Ohio State Teachers’ Retirement System, Columbus, pension fund approved a leaner incentive plan for investment staff and could lose its actuarial consultant due to one of the changes.Ohio State Teachers may lose its actuarial consultant after changing the performance-based incentive plan for senior investment staff.
The $94.5 billion pension fund’s board at its July 19 special meeting voted to reduce bonuses to senior investment staff by 15% if the board’s actuary determines there is not sufficient funding to enhance member benefits and 10% if only a de minimis amount is available for benefit enhancements, a webcast of the meeting shows.
The changes to the performance-based incentive plan are effective July 1 through June 30, 2025.
The board’s July 19 vote augments changes to the performance-based incentive policy the board approved in August 2023, to establish a 10% reduction to PBI payments when there is not sufficient funding to enhance member benefits. Among other changes at that time were the removal of 30 investment positions from PBI eligibility and the reduction of maximum incentive percentages.
At the July 19 meeting during the discussion regarding the performance-based incentive plan, Acting Executive Director Lynn Hoover informed the board she had just been in contact with Gene Kalwarski, CEO and co-founder, and Mike Noble, principal consulting actuary, both with Cheiron, the pension fund’s actuarial consultant.
They informed her that if the board went ahead with the additional caveat of reducing incentive payments when there is a minimum budget for benefit enhancements, “they would need to reconsider their contract and discuss that with their attorneys.”
In 2023, Cheiron developed a sustainable benefit enhancement plan for the pension fund that consists of three tests designed to evaluate whether any benefit enhancements (such as a COLA) would impair the fiscal integrity of the system.Ohio law requires any board approval of a COLA must be vetted and approved by the pension fund’s actuarial consultant. According to Hoover in the July 19 meeting, Cheiron has not considered how that sustainable benefit plan budget would affect board decisions on compensation, and that is something their contract has not considered in the past.
A Cheiron spokeswoman declined to comment.
If Cheiron decides to resign as actuarial consultant, they would be the third firm to decline to work with the pension fund since reform trustees took a majority of the board in April.Aon resigned as governance consultant in April, and compensation consultant McLagan, which has worked with STRS in multiple projects over the past two decades, said they would not be working with them for the next compensation-related project.
Grassroots movement
In April, the pension fund’s board tilted to a majority of reformers who want to gut investment staff and move the pension fund to all index funds, citing a desire to restore a permanent 3% cost-of-living adjustment. A 2012 law meant to shore up funding eliminated the automatic COLA and gave the board authority to determine it annually.
The reform-minded trustees have been vocal in their support of a grassroots movement of retirees and active Ohio teachers angry about reduced or eliminated annual COLAs since that time.
Much of that anger has been directed at the investment staff that reformers hope to cull, notably after a total of $11 million in bonuses were awarded for beating performance benchmarks for the fiscal year ended June 30, 2022, a period in which the Russell 3000 index and Bloomberg U.S. Aggregate Bond index returned -13.9% and -10.3%, respectively.
The backlash for those bonuses led to the board’s decision in August 2023 to overhaul the performance-based incentive policy.Those moves were not enough for some reform trustees at the June board meeting, who rejected the fiscal year 2025 plan and voiced their desire to eliminate bonuses entirely.
Hoover at the July 19 meeting urged the board to make one of two potential choices determined by McLagan. One was to simply maintain the performance-based incentive plan for which the board voted last August, or eliminate the plan and make up two-thirds of the difference in base salary, which would add over $9 million to the pension fund’s operating budget.
At the July 19 meeting, reform trustee Pat Davidson proposed a third option consisting of further cuts in the performance-based incentive plan, specifically for the 11 senior investment staff members who are eligible for bonuses of up to 95% of their base pay.Davidson proposed a plan that would make a larger cut in incentive pay to 30% from 10% if there is not sufficient funding to change member benefits; adding a cut of 20% if a de minimis amount is available only for a minimum benefit enhancement; a 10% cut if the budget for benefit enhancements is up to $1.8 billion and no cut if the budget for benefit enhancements is over $1.8 billion.
After Fiduciary Counsel George Vincent informed Davidson and the board that those level of changes would bring the board “awfully close to breaching your fiduciary duty,” Trustee Allison Lanza Falls proposed the lesser change of the 15% and 10% “haircuts.” Vincent said that would be a relatively minor change and would unlikely represent a violation of fiduciary duty.
Now it's a matter of waiting to see if Cheiron decides to resign, in which case the pension fund would need to conduct another vendor search. A search for a new governance consultant is in progress, and a search for a compensation consultant is pending.