts are sustainable, but will require more than 40 years to reach 100 percent funding levels. The yellow designation reflects that the plan will be able to pay benefits into the future, unlike the situation in 2009 when the fund was predicted to run out of funds in 20 years. As a result of those projections, the General Assembly passed <a href="https://www.copera.org/preview?pageid=41010">Senate Bill 10-001</a>, which resulted in significant reforms that returned the fund to being able to always pay benefits due.



“This year’s clean audit and PERA’s adoption of the signal light technology demonstrate our commitment to transparency, as well as our desire to ensure the highest level of quality in all of our operations,” said Gregory W. Smith, PERA Executive Director. “We take seriously our responsibility to provide a secure retirement for our members. That means ensuring that our operations are sound and providing an honest assessment of the financial status of the fund,” he added.



Colorado PERA provides retirement and other benefits to more than 547,000 current and former teachers, State Troopers, corrections officers, snow plow drivers, and other public employees who provide valuable service to all of Colorado. PERA is a vital and stable contributor to Colorado’s economy, distributing $3.7 billion in 2015 to retirees who live in Colorado. PERA is one of Colorado’s best investments.

Tag Archives: