Board Governance - POLICY TYPE - ENDS

(Adopted September 14, 1999, with amendments through November 15, 2007)

Purpose
Investments
Member Benefits
Legislation
Sound Actuarial Condition
Rulemaking

Return to Section Index >

Purpose

The purpose of MOSERS is to provide retirement, survivor, disability, and life insurance benefits to its members.

THE MISSION OF MOSERS IS: TO EXCEED CUSTOMER EXPECTATIONS BY PROVIDING OUTSTANDING BENEFIT SERVICES THROUGH PROFESSIONAL PLAN ADMINISTRATION AND SOUND INVESTMENT PRACTICES.

Achievement of this mission will result in MOSERS being a premier retirement system as evidenced by:

MEMBER BENEFITS: Providing retirement benefits and planning services to enhance the quality of life for members, and

QUALITY SERVICE: Striving to exceed the service expectations of members, employers, and associates

Through

FIDUCIARY RESPONSIBILITY: Safeguarding members’ financial retirement security using ethical and professional business practices, and

FINANCIAL PERFORMANCE: Improving funding through prudent investments and resource management,

By

EMPOWERMENT OF ASSOCIATES: Enabling associates to act through the delegation of authority and the acceptance of accountability, and

ORGANIZATION RENEWAL: Enhancing MOSERS’ future by continually acquiring, sharing, and implementing new knowledge.

Back to Top ^

Investments

THE INVESTMENT “ENDS”:

This policy defines the desired outcome of the investment program. It will be the Board's responsibility to carry out the following duties with the assistance of the staff:

1. Develop a Real Return ¹ Objectives (RRO) that will:

1. Keep contribution rates reasonably level over long periods of time absent changes in actuarial assumptions.
   
   
2. Maintain contribution rates consistent with historical levels ranging from 8% to 12% of covered payroll subject to and recognizing that changes made in the law or actuarial assumptions will affect contribution rates.

2. Establish an asset allocation policy that is expected to meet the RRO while minimizing the impact of the fund's volatility on the contribution rate. Secondary considerations include, but are not limited to, the expected rate of return for each class, the expected risk of each asset class, the correlation between rates of return among the asset classes, and the investment objectives and risk constraints of the fund.
   
   
3. Monitor costs associated with the efficient implementation of the asset allocation through the use of internal and external resources.

REAL RETURN OBJECTIVE:

Based on actuarial assumptions adopted by the Board on September 20, 2001, it is estimated that the portfolio must generate a compound annual real return on invested assets of 5.0 percent per annum² in order for the System to accumulate the assets needed to meet benefit obligations while at the same time maintaining a level percent of payroll contribution rate objective of 8% to 12% based on the analysis of current assets and liabilities as of that date.

_________________

¹ The real return objective is the rate by which the total return exceeds the inflation rate as measured by the Consumer Price Index, U.S. City Average for All Urban Consumers (CPI-U).

² The Board recognizes that the estimated required real rate of return will likely need to exceed the 5.0% actuarial required rate of return. The additional return is necessary to cover operating and rebalancing expenses. For further details on these assumptions, please consult the February 2002 Value Added.

Back to Top ^

POLICY AND STRATEGY ASSET ALLOCATION MIX:

Based on the Board’s determination of the appropriate risk tolerance for the System, and its long-term return expectations, it has chosen the following broad Asset Allocation Policy Mix: (this mix was adopted at the June 20, 2002 Board meeting)

The Board has granted the CIO the responsibility for establishing the strategic (sub-asset class) allocation of the portfolio within broad bands approved by the Board. The CIO will make strategic allocation decisions away from the policy benchmark weight subject to approval from the Chief General Asset Consultant (CGAC) with certification from the Executive Director (ED) that the change is in compliance with the Board's policy. Based on a variety of considerations, the Board has selected the strategic (sub-asset class) allocation bands that are allowable. These ranges are outlined in the table shown below. In addition, this table outlines the benchmark weights which will be used to measure performance.

