The investment committee at the $94 billion State Teachers Retirement System of Ohio (STRS Ohio) has narrowly voted to block bonuses to investment staff.
The decision to stop at least $8.5 million earmarked for performance-based bonuses marks the latest turmoil at the pension fund. The 11-member main board has a 6-5 majority in favour of reform-minded trustees who have publicly supported moving the fund to index strategies and downsizing the 108-member investment team.
They also have the backing of a noisy beneficiary group, Ohio Retirement Teachers Association, ORTA, which has used the board election process (7 members are elected) to push reform-minded candidates onto the board.
In-house investment and costly alternative allocations have become a lightning rod for anger amongst ORTA members who never received an adequate annual cost-of-living allowance (COLA) given to retired teachers.
The previous board cut the standard 3 per cent COLA and then eliminated it for five years to help stabilise the system’s finances. Retirees got a 3 per cent adjustment in 2023 and 1 per cent in 2024, not nearly what they wanted.
Meanwhile, other forces are trying to pull Ohio STRS in the opposite direction. The state’s Republican attorney general is suing to remove two board members, claiming they have breached their fiduciary duties following an anonymous memo – reportedly from the investment team – flagging board misconduct. The board, the memo said, was lobbying to mandate 70 per cent of the fund’s assets to an investment firm touting an untested AI-driven trading strategy.
This hotchpotch of grievances made for a fraught June investment committee meeting where discussion included the annual review of performance compensation for the investment team. The testy back and forth, peppered with applause from current and retired teachers assembled in the audience, shows what happens when the investment team are drawn into politics and face public participation.
One board member argued that recent returns showed the fund was doing well without needing to pay higher compensation. “If we can get top performance and not pay as much, what’s wrong with this?” the board member asked. STRS’s net total fund performance is in the top 10 per cent of sponsor peer group analysis over the long term.
A reference to the disconnect between asset performance and the COLA was greeted with angry shouts. Elsewhere, concerns from one board member that not paying the investment team performance compensation risked staff leaving, met with calls from the gallery to “let them walk.”
It fell to Lynn Hoover, acting executive director, to lay out the risks of not rewarding investment performance. Sixty-nine members of Ohio STRS 108 investment staff are eligible for incentive pay and current levels sit below peer funds, she warned. Competitive pay is crucial to the fund’s ability to attract and retain staff at a time an increasing number of staff members are approaching retirement.
Over the last five years, 200 staff have retired or left the organisation, and between 90 and 95 current employees who have been at Ohio STRS for the past 25 years will also retire soon.
“Ninety four billion dollars in assets – that does not manage itself,” Hoover said.
Hoover added that investment performance is a key source of funding for benefits. She said internal management is a strategic advantage at the pension fund and provides low-cost access to both active and passive strategies. Outsourcing internal management would increase costs by an estimated $130 million annually.
“It is important for eligible associates to understand performance goals and expectations before the fiscal year begins,” Hoover said. The bonuses would be applicable for July 1 to June 30, 2025. Although the board agreed to explore alternative plans for employee performance incentives at a meeting in July, they did not set an exact date.
The meeting also exposed the challenge for pension funds when members of the board lack investment expertise. Witness one board member’s rapprochement of the investment team during presentations on asset class performance for using investment terms like tranches, credit and pre-payment risk. Calling for better explanations and clarity, and more information presented in a simple way, he said: “It’s not helpful making decisions if you don’t have a good grasp of the information.”
Others countered it was incumbent on board members to take an active role by asking questions, and suggested focusing board scrutiny on the competency of investment staff in managing the fund and making investment decisions. Members of the investment team responded that they seek to find a balance between clear explanations and not dumbing down or patronizing the intelligence of the board.
Such discussions will surely grow more heated as the year progresses. Decision-making will now focus on a new asset liability study requiring board decisions on implementation and the asset liability mix.
