Page 27 - FOP August 2021

Getting the pension fund back on track
In the February issue of Chicago Lodge 7 mag- azine, I wrote an article pertaining to the current state of our pension fund. The article detailed factual reasons that contributed to the se- verely underfunded position our fund is
in today. The article addressed sources of funding and the contributions from the
City having the most significant impact to
our fund. This is the first year that we are re- ceiving actuarial-based funding, the City owes
our fund $737.5 million and we have received $450
million to date. The employee contributions to our fund equal approximately $9 million per month. This article focuses on the goals and strategies of our investment portfolio and investment returns.
Historically, the fund has utilized the services of a profession- al institutional investment consultant who acts as a fiduciary and advisor to the board. Currently, the fund’s investment con- sultant is NEPC. NEPC was founded in 1986 and is one of the largest independent investment consulting firms in the indus- try. Headquartered in Boston, with offices in Atlanta, Charlotte, Chicago, Las Vegas, Portland, Oregon and San Francisco, NEPC advises on a total of $1.4 trillion among 402 retainer clients. Specific to public funds like us, they advise 69 clients represent- ing approximately $757 billion.
Kevin Leonard is the lead consultant on our fund and has worked in the investment consulting industry since 1994. Kev- in, a partner of the firm, is the team leader for the NEPC Public Fund Consulting Practice and is also a member of NEPC’s Due Diligence Committee and Large Cap Equity Research Advisory Committee. Kevin was recognized as the 2012 Public Plan Con- sultant of the Year by Money Management Intelligence and was included on Chief Investment Officer magazine’s 2019 Knowl- edge Brokers list as one of the world’s most influential invest- ment consultants.
The services provided by NEPC and the team assigned to our fund include: development, refinement, review of our Investment Policy Statement, objectives and guidelines; lia- bility-based asset allocation studies; asset-based allocation studies; traditional and alternative asset manager search- es; investment manager fee negotiation, custodian searches; monthly and quarterly performance evaluation; alternative as- sets consulting; educational seminars; and participation at our monthly meetings.
The primary goal of our investment portfolio is to exceed our assumed rate of return over the long term by building a di- versified portfolio that seeks to maximize return and income while assuming prudent levels of risk. The assumed rate of return is recommended by the fund’s actuary, and it is deter- mined through analysis of capital market assumptions and for- ward-looking measures of likely investment return outcomes for the asset classes in the current investment policy.
The fund’s Investment Policy Statement outlines our invest- ment philosophy and objectives. The Fund’s assets are prudent- ly invested with consideration of liabilities, funding sources, li- quidity and portfolio size. Diversification is a key determinant of return, and a disciplined rebalancing program is followed to maintain appropriate asset allocation ranges. Annually, an as-
set allocation review is conducted, ensuring that proper diversi- fication is achieved among managers and asset class. The table
represents the fund’s current Asset Allocation Policy.
Relative to policy, the fund is currently under-allocated to private equity and private debt. This is a result of the fund halting investments into illiquid asset classes such as private equity, private debt and real estate after the financial crisis of 2008 due to liquidity concerns. It was determined that the significant mismatch between con- tributions coming into the fund versus money going out to pay pensions did not allow for the prudent use of illiquid as- set classes. In 2016, as contributions into the fund began to in- crease and the liquidity profile of the fund improved, the board slowly began reallocating back into illiquid asset classes. The board plans to continue building out its private equity, private debt and real estate portfolios into the future as we continue to
receive increased contributions from the City.
As of June 30, 2021, the fund retains approximately 45 ex- ternal investment managers who provide investment services and invest the fund’s assets according to specific guidelines and objectives. A comprehensive list of investment managers can be located on the fund’s website (chipabf.org). The board hires investment managers through a Request for Proposal (RFP) process providing competitive selection, objective evaluation, due diligence and full disclosure and in accordance with the Pension Code. The Pension Board ultimately makes investment decisions with guidance and advice provided by NEPC.
The goal of each investment manager is to outperform the established benchmarks, goals and objectives on a net-of-fee basis. NEPC and the board review manager performance on a monthly and quarterly basis. In early 2019, the board termi- nated two active U.S. Large Cap managers due to performance concerns. It has been difficult for managers to outperform benchmarks in this asset class due to the efficiency in this part of the market. Market efficiency occurs at a high level when
TOM BEYNA
CHICAGO LODGE 7 ■ AUGUST 2021 27