COMPONENTS OF INVESTMENT RETURN:

Investment return is comprised of two components known as “beta” and “alpha.” Beta return is the return generated from exposure to the policy sub-classes that we have identified in the above table. Beta return is thought of as the market return for the sub-class in question and is identified by the Policy Benchmark Index. Alpha return is generated as a result of manager skill or investment decisions made that add or detract value relative to the Policy Benchmark Index. The following paragraphs define each component’s respective role within the portfolio.

Beta Exposures:

The policy weights outlined in the above table represent policy exposures to various markets we have defined as sub-asset classes. It is also appropriate to think of these sub-asset classes as exposure to the beta component of the return equation. (As currently approved, there are two sub-asset classes, specifically the Market Neutral and Distressed Debt sub-asset classes, that have attached to them an absolute return component (for example, the 4% component of T-Bills + 4% benchmark for market neutral) which is more appropriately defined as alpha, however, for purposes of our policy these absolute percentages will be viewed as beta.) What follows are descriptions of each sub-asset class, their purpose in the overall portfolio, and more specifically, the types of investments that would be expected to be made within the sub-asset class according to a mutual understanding between the investment management group (staff) and the Board.

Public Equity

Domestic Equity: This sub-asset class seeks to provide a combination of long-term capital appreciation and dividend income that is expected to exceed the rate of inflation. It is expected that investments in this class will perform well during periods of rising economic growth and/or falling inflation. Investments in this sub-asset class may include a variety of US stock investments with varying characteristics related to market capitalization and investment style. These characteristics include large-cap, mid-cap, small-cap, and micro-cap stocks, and value and growth stocks. Investments could also be made in specific sectors of the overall market such as technology, energy, or real estate investment trusts (REITs). Short selling is expected in this sub-asset class from time to time to rebalance the overall fund.

Hedged Equity: This sub-asset class provides diversification to the total portfolio and strives to reduce volatility within the total fund by targeting a .4 beta to the US equity market. This .4 beta in combination with alpha strategies, are expected to generate returns over a full market cycle in line with the returns of the Domestic Equity sub-asset class. However, because of the unique structure of this sub-asset class, it is expected to generate returns in a different fashion (i.e. absent a high correlation to US equity). It would be expected that during periods of stock market strength, this portfolio would lag the US equity sub-asset class. Conversely, during periods of stock market weakness, this portfolio should be expected to outperform the US equity sub-asset class. The alpha implementation strategies within this sub-asset class will include a variety of marketable alternative strategies including, but not limited to long/short equity, convertible arbitrage, event driven, relative value, global fixed income/currencies, managed futures, and commodities both on a domestic and international basis. It is expected that these strategies will, in the aggregate, have little to no market/beta exposures, thus when combined with the US equity beta of .4, it is expected to produce a return equal to 40% of the US equity market return plus an absolute return of 4-5%.

International Developed Equity: Like the Domestic Equity sub-asset class, International Developed Equity seeks to provide long-term capital appreciation and dividend income that in aggregate are expected to exceed the rate of inflation. Investments in this category will be made through a diverse group of strategies varying in size, investment style, and exposure to opportunities in a large group of developed countries. It is expected that investments in this sub-asset class will perform well during periods of rising economic growth and/or falling inflation, however, because of the non-US nature of these investments, they will also include non-dollar currency exposure not found within the US equity portfolio. This currency exposure during periods of dollar weakness will improve this portfolio’s performance, and to the contrary, during periods of dollar strength it is more likely that these investments will lag the US equity sub-asset class. Characteristics of this sub-asset class include large-cap, mid-cap, small-cap, and micro-cap stocks, and value and growth stocks. Investments may also be made in specific sectors of the overall non-US market such as technology or energy as examples. Managers could be hired with a global focus or for specific country exposures. An example of the latter would be a Japan-only manager. This sub-asset class will be invested predominantly in equities that make up the Morgan Stanley Capital International (MSCI) Europe, Australia and Far East (EAFE) Index, however, from there may be minor investments in countries outside of EAFE. Short selling is expected in this sub-asset class from time to time to rebalance the overall fund.

