A physical check-up of a retirement system's investment program.

• Author: Halpern, Samuel

As the size and complexity of public pension funds has increased over recent years, so too have the concerns of government, the media, and participants and beneficiaries. Many state and local governments, faced with significant budget deficits or cuts in services, are focusing on the size of their retirement fund cash contributions. Participants and beneficiaries--as well as politicians and the press--want assurance that promised pensions will be there upon retirement.

Over the past 10 years, the assets of the Virginia Retirement System (VRS) more than quintupled from approximately $3 billion to $16 billion. Similarly, the number of retirees and beneficiaries increased 141 percent, with a total number by 1993 of 259,000 active, 71,200 retired and 15,100 vested inactive members. The system's portfolio has grown from two asset classes (domestic stocks and bonds) to a complex and diverse investment structure that includes international stocks and bonds, real estate, alternative investments (such as venture capital and buy-outs) and managed futures.

Several asset classes and certain specific investments generated public concern about the fund and whether changes were needed to ensure independence and financial integrity. This led the Virginia General Assembly to pass legislation in the 1993 session directing its Joint Legislative Audit and Review Commission (JLARC) to study the structure and investment soundness of the VRS. The purpose of the review was to assist the state legislature in monitoring the VRS' investment program.

The Study Process

At the outset, JLARC selected an independent investment consultant to assist in conducting the study. The first step was to refine its exact nature and scope. Because investment issues and problems surrounding different funds vary considerably, the review of the VRS was tailored to suit the particular objectives of the legislature and JLARC. The study covered the following major aspects of the VRS investment program: organizational structure, policies and procedures, asset allocation, investment performance, managed futures and statutory investment restrictions.

The next step was the collection of documents--written policies and procedures, custody statements, reports on performance, research reports, actuarial studies, annual reports from other funds, consultants' reports and other pertinent data. Sources included the VRS staff and trustees, as well as various outside information sources (including the...