Best Governance & Risk Oversight Practices
National Conference on Public Employee Retirement Systems July 10, 2019
Julian Regan, SVP / Public Sector Market Leader Maureen O’Brien, VP / Director of Corporate Governance John Ross, SVP / Co-Head of Risk Management Pam Dubuc, CFA, Senior Consultant
Copyright © 2019 by The Segal Group, Inc. All rights reserved. Presenters
Julian Regan Maureen O’Brien Sr Vice President / Vice President, Public Sector Market Leader Corporate Governance Director
John Ross Senior Vice President / Pam Dubuc, CFA Co-Head of Risk Management Senior Consultant
2 Best Governance & Risk Oversight Practices Capital Markets Challenges and Opportunities Changing Risk Environment NCPERS Best Practice Recommendations Risk Management Framework Takeaways Appendix
3 Public Retirement Systems: Challenges and Opportunities
Asset Growth and Funding Levels • Strong returns since ’09; pressure on funded levels Asset Allocation • Improved diversification; changing risk exposures
Capital Markets State & Local Pension Fund • Assets ($ Trillions) Return assumptions; evolving markets $4.10 Governance and Risk Oversight • Implementation of leading edge practices and tools $2.44 Capital Stewardship • Best practices premium; ESG integration. 2018 2008
Source: NASRA, U.S. Census Bureau
“Defined-benefit plans are critical to the retirement security of millions of Americans, and have served our nation well for decades. —Hank Kim, Esq. Executive Director, NCPERS
4 Public Pension Funds: Capital Stewardship
INSTITUTIONAL OWNERSHIP Pension Funds Ownership of U.S. Equities
Other 8% ETFs 4% Hedge Funds 3% International Investors 14% Government Retirement Funds 8% Pension Funds (non-Public) 9% Mutual Funds 20% Households 34%
Public and private pension funds collectively own an estimated 17% of the U.S. equity market As large institutional owners, public funds take a proactive capital stewardship approach Retirement fund governance is internally focused, while corporate governance is external Effective practices include corporate governance (externally focused) and other mechanisms designed to maximize the value of shares for the benefit of members and beneficiaries.
Source: Federal Reserve Board, Lionshares and Goldman Sachs Global ECS Research. 5 Pension Fund Governance: Performance Premium
Why Focus on Governance Best Governance Practices Effective governance practices may significantly impact performance Board Public pension funds and other leading investors are continuing to place emphasis on strengthening governance Effective governance provides a structure for managing ccountability market, liquidity, operational and other risks. Risk A Management Consistency Transparency
“The top CEO score funds outperformed the bottom “Instituting governance best practices will provide ones by an average 2.4% per annum…” the company with an internal effectiveness —Rotman International Journal structure and a tool to manage corporate risk.” of Pension Management , Fall 2008 —The Conference Board
6 Public Funds: Governance & Risk Oversight Trends
• Enterprise Risk Management (ERM) • Liquidity Tier Analysis • Chief Risk Officer Role (CRO) • Key Risk Measures (Analytics) • Asset Liability Modeling (ALM) Integration • ESG Integration/Corporate Governance
Public Pension Funds: Global Public Pension Funds: Trends in Oversight Practices Changes to Investment Policies 2012 2018 Began Applying ESG Criteria 57%
18% Use formal ERM Framework* Enhanced Focus on Liabilities 62% 35% Enhanced Measurement of Fees 69% Receipt of GFOA Award for 47% Excellence 59% Enhanced Risk Analytics 71%
Source: NCPERS. Excerpt for illustrative purposes. Source: BlackRock / Economist Intelligence Unit, 2018. 7 Environmental, Social and Governance (ESG) Integration: Role in Risk Management Framework
ESG—Quantitative metrics and qualitative data that inform the assessment of an asset beyond traditional financial metrics.
CFA Institute Survey: ESG Factors Considered in Asset Managers Considering ESG Criteria (Trillions)* Investment Analysis or Decisions 2015 2017
67% 64% 2016 $8.10 54% 54% 50% 49%
27% 27% 2014 $4.80
Governance Environmental Social Do not Consider $0.00 $2.00 $4.00 $6.00 $8.00 $10.00
Source: CFA Institute ESG Survey, 2017 * Source: US SIF Foundation Biennial Report on U.S. SRI Trends, January 2017
8 Best Governance & Risk Oversight Practices Capital Markets Challenges and Opportunities Changing Risk Environment NCPERS Best Practice Recommendations Risk Management Framework Takeaways Appendix
9 Asset Allocation: Changing Risk Exposures
Public Pension Funds: Average Asset Allocation Institutional Investors' Asset Mix FY 2001 FY 2017 2008 2018
35% 31% 55.3% 28% 48.8% 23% 20% 18% 35.1% 10% 26.5% 8% 22.6% 6% 7% 4%5% 7.1% 3% 2% 2.7% 2.1% U.S. Int'l Fixed Real Hedge Private Other Equities Fixed Income Alternatives / Cash/Other Equities Equities Income Estate Funds Equity Real Estate Source: NA SRA Source: Greenw ich Associates
Average public pension fund allocations to alternative investments and real estate reportedly more than tripled over a period of 15 – 20 years Allocations to alternative investments may increase expected return, while reducing volatility and improving portfolio efficiency. An effective alternative investment program requires an enhanced framework to manage market, liquidity, operational and credit risks not captured in traditional modeling.