Emerging Market Equity: This sub-asset class seeks to provide long-term capital appreciation in excess of inflation primarily through non-US equity investments in countries outside of those included in the MSCI EAFE Index. Because of the higher growth rates in these countries, higher returns are expected. Investments may range in size (large, mid, small, and micro-cap stocks) and style (growth and value) and be both long and short.

Public Debt

Core Fixed Income: The core fixed income portfolio is designed to provide a source of current income and to reduce overall fund volatility. In addition, it is expected that investments in this category would perform well in periods of falling inflation. Investments within this category may include US Treasuries, agencies, mortgage-backed securities, asset-backed securities, and investment grade corporate securities (i.e. bonds with a credit quality rating no less than BBB) and international investment grade securities. Shorting is expected in this portfolio from time to time as necessary to rebalance the overall fund

Treasury Inflation Protected Securities (TIPS): This allocation is designed to provide a source of current income to the portfolio, while providing a hedge for the inflation sensitivity of the System’s liabilities. TIPS are fully guaranteed by the full faith and credit of the US government and are highly liquid. Additionally, the specific guidelines for the TIPS portfolio allows for the inclusion of a small portion (a maximum of 10%) of non-guaranteed securities that must also be structured to provide inflation protection but may be of agency quality or corporates of AAA or AA credit quality. Other instruments which are allowable holdings may include international inflation protected securities, nominal treasuries, swaps, forward contracts, and inflation futures, however it is expected that these types of securities will never make up a majority of this category.

High Yield Bonds: This sub-asset class seeks to provide capital appreciation within the portfolio through investment in below investment grade debt instruments and debt considered to be “opportunistic” in nature. Generally, it is expected that securities in this bucket will be in “current pay” status with superior coupon cash flow because of the lower credit quality bias. Investments in this portfolio may include non-investment grade debt of both US and non-US issuers.

Market Neutral: This sub-asset class provides diversification to the total portfolio and strives to reduce total fund volatility. The reasoning behind this sub-asset class being positioned within public debt is not that all of its exposure will be to debt instruments, but, more importantly that it will be expected to have lower volatility (standard deviation) and similar returns over long periods of time to other public debt investments. This area will include investments in a group of skill-based managers using a variety of strategies to produce absolute returns of 4% in excess of the return on 90-day Treasury Bills. At any given point in time, the number of managers and types of investments and strategies being utilized may include the entire universe of available investment options. In addition, a variety of marketable alternative strategies may be utilized within this sub-asset class including, but not limited to hedged equity, convertible arbitrage, event driven, relative value, global fixed income/currencies, managed futures, and commodities.

Alternative Investments

Real Assets: This sub-asset class is expected to perform well in periods of rising inflation. There are several types of real asset investments that may be included in this sub-asset type. The most common are outlined below and comprise our blended benchmark. However, from time to time other real assets may be identified that do not fit nicely into one of these buckets. In these instances it is expected that the investment will be assessed based upon its risk, return, and diversification characteristics relative to the buckets identified and only made if it is expected that the asset improves the overall risk adjusted return of the portfolio.

• Real Estate - would be expected to provide a relatively high level of income and provide diversification to the overall fund. Real estate includes real estate investment trusts (REITS), opportunistic real estate funds, direct real estate holdings, and mezzanine debt investments.
  
• Commodities - would be expected to provide superior returns during periods of unexpected inflation. Investments in this category might include a variety of derivative instruments including futures, total return swaps, options, and forward contracts, as this is how most commodities exposure is obtained. It is also possible that this category might include limited partnerships and/or commodity trading advisors (CTAs) who seek exposure to various types of commodities and commodity-related investments, including oil, gas, and other energy investments.
  
• Timber - would be expected to be very illiquid and long term in nature. Timber is expected to earn real returns equal to traditional equity investments with volatility in between stocks and bonds over long periods of time. Beta exposures in this sub-asset class will include timberland and related assets in both the United States and on a global basis.

