The Virginia Retirement System beat the stock market this year and now its investment staff is reaping the rewards.
The VRS board of trustees approved incentive pay of more than $7.85 million for 52 members of its internal investment staff on Tuesday as added compensation for a 27.5% investment return in the last fiscal year. The return swelled the retirement trust fund for public employees to $101.8 billion — the first time it has exceeded $100 billion.
The board also answered critics who say the retirement system could earn more for public employee pensions by investing in indexed funds for stocks and bonds instead of paying an internal investment staff to manage its assets.
“These excess returns would not have been possible under passively managed investment strategies,” VRS Chairman O’Kelly McWilliams said before the unanimous board vote to approve the incentive pay package.
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A year ago, the retirement system wasn’t crowing. It had finished the fiscal year on June 30, 2020, with a 1.4% return on investments — far below the 6.75% annual return on investments it assumes in setting government contribution rates to pay long-term pension liabilities for state employees, teachers, law officers and judges, and many local government workers. (VRS awarded $3.35 million in incentive pay to its investment professionals last year.)
The dramatic turnaround in the past fiscal year, which ended June 30, reflected big gains in private equity stocks — part of a highly diversified investment portfolio that some critics have faulted for leaving potential stock gains on the table — and public equity stocks that generally fuel the stock market. VRS achieved returns of 54% on its investments in private equities and 41% on public equities, compared with almost 39% for the S&P 500 index.
VRS created the “investment professionals’ pay plan” to attract and retain employees to the system’s internal investment division, which manages about one-third of its assets. The plan bases incentive pay on how VRS investments perform compared with third-party benchmarks over three and five years.
In the last fiscal year, VRS investments earned 2.2% more than the system would have expected under its asset allocation policy, which aims to diversify where it puts its money.
“VRS’ approach, consistent with industry best practice, is to manage to a broader opportunity set, beyond just U.S. stocks and bonds,” spokeswoman Jeanne Chenault said Tuesday.
Last year’s gains should lower the cost of paying for future pension liabilities in the next two-year state budget, which will reflect contribution rates that the VRS board will recommend next month for state and local government employers to pay from July 1, 2022, through June 30, 2024.
Gov. Ralph Northam, who will propose a new budget in December before leaving office the next month, told legislators in August that a rise in the stock market has been “profoundly good for the Virginia Retirement System that funds the retirement for police officers, teachers and public workers all over Virginia.”
Separately, an annual outside study by CEM Benchmarking found that VRS’ administrative costs were $33 less per active member of the retirement system than the average last year for other public pension systems considered its peers. VRS’ costs were $72 per member in 2020, compared with $105 per member for peers.
The board awarded a 2.5% bonus to administrative employees, including those who support the investment division, for meeting performance benchmarks, as well as merit pay increases of 2% to 4% for those whose performance exceeds standards or excels. The combined cost is about $1.2 million.
The board also approved a 5% bonus for VRS Director Trish Bishop, or about $10,000, as well as a $75,000 payment in December to bring her total compensation closer to her peers at other pension systems. It also approved a 7% bonus worth $12,382 for Jennifer Schreck, the internal audit director.