10 Projected Asset Allocation Shifts: Changing Exposures
Institutional Investors Projected Asset Allocation Shifts Significant Institutional Investors Expected Significant Decrease 3-Year Allocation Shifts Increase -21% U.S. Equities – Active +3% -20% U.S. Equities – Passive +4% -4% Real Estate +7% -11% Hedge Funds +6% -4% Private Equity +22%
Source: Greenw ich Associates
The number of U.S. private equity-backed companies reportedly increased from approximately 4,000 in 2006 to 8,000 in 2017* Private markets challenges include build-up of committed capital (“dry powder”) Opportunities include demand for infrastructure, less efficient markets and managers who possess skill sets to generate risk-adjusted returns through late cycle environment.
* Source: McKinsey, 2019 11 Public Equity Markets: Changing Environment
Passive Management Share of Active/Passive Asset Flows: Equity Mutual Fund & ETF Market Potential Risks to Financial Stability Impact to 37% Financial Risk Type System Risk Liquidity & Redemptions Reduces
Investing Strategies that Amplify Volatility Increases
14% Financial Industry Concentration Increases 3% Changes in Valuations, Volatility Unclear and Co-movements 1995 2005 2017 Source: Morningstar Source: Federal Reserve Bank of Boston; August 27, 2018. Moodys.
Investors continue to allocate assets to passive management to implement cost-effective investment programs and eliminate tracking error Asset flows to passive management have raised concerns about systemic impacts Factoring high frequency and other forms of automated trading, some experts believe that only 10% of daily U.S. equity trading volume is driven by fundamental decisions.
“Just 10% of trading is regular stock picking, J.P. Morgan estimates” —CNBC, June 13, 2017
12 Operational Risk: Emerging Exposures
Operational risk encompasses multiple types (e.g. legal, valuation, cybersecurity, etc.) Due to the increasing complexity of institutional portfolios and reliance on technology, benefit funds increasingly require a framework for managing operational risk.
Risk Categories Operational Risk Types
Legal and Transaction Asset Operational Market Compliance Processing Valuations Risk Risk
Reputation Financial Vendor Data Risk Reporting Selection Security
Asset Credit Physical Information Business Liability Risk Security Technology Continuity
“Compliance failures are the single biggest cause of reputational risk…” —The Economist Intelligence Unit
13 Actuarial Risks: Demographic & Economic Inputs*
Pension Plan risks, including investment (market) risk and the risk of adverse changes to demographic assumptions (e.g. employment, longevity) must be monitored and measured.
RISK WHAT IT IS WHY IMPORTANT
Shortfall must come Assets earn less Investment (Market) from contributions or than expected benefit reductions
Shortfall must come Employment levels less from extra contributions, Employment than expected asset returns or benefit reductions
Pensions are paid longer, Retirees live longer creating an unexpected Longevity than expected drain on the fund
* Note: Actuarial risks are primary sources of Asset Liability Risk. 14 Best Governance & Risk Oversight Practices Capital Markets Challenges and Opportunities Changing Risk Environment NCPERS Best Practice Recommendations Risk Management Framework Takeaways Appendix
15 NCPERS Best Governance Practices
Governance Manual Risk Oversight Communications • Statutes, Rules • Risk Governance • Mission Statement • Mission Statement • Risk Assessments • Participant Surveys • Organization Chart • Key Risk Measures • Reports to Members (CAFR) • Policies, Charters • Reporting • Governance Principles
Board Practices Strategic Planning • Strategic Planning • Multi-Year Plan • Fiduciary Education • Measurable Goals & Objectives • Actuarial Studies • Multi-Year Budget • Corporate Governance • Succession Planning
Board Policies Measures & Metrics • Standards of Conduct • Key Performance Measures • Investment Policy • Key Risk Measures • Privacy, Data Security • Member Satisfaction • Procurement • Balanced Scorecard
• Source: NCPERS Best Governance Practices. https://w ww.ncpers.org/files/NCPERS_BEST%20GOV ERNA NCE%20PRACTICES_2019_Final.pdf 16 NCPERS Best Practices: Governance Structure
Governance Framework Laws & Regulations Board Policies • Rulings & Agreements Board Provide Guidance & Strategic Oversight • Review and Approve Policy Plan Document • Oversee Performance & Risk Required Reporting
Authority delegated through course of Management • Develop and Recommend Policy conduct, job descriptions and contracts • Monitor Performance & Risk • Supervise Service Providers
Fund Staff/Counsel Finance / Administration Benefits Counsel* Compliance
Advisors/Service Providers* Investment Investment Custodian Actuary Auditor Consultant Managers
• Sample for illustrative purposes. Example does not include Committees of the Board.
