FREQUENTLY ASKED QUESTIONS
SIB Investment Program
- What funds are invested by the SIB?
As of 6/30/15, the SIB has 12 statutory clients (as specified in NDCC 21-10-06) and 11 contracted clients. The largest of these include the Teachers Fund for Retirement (TFFR), Public Employees Retirement System (PERS), Workforce Safety & Insurance Fund (WSI), the Legacy Fund and the Budget Stabilization Fund. Other clients include the City of Grand Forks Pension Fund, the City of Bismarck Employees and Police Pension Funds, and the State Fire and Tornado Fund. Please refer to the SIB performance summary page which lists the various funds under the SIB.
- What is the size of the SIB investment portfolio?
Please refer to the SIB performance summary page for the most recent quarter-end market values of the various funds under the SIB.
- How does the SIB investment program work?
The SIB, with assistance from the RIO staff, implements the investment strategies of the individual clients of the SIB based on the clients' investment policies, which contain their asset allocations. Investments are managed in pools to take advantage of cost efficiencies available to larger pools of money. The SIB externally manages all of its investments, and hires professional investment managers to manage strategies intended to best maximize returns for stated levels of risk within the client policies. The investment managers make the day-to-day decisions on which securities to buy or sell based on investment strategies they are hired to utilize. RIO staff acts as a "manager of managers" and coordinates the activities of the external investment managers, custodian bank and investment consultant. Please click here to view a diagram of the SIB investment program.
- What is the prudent investor rule used by the SIB and how does it affect the investments made for my retirement?
According to NDCC 21-10-07, the SIB "shall apply the prudent investor rule in investing for funds under its supervision. The prudent investor rule means that in making investments the fiduciaries shall exercise the judgment and care, under the circumstances then prevailing, that an institutional investor of ordinary prudence, discretion, and intelligence exercises in the management of large investments entrusted to it, not in regard to speculation but in regard to the permanent disposition of funds, considering probable safety of capital as well as probable income."
Chapter 59-17 of the NDCC describes in more detail the prudent investor rule and standards of care. This chapter uses similar language to what is found in the American Law Institute's Restatement of the Law Third, Trusts: Prudent Investor Rule, 1992. The General Standard of Prudent Investment, under section 227 of this publication, includes the following:
The trustee is under a duty to the beneficiaries to invest and manage the funds of the trust as a prudent investor would, in light of the purposes, terms, distribution requirements, and other circumstances of the trust. This standard requires the exercise of reasonable care, skill, and caution, and is to be applied to investments not in isolation but in the context of the trust portfolio and as a part of an overall investment strategy, which should incorporate risk and return objectives reasonably suitable to the trust.
In making and implementing investment decisions, the trustee has a duty to diversify the investments of the trust unless, under the circumstances, it is prudent not to do so. In addition, the trustee must conform to fundamental fiduciary duties of loyalty and impartiality, act with prudence in deciding whether and how to delegate authority and in the selection and supervision of agents, and incur only costs that are reasonable in amount and appropriate to the investment responsibilities of the trusteeship.
- How have the funds under the SIB performed historically?
Over 30 years, the ND pension funds' net performance has been above 8.0%, which has been the actuarial assumed investment return rate.
As of July 1, 2015, the TFFR Board has adopted an actuarial assumed rate of return of 7.75%. See the SIB performance summary page for the net of fees performance history of the various funds under the SIB for time periods ended June 30 of each year, as well as the current fiscal year-to-date. RIO, as well as the State of ND, operates on fiscal years (July 1 - June 30) rather than calendar years. When comparing investment returns, it is important to understand the time periods reported.
- How have the ND pension funds done compared to other public pension funds around the country?
the ND pension portfolios have performed better, relative to a broad universe of pension funds, in periods when equities did better than bonds. In the near-term, the ND pension funds have performed in the top third and over the longer-term the performance has been similar to the average public pension fund. This exhibit shows the TFFR and PERS funds' historical returns versus a peer group of currently nearly 300 public funds as tracked by investment consultant Callan Associates Inc. (CAI). This exhibit uses time periods ended June 30, 2015, the most recent fiscal year-end available for this database.
