Surprise! This Public Pension Isn't Complaining

(May 29, 2012) — When people say ‘Illinois pension’, you automatically think ‘SEC, Deficit, Nightmare’. In fact, this couldn’t be further from the truth for at least one of the state’s investors.

You know the Illinois public pension fund that is being investigated by the SEC? The Illinois’ state pension system’s unfunded pension liability is so dire — totaling about $83 billion — that it is now being investigated by the US regulatory agency. Well, meet the woman who is running the $26.8 billion Illinois Municipal Retirement Fund (IMRF), which isn’t facing such regulatory backlash. Dhvani Shah is its Chief Investment Officer.

The IMRF does not share the overwhelmingly negative outlook among state funds across the country. “We are not funded by the State of Illinois like the state funded systems. Instead, we are funded by local units of government, like municipalities, school districts, and park districts,” Shah said.

The scheme’s board of trustees has the ability to collect payment from employers — who annually contribute a total of 12.09% of payroll expenses on average to fund the system, which additionally receives regular employee contributions. Historically, investment returns fund the majority—59%—of retirement benefits.

“When you fund contributions on an annual basis, you have a large asset base in which you can run an investment program, so you can then focus on asset allocation and manager selection,” according to Shah. “Because our employers in the system pay us in full and on time, we have that money to invest and grow.”

The municipal fund’s current asset allocation includes a 12% target to alternatives — including real estate, hedge funds, and private equity — 38% in domestic equities, 20% in international equities, 29% in domestic fixed-income, and 1% in cash. The next frontier in terms of asset allocation? “Global bonds is definitely something to think about, along with real assets” Shah said. “Currently we have domestic fixed-income, but we need to think more globally and pursue the alternatives space at the same time.”

In terms of managers employed at the IMRF, the scheme participates in a manager of manager program. With 100% external management in private equity, the scheme partners with Abbott Capital, Pantheon Ventures, and Muller and Monroe. The result: fewer managers, better relationships with existing fund managers, more customization with regards to private equity, and a greater skill set with more complex investments, according to Shah.

“Going forward, we can pick some of the best investing opportunities and add them directly to our portfolio, while not having to pay a double layer of fees,” Shah asserted. “It’s really a sound system. Being well funded keeps our investment program stable,which keeps contributions low as well.”

The IMRF’s funding status stands at 83%, above the above 80% threshold that is widely considered ‘well-funded’ for public and private defined benefit pension plans in the US.

Shah’s goal as a CIO, then, is to find the combination of assets that will get the fund to reach its 7.5% actuarial annual rate of return target over the long-term, picking a combination of risk and non-risk assets that will deliver returns. “Our funding position allows us to stay disciplined to an investment program. This certainty allows us to get the most out of our 70/30 equity-type/fixed income asset mix.”