17 NCPERS Best Practices: Risk Management Framework
Governance Assessments Measures Reporting
• Committees • Financial Audit • Beta • Auditor • Investment Policy • ALM Modeling • Sharpe Ratio • Custodian • Guidelines • Liquidity Tier Analysis • Standard Deviation • Investment Consultant • Contracts • Stress Testing • Leverage • Investment Managers
Example: Stochastic Modeling Example: Liquidity Tier Analysis Allocation of Assets by Tier Tier 1* Tier 2 Tier 3 Tier 4 Tier 5 Tier 6* Qtrly to 1 to 3 3 to 7 7+ Terms Daily Monthly 1 year years years years
Current Liquidity $318.8 $30.0 $70.0 $10.0 $10.0 $61.2
Allocated % 63.8% 6.0% 14.0% 2.0% 2.0% 12.2%
Aggregate Available 63.8% 69.8% 83.8% 85.8% 87.8% 100.0% %
18 Best Governance & Risk Oversight Practices Capital Markets Challenges and Opportunities Changing Risk Environment NCPERS Best Practice Recommendations Risk Management Framework Takeaways Appendix
19 Governance Risk Governance: Defining and Categorizing Risk
Market Risk* Liquidity Risk • Risk related to adverse movement in • Risk of loss resulting from an asset market factors such as asset prices, owner’s inability to sell an asset in a exchange rates or interest rates. timely manner and for its actual value.
Market 9 Operational Market 4
-1 Risk -6
-11 Liquidity Credit -16
Operational Risk Credit Risk • Risk resulting from inadequate or • Risk of loss due to failure of obligors failed internal processes, people and (e.g. bond issuers, tenants) to honor systems of from external events. their payments.
* Note: Sample for Illustrative Purposes. Market risk types include, but are not limited to equity, inflation, currency and interest rate risk. Asset / Liability Risk: Risk that liquidity w ill not be adequate to meet operational requirements or financial obligations. 20 Governance Risk Governance: Investment Policy Provisions
A comprehensive investment policy provides a framework for investment program design, decision making, risk monitoring, performance and cost measurement.
Investment Policy Components
Asset Allocation Oversight Roles Objectives Asset Class Target Range Role s Equities 50% 45% - 55%
Fixed Income* 25% 20% - 30% Asset Allocation Structure Alternatives* 25% 20% - 30% Portfolio Structure Total 100%
Performance Benchmarks & Risk Guidelines
Rebalancing Procedures
21 Assessment Risk Management Framework: Assessment Tools
Governance Assessments Measures Reporting
• Committees • ALM Modeling • Beta • Auditor • Investment Policy • Liquidity Tier Analysis • Sharpe Ratio • Custodian • Guidelines • Stress Testing • Standard Deviation • Investment Consultant • Contracts • Due Diligence • Leverage • Investment Managers
Retirement System Risk Exposures
Liquidity Tier Analysis ALM Modeling • Liquidity Risk – Contributions, Benefits • Demographics • Illiquidity Opportunities—Alternative Investments • Market Risk* • Redemption Terms • Inflation Risk • Currency Stress Testing • Volatility/Asset Class Relationships • Client Defined Market Risks • Interest Rates/Asset Class Relationships • Enterprise Specific Considerations Audits Investment Manager Due Diligence
* Note: Market risks include, but are not limited to equity, inflation, currency and interest rate risks. 22 Assessment Current State: Liquidity Matrix Example
Tier 1 Tier 6 Tier 6 As of December 31, 2017 (current)* Tier 2 Tier 3 Tier 4 Tier 5 (current) (future)* Investment Availability Daily Monthly Qtr to 1 yr 1 to 3 years 3 to 7 years 7+ years Equity $125,860,000
Fixed Income $48,720,000 Bank Loans $6,090,000 REIT Index $4,060,000 REIT LP $6,090,000 Real Estate Opportunistic $10,150,000 $10,150,000 Hedge Funds $0 Hedge Funds—Opportunistic $0 $0
Private Equity $0 $0 Infrastructure $0 $0 Commodities $0 Cash $2,030,000 Total $180,670,000 $6,090,000 $6,090,000 $0 $0 $10,150,000 $10,150,000
Percent 89% 3% 3% 0% 0% 5% 5%
Most Liquid Least Liquid
Illustrative 23 Assessment Liquidity Risk Assessment
Tier Analysis – Includes Current Committed Capital
Allocation of Assets by Tier The asset classes have been separated into Tier 1* Tier 2 Tier 3 Tier 4 Tier 5 Tier 6* Total tiers based on their respective liquidity, or Terms Daily Monthly Qtrly to 1 yr 1 to 3 years 3 to 7 years 7+ years how easily they can be redeemed for cash. Current Liquidity $182,200,947 $39,315,086 $48,989,816 $23,130,781 $27,829,806 $24,628,916 $346,095,352 Tier 1 is the most liquid (daily liquidity) while Allocated % 52.6% 11.4% 14.2% 6.7% 8.0% 7.1% Tier 6 is the least liquid (dollars tied up for 7 Aggregate Av ailable % 52.6% 64.0% 78.2% 84.8% 92.9% 100.0% or more years).