Private Investments: This sub-asset class is expected to generate high returns with commensurately high risk. Generally, private investments are long term and illiquid in nature. The most common types of investments in this sub-asset class are identified below; however, from time to time other private investments may be identified that do not fit nicely into one of these buckets. In these instances, it is expected that the investment will be assessed based upon its risk, return, and diversification characteristics relative to the bucket identified and only made if it is expected that the asset improves the overall risk adjusted return of the portfolio.

• Private Equity - would be expected to provide high real returns over long periods of time while providing additional diversification to the fund even though it is understood that the diversification benefit is likely due to the lack of market pricing on these investments as opposed to a “true” diversification characteristic of these investments. Investments in this category are expected to be very illiquid and long term in nature. Investments in this category include corporate buyout, venture capital, and opportunistic/special situations. These opportunities may be identified domestically or on a global basis.
• Private Debt – would be expected to provide equity-like returns by purchasing debt securities to gain controlling interest in companies at a significant discount to fair value. Investments include debt instruments of U.S. and international companies which may be publicly traded or privately held that are financially distressed and are either in bankruptcy or likely candidates for bankruptcy. Typical holdings are senior and subordinated debt instruments and bank loans. Equity exposure is acceptable in this sub-asset class as debt positions are often converted to equity during the bankruptcy reorganization process.

Allowable Investments in all Sub-Asset Classes (Beta Exposures):

As it pertains to the above referenced sub-asset classes within MOSERS’ portfolio, beta exposure may be gained through investments in derivative instruments including, but not limited to futures, forward contracts, swaps, and options per the terms of each manager’s specific governing documents and in accordance with the limitations outlined in this governance policy under “Investment Limitations”. In addition to derivative instruments, leverage may be utilized in the implementation of these sub-asset classes in accordance with each manager’s specific governing documents and in keeping with the investment limitations outlined in this policy. Additional investments which are allowed include exchange traded funds (ETFs), warrants, rights, convertible bonds, and preferred stock. Currency hedges may also be used for non-dollar exposures within each respective asset class as outlined in each manager’s governing document. Long/short investment strategies may also be employed per the terms of the Investment Limitations defined in this governance policy, however, from a beta perspective the predominance of long/short strategies would be expected to exist within the domestic equity and market neutral sub-classes.

In addition to the instruments outlined in the paragraph above, for every sub-asset class, a variety of investment structures may be utilized depending on the nature of a particular investment. Per the terms of the investment limitations outlined in this policy, these structures may include mutual funds, partnerships, limited liability companies, trusts, fund-of funds, and separately managed accounts in which assets may be held by an external custodian who is selected and monitored by the external manager or general partner.

Alpha Strategies:

A variety of implementation strategies may be used in capturing alpha (skill-based manager returns) within the portfolio. These strategies include both traditional active management strategies and marketable alternative market neutral strategies. Marketable alternative strategies may be used as long as both the CIO and CGAC are convinced that these strategies exhibit little to no market exposure. The use of investment instruments available to these managers is broad, covering a variety of investment types and strategies across numerous asset classes. In making implementation decisions related to the alpha component of the portfolio, staff may utilize any and all investment tools so long as they are defined in each manager’s governing documents and are carried out in accordance with the Investment Limitations spelled out in this policy.

PERFORMANCE MEASUREMENT:

The System’s success in achieving the RRO will only be evaluated over long time periods. The reason for the long-term focus on this objective is to preclude the temptation to overreact to events in the marketplace that have no relevance in long-term asset/liability management. The resulting dilemma is the conflicting need to evaluate investment policy implementation decisions over shorter time frames while maintaining the longer-term focus necessary to manage and measure the fund’s performance relative to the RRO.