It is important to note that during Fiscal Years 2008 and 2009, the stock market (both domestic and international) was down to historically low levels. The domestic stock market, as measured by the Standard and Poor's (S&P) 500 Index, was down 13.12% for the fiscal year ended 6/30/08, and down 26.21% for the fiscal year ended 6/30/09. The international stock market, as measured by the Morgan Stanley Capital International Europe, Australasia, Far East (MSCI EAFE) index, was down 10.61% for the fiscal year ended 6/30/08, and down 31.35% for the fiscal year ended 6/30/09.
The returns are all shown before the effect of investment management fees or "gross of fees" as this provides a more accurate comparison within the database of public funds.
- Investment fees are typically quoted in "basis points." What is a basis point?
One basis point is equal to 0.01% or one one-hundreth of a percent. As an example, if the fees on a fund are $200 and the total value of the fund is $100,000, the fees would be 200/100,000 or 0.20% which is 20 basis points.
- How much is paid each year in investment expenses?
For the fiscal year ended June 30, 2015, the SIB paid investment fees to professional investment firms for management, consulting and custodial bank services totaling 47 basis points (0.47% of total average market value). Details of these fees can be found in the 2015 Comprehensive Annual Financial Report beginning on page 176.
The breakdown of fees by trust is as follows:
Over the past 25 years, the asset allocations of the funds under the management of the SIB have become more diversified and incorporated asset classes with higher return expectations. These asset classes also have higher management fees. The expectation in selecting investment managers is that their returns will add value to the portfolio net of fees.
For the fiscal year ended June 30, 2015 - 63 basis points (0.63% of average market value)
Over the past 25 years the fees for the pension trust averaged 56 basis points per year.
For the fiscal year ended June 30, 2015 - 35 basis points (0.35% of average market value)
Over the past 25 years the fees for the insurance trust averaged 26 basis points per year.
For the fiscal year ended June 30, 2015 - 33 basis points (0.33% of the average market value)
Although the Legacy Fund assets were first invested in 2012, fiscal year 2015 was the first year that the Legacy Fund was fully invested in a diversified asset allocation, therefore comparison of fees with prior years would be less meaningful.
In mid-2014, the SIB hired Callan Associates to conduct a fee analysis for all of the fees paid to investment managers for the fiscal year ended June 30, 2014. The report can be found here.
- What causes differences in investment performance among plans?
Studies have shown that 90-95% of the total return of a portfolio is based on asset allocation. All plans have unique asset allocations that are based on the underlying liabilities or cash flow needs of those plans. Which asset classes are performing better, what strategies are employed within each asset class, and how much is allocated to each asset class determines the total performance of the fund. It is important to note that the asset allocation is not determined by the SIB but is set by the clients, such as the PERS or TFFR boards.
- What is considered a reasonable actuarial return assumption?
Actuarial return assumptions are long-term in nature and are based, in part, on capital market projections which are obtained from multiple sources. These projections take into consideration long-term historical performance of the various asset classes as well as future long-term expectations in the markets. Currently, the majority of industry experts believe that a 7%-8% return, over the long-term, is achievable.
- If the stock market performs poorly, how does this affect my pension benefit?
All of the pension funds invested with the SIB are Defined Benefit Plans. This means that your pension benefits are determined by a formula defined as years of service × average salary × a multiplier. Fluctuations in the markets do not have a direct impact on your pension benefit; however, it may impact long-term funding available for the plans.
- Why do different SIB clients have different asset allocations?
Asset allocation is set based on the underlying liabilities or cash flow needs of a fund. Funds that have shorter term cash flow needs (i.e. Insurance Trust clients) generally will have higher allocations to less volatile asset classes such as fixed income and cash equivalents. When a fund is more long-term in nature (i.e. Pension Trust clients), higher allocations to asset classes with more volatility are appropriate to meet long-term return objectives. Because of this, each client sets its own asset allocation.
