Home ListingMarch 7, 2014

Oregon Lawmakers Push to Empower Pension Investment Office

The legislation would in-source asset management and reorganize the governance structure of the state’s $87 billion pension system.

Reported by Featured Author

(March 7, 2014) — Lawmakers and pension systems of Oregon are pushing for a legislative reform to align fiduciary responsibility and bring risk and portfolio management in-house.

Under the current governance policy, the treasurer has authority over investment and personnel oversight and cash management via the Oregon Investment Council (OIC). As a result of this structure, the state has had to outsource much of its risk and portfolio management to Wall Street money managers.

According to a report from the office of State Treasurer Ted Wheeler, the $87 billion pension system’s policies are largely a creation of 1970s statutes. “But as the investment world has evolved to become more complex and nimble, Oregon’s model has failed to keep pace,” the report said.

The Investment Modernization Act (House Bill 4144) would establish an independent public investment agency and “transfers the duties of state treasurer as investment officer to the department.” A director appointed by the five voting and one non-voting members of the OIC would supervise the agency.

The bipartisan bill was introduced by Representatives Tobias Read, Vicki Berger, John Davis, Margaret Doherty, Caddy McKeown, Nancy Nathanson, and Jeff Reardon.

“The Legislature has the opportunity to save Oregonians $2.8 billion over the next 20 years, and also to help ensure that Oregon’s public investments are better protected,” said Treasurer Wheeler, who is also a member of the OIC.

The compounded cost savings would largely result from a shift to an in-sourcing model. Based on the 7.75% expected earnings rate, Oregon’s pension plans could save $63 million per year.

“What’s broken?” testified Dick Solomon, OIC chair, in support of the reform bill. “After all, Oregon has been recognized as a leader in investment management for many years. However, to sustain leadership requires vigilance and continuous improvement.”

The Oregon Public Employees Retirement System, the largest of the state’s five pension plans, was 96% funded—including side accounts—with $2.2 billion in unfunded actuarial liability in fiscal year 2013.

“The lines of accountability are blurred because the OIC, though able to set investment policy, is not actually able to direct staff in the implementation of that policy,” Solomon continued. “Oregon’s cost structure is higher than similar funds because of our heavy reliance on external investment managers. And critically, Oregon has only a fraction of the risk management, analysis, and compliance functions that are commonplace for managers of similarly-sized portfolios.”

The bill is currently on the House floor, before the Joint Ways and Means Committee, for a third reading.