To address this problem, the Board has established the following categories to measure performance:

1. Board Policy Decisions
   
   
2. CIO Decisions

1. Strategy Decisions



2. Implementation Decisions
   

Board Decisions

The value added through Board Policy decisions is measured by the difference between the Policy Benchmark return and the Required Rate of Return Objective (defined as Real Return Objective + Inflation). This difference captures the value added by the Board through their broad policy asset allocation decisions relative to the required rate of return objective necessary to meet the actuarial assumptions. A Policy Benchmark return greater than the Required Rate of Return Objective reflects value added through Board decisions. A Policy Benchmark return less than the Required Rate of Return Objective reflects losses or shortfalls in performance in funding the liabilities of the system. These policy decisions are measured over long periods of time.

CIO Decisions

There are two components to the CIO decisions that are monitored by the Board on an ongoing basis:

Strategy Decisions:

Strategy Decisions are sub asset class asset allocation choices made by the CIO, with approval from the CGAC to deviate from the Policy Benchmark weights and a certification from the Executive Director that the proposed deviation is in compliance with the Board's Investment Policy. The value added through these decisions to overweight and/or underweight these sub-asset classes is measured by the difference between the Strategy Benchmark return and the Policy Benchmark return. This difference captures the value added by the CIO through sub asset class strategic decisions relative to the Board’s broad policy allocation decisions. A Strategy Benchmark return greater than the Policy Benchmark return reflects value added through the with-in class allocation decisions. A Strategy Benchmark return less than the Policy Benchmark return reflects losses to the fund’s performance based upon strategy decisions. Strategy decisions should be measured over all periods of time.

Implementation Decisions:

Implementation Decisions are money manager selection choices made by the CIO with the approval of the CGAC and a certification by the Executive Director that the proposed manager selection choices are in compliance with the Board's Investment Policy. The value added through these manager selection decisions is measured by the difference between the Actual Portfolio return and the Strategy Benchmark return. This difference captures the value added through these manager hiring decisions. An Actual Portfolio return greater than the Strategy Benchmark return reflects value added through these manager selection decisions. An Actual Portfolio return less than the Strategy Benchmark return reflects losses to the fund’s performance based upon implementation decisions. Implementation decisions should be measured over all periods of time.

PERIODIC REPORTS:

The Board will monitor performance through periodic reports that will allow assessment of broad policy decision, strategic (with-in class) allocation decisions, and implementation decisions. All performance shall be calculated using time-weighted rate of return methodology.

• Quarterly, the CIO will submit a report to the Board addressing the System’s success or lack thereof in accomplishing the investment “ends” based on the benchmarks described within this policy at the total fund level and asset class levels. This report will also include a summary of due diligence meetings held throughout the quarter, and will also provide the Board with a brief commentary by the CIO and/or CGAC which summarizes their thoughts on the market and key strategic decisions made in the quarter along with justification for those decisions.
  
  
• Not less often than every five years a formal asset/liability study will be conducted. In the interim, the CIO shall submit an opinion to the Board on an annual basis, at the first board meeting following the beginning of the new fiscal year that addresses the continued prudence of the current asset mix in achieving the RRO.
  
  
• Annually, a representative of Cost Effectiveness Measurement or another external consultant shall report to the Board regarding the System’s success or lack thereof in minimizing implementation cost without negatively impacting performance.

Member Benefits

The “ends” to be achieved through the benefits administered by MOSERS consist of:

Benefit plan structure issues

• To maintain a benefit plan structure, which is externally competitive with the marketplace, internally equitable, and consistent with the state’s goal of allowing career state employees to maintain a reasonable standard of living at retirement.

Member service issues

• To ensure that members receive high quality service from MOSERS’ staff.
• To enhance services to all members.
• To provide training programs that meet the needs of our members across multiple age ranges.

Communications issues

• To provide members with access to information about the benefits administered by MOSERS in a cost-effective and timely manner.
• To ensure that members receive updates on plan changes that are individualized and are distributed effectively.

Administrative issues

• To ensure that benefit recipients receive their payments in a cost effective and timely manner.
• To ensure the security and accuracy of member records.