- What is the process used by the SIB to hire investment managers to invest pension and insurance trust funds?
Based on the asset allocations submitted by the individual clients, the SIB has created investment pools in which clients may participate. Each pool is made up of various investment managers hired to manage portfolios within those asset classes. RIO staff researches investment managers and brings recommendations to the full SIB for consideration. Representatives from the firm present to the full board, explaining their strategy and methods. A “Due Diligence” profile is completed for reference and fees are negotiated. All new investment management relationships are approved by the SIB.
- Once investment managers are selected, how are they monitored to ensure they are meeting investment objectives and following guidelines?
Prior to funding a new investment manager, investment guidelines specific to the investment strategy are agreed upon and included as part of the contract documentation. Investment management firms have internal departments dedicated to ensuring that all investment guidelines are followed. If a situation arises that causes the portfolio to move outside of the investment guidelines, the investment manager will contact RIO staff and explain the situation. A decision is then made as to whether immediate action is necessary. All such instances are documented.
Additionally, RIO staff monitors the portfolios using both sophisticated software products and various reconciliation procedures. Portfolio performance data is collected monthly from the investment managers. The investment consultant, Callan Associates, Inc., also recalculates the performance of each portfolio based on the custodian bank data. RIO staff then compares the returns provided by the investment managers to Callan’s calculations to ensure that all data is reasonable. Investment returns are then compared to benchmarks chosen by the SIB and staff to ensure that the portfolios are performing as expected. Large deviations from benchmarks can indicate that the portfolio is not being managed within original parameters. Investment managers are brought in at least annually to provide an update on their firms, discuss performance and provide overall economic analysis. If the SIB believes an investment manager is not meeting its stated objectives, they may put them on a “watch list,” giving that portfolio added scrutiny for a period of time, until they feel the situation has improved or, when necessary, they terminate the relationship.
- How many investment managers does the SIB employ?
As of June 30, 2015, the SIB utilized 36 professional investment firms that manage 55 separate investment strategies. A listing of these firms and investment strategies can be found in the 2015 Comprehensive Annual Financial Report beginning on page 74.
- What kind of checks and balances are in place to ensure my retirement funds are invested properly?
The SIB as well as the individual pension fund boards employs professional investment and actuary firms to assist them in ensuring the retirement funds are managed appropriately. Asset/liability studies are performed, at a minimum, every 5 years by a 3rd party firm. These studies take into account the underlying liabilities of the pension fund as well as the total assets. These studies result in a range of options considered to be the optimum asset allocation for the fund based on risk and return assumptions.
The SIB also uses a custodian bank, The Northern Trust Company, whose job includes settlement of trades directed by the investment managers, record keeping of all investment transactions and safe-keeping of the assets. The custodian bank is audited annually, including a review of their internal controls and processes.
Audits are also performed annually on all of the investment management firms and any underlying funds or partnerships. The reports on these audits are made available to the RIO office and are reviewed for any issues that may be included in the reports.
An annual financial audit of the RIO office is also conducted (see question 17). RIO’s auditors review the audits of the investment firms and custodian bank as well.
An investment consultant is also utilized for 3rd party performance measurement of the investment manager accounts, to assist with investment manager searches and to provide education and other special projects for the board.
- Is the SIB audited on a regular basis?
Under NDCC 54-10-01, the State Auditor must perform or provide for the financial audits of state agencies at least once every two years. To comply with that requirement, the State Auditor contracts with a public accounting firm to complete an annual financial audit of RIO. Contracts generally cover three fiscal years. RIO recently finished the first year of the current three year contract with CliftonLarsonAllen (CLA) LLP. This is the second three year contract awarded to CLA. The purpose of the financial audit is to determine whether RIO’s financial statements present fairly, in all material respects, the financial position of the fiduciary funds under its responsibility as of and for the year ended June 30 of each fiscal year. The most recent financial audit report of RIO can be found here.