Passive aggressive: treasurer Janet Cowell favors a bolder plan to ensure the state's pension stays among the nation's strongest.

• Author: Otterbourg, Ken
• Position: Cover story

This past December, a pension-fund research company called CEM Benchmarking Inc. analyzed North Carolina's retirement fund, the ninth-largest public retirement plan in the United States. The data-crunchers at Toronto-based CEM issued a report to N.C. State Treasurer Janet Cowell with this conclusion: For all the time and money that Cowell and her team of internal and external managers spent on trying to beat the market through increasingly complex investments, the spread between that work and placing the money in comparable index funds was only 0.1%. This may be the true definition of a rounding error. But with a pension fund that is worth $90 billion, it is also a rounding error totaling $90 million. It is both incredibly hard to move the needle and incredibly important if you are even just a little right on placing your bets.

That is the world of Janet Cowell. She may be the most powerful woman in the state--too powerful if you believe her critics at the State Employees Association of North Carolina--with an expanding empire. Since 2012, she has overseen the State Health Plan, which insures nearly 680,000 public employees and their families and has an annual budget of $2.5 billion. She chairs the State Banking Commission. She is the principal guardian of the state's Triple A bond rating. Most importantly, she controls the state pension fund, where the assets go and who gets paid for managing them. Though her annual salary of about $125,000 is more akin to the pay of a midlevel banker than a finance-industry CEO, the buck stops and starts with Cowell, the fund's sole fiduciary. During her six years in office, she and the General Assembly have overhauled how the state invests, aligning Jones Street more closely with Wall Street and taking on more risk for the chance of higher returns. She has said it is an experiment, but it's with real money, and it needs to work. For Cowell. For more than 900,000 state employees and retirees. And, of course, for the taxpayers.

PENSION FUNDS, at their heart, work like this: Employers and employees contribute to the fund, and the fund administrator invests that money and pays retirees a set amount each month. The actuarial calculations that guide those decisions are based on assumptions about contributions, payouts, the rate of return on investments and the life expectancy of pensioners. A mistake in adjusting those figures can have disastrous long-term consequences. State pension funds run into problems--Illinois, Kentucky and Connecticut are three examples--by shorting the employer contributions, offering overly generous benefits or assuming unrealistic returns on investments. North Carolina has the nation's second best-funded pension, trailing only Wisconsin, according to Standard & Poor's Financial Services LLC, the New York-based rating agency. Still, its performance has lagged the expected annual return of 7.25% during lengthy periods. Over the past 15 years, the fund, which is technically made up of eight different entities, averaged a 6.2% gain. To fill in the gap, the state chips in more to meet actuarial obligations. That7s why even small increases in yield are important.

To make the target, the state pension requires a strategy that relies on more than passive investments and hoping the rising tide of markets lifts all boats, Cowell says. "At some point, if you miss the target year after year after year, there are political consequences for that. It can get very expensive. Questions will be asked. But I would just say that some of the folks that say, 'Let's just go into public stock and public bonds and do it passive, and let's just call it a day because in the end it will all work out,' I would say, 'In America, in this system, in the way we run our pensions, I don't think that would work out.'"

AS HER OWN CAREER SHOWS, Cowell, 46, is not a passive person. She grew up in Memphis, Term., daughter of a Methodist minister and a schoolteacher. She earned a bachelor's degree in Asian studies from the University of Pennsylvania and worked as a financial analyst in Hong Kong and Jakarta, Indonesia, before returning to Penn for a Wharton School MBA. She was an energy-market analyst for Corning, N.Y.-based Coming Inc. before moving to Raleigh in 1997 to work for Sibson Consulting, a human-resources adviser now owned by New York-based Segal Group. She left the corporate world in 2000 to lead development for the Common Sense Foundation, a liberal think tank in Raleigh that pushed for greater fairness in the tax code. It was a difficult job, she says, balancing the organization's progressive ideals with realities of fundraising. Steve Schewel...