Back to Top ^

Legislation

To fulfill its mission and to provide consistency in its policies, the MOSERS' Board of Trustees hereby adopts the following Ends Policy with respect to legislation. In adopting this policy, the Board acknowledges its responsibility to perform its duties for the exclusive purposes of providing benefits to participants and their beneficiaries, and defraying reasonable expenses of administering the System. The Board further acknowledges that its duty to the System’s participants and beneficiaries takes precedence over any other duty.

Advocate/Activist - In this role, staff will support:

• Proposals which give the Board increased flexibility in its administration;
• Proposals which provide remedies for inequitable, unfair or discriminatory benefits;
• Proposals which correct structural deficiencies in program design;
• Retirement program changes developed through a collaborative effort where the opinions of all relevant stakeholders are considered and the changes do not otherwise conflict with the system’s objectives;
• Proposals which add protection to the trust;

Information Source - In this role, staff will be available for technical commentary but will remain neutral and take no position on:

• Proposals which do not significantly affect the benefit interests of our stakeholders and which do NOT significantly impact MOSERS’ benefits or the administration of the System;
• Proposals which have conflicting policy implications;

Protector: Act when MOSERS is threatened, when mandates are proposed, or when limitations to the Board's authority would result. In this role, staff will oppose:

• Proposals which threaten the Trust;
• Proposals which deprive members of vested benefits and do not provide an equivalent, compensating benefit;
• Any change which would endanger the tax-exempt status of MOSERS and the deferred treatment of income tax on employer contributions and related earnings;
• Any investment mandate or restriction on the Board's investment authority;
• Proposals which create a benefit change for a subcategory within a member classification;
• Proposals which reduce or limit the Board's administrative authority;

Technical Advisor: Staff will review all proposed legislation which impacts programs administered by MOSERS and provide technical comments and fiscal information to the sponsor and the appropriate legislative oversight agencies. Beyond that, staff will offer alternatives and provide an unbiased analysis, including the pros and cons of proposals, when appropriate.

NOTE: "Stakeholders" means those people or entities who have an interest in the performance of the System, i.e., customers (members, beneficiaries, and employing agencies), the legislative, executive, and judicial branches of state government, and the taxpayers.

This Ends Policy is intended to provide management staff with general policy guidance in formulating positions on legislative proposals and in no way binds the MOSERS’ Board of Trustees from adopting a differing policy position on any specific legislative proposal presented for Board consideration.

IMPLEMENTATION: Subject to budgetary approval by the board of trustees, the executive director may, in connection with this policy, retain an employee(s) or the services of a governmental relations consultant or firm of such consultants for assistance with interaction with members of the general assembly and the administration.

Back to Top ^

Sound Actuarial Condition

The ends to be maintained from an actuarial standpoint are as follows:

To collect contributions based on contribution rates that have been determined by a qualified actuary based on assumptions, which are reasonable in relation to long-term plan experience. The contribution rates so determined are intended to remain relatively level as a percent of payroll from generation to generation of Missouri citizens and comply with standards promulgated by the American Academy of Actuaries and Governmental Accounting Standards Board.

(reference: Board rules 2-17 and 3-15 contain procedures for selection of actuary: Beginning 2003, the Executive Director shall retain an independent actuarial firm to perform an actuarial audit at least every 5 years in order to evaluate the actuarial firm that is currently providing actuarial services to the Board and report the results of that audit to the Board at a Board meeting held during the first quarter of that year. The Executive Director may recommend changes to the contract with the actuarial firm that is currently providing actuarial services to the Board or the issuance of a request for proposal from additional actuarial firms based on the information provided in the actuarial audit report, or whenever the Executive Director determines it is appropriate to do so.)

Back to Top ^

Rulemaking

The Ends to be achieved with regard to the promulgation of rules are as follows:

To promulgate rules as necessary and in accordance with section 104.1063, RSMo, to implement statutes and to provide members with adequate notice of statutory benefit provisions.

Back to Top