Additional inputs into the liquidity When Will Assets be Available by Tier? assessment will include: 100% 93% • The Fund’s projected cash flows; Funded 85% 7% 78% 8% 8% ratio; Additional characteristics. 7% 7% 7% 64% 14% 14% 14% 14% 53% 11% 11% 11% 11% 11%
53% 53% 53% 53% 53% 53%
Tier 1 +Tier 2 +Tier 3 +Tier 4 +Tier 5 +Tier 6 (Daily) (Monthly) (1 Year) (3 years) (7 Years) (10 Years)
Illustrative 24 Assessment Deterministic Projections
Assuming all assumptions are met the plan’s market value of assets will equal its actuarial liability by 2036 This assumes contributions of about $4.4m are made annually Benefit payments are expected to exceed contributions by about $12m through 2030 The market value funded status is expected to reach 86% by 2030 (if assets return 6.75% annually) but could be as low as 75% if the assets return 5.0% annually.
Illustrative 25 Assessment Stochastic Projections—Current Portfolio Annual Contributions ($M) Present Value of Contributions (PVC)
Economic Cost ($M) Employee contributions are made even if the plan is overfunded Present values are calculated at 6.75% and new unfunded liability is amortized over 15 years for this purpose Economic cost is the PVC + Present Value of any deficit that exists at the end of a horizon At the outset the economic cost is simply the starting deficit At 2028 the expected “economic cost” is $41m • Roughly $32m of PVC • Median deficit of approx. $18m (PV = $9m).
Illustrative 26 Assessment Assessment: Asset Allocation Modeling
60% 45%
40% 22% 5% 5% 8% 0% 0% 0% 0% 0% 12% 3%
Public Fixed RE Infr HF Private Private Public Fixed RE Infr HF Private Private Equity Income Credit Equity Equity Income Credit Equity
60/40 Add Add Add Hedge Add Priv ate Add Priv ate Portfolio Real Estate Infra. Funds* Credit Equity 20 Year Expected Return (Arithmetic)* 6.8% 6.9% 7.0% 7.0% 7.1% 7.7% 20 Year Expected Return (Geometric)* 6.2% 6.4% 6.5% 6.6% 6.7% 7.1% Standard Deviation 11.3% 10.2% 10.3% 10.2% 10.0% 10.9% Sharpe Ratio 0.32 0.36 0.37 0.38 0.40 .41
Alternative investments may increase expected return, while reducing volatility An effective alternative investments program requires an enhanced risk management framework.
* Notes: 1. Model portfolios are included for illustrative purposes. Hedge Funds example is Opportunistic Hedge Fund of Funds; Expected return excludes net-of-fee alpha that may be generated by active management; 2. Abbreviations: RE: Real Estate; Infr: Infrastructure; HF: Hedge Funds. 27 Assessment Candidate Portfolios Example
Policy Mix 1 Mix 2 Mix 3 Mix 4 US Equity 35.0% 35.0% 35.0% 35.0% 30.0% International 9.0% 9.0% 9.0% 9.0% 6.0% Emerging Market Equity 6.0% 6.0% 6.0% 6.0% 4.0% Total Equity 50.0% 50.0% 50.0% 50.0% 40.0%
Core Fixed Income 30.0% 20.0% 20.0% 20.0% 25.0% Global Fixed Income 5.0% 5.0% 5.0% 5.0% 5.0% Total Fixed Income 35.0% 25.0% 25.0% 25.0% 30.0%
Multi-Asset Class Solutions (MACS) 0.0% 10.0% 5.0% 5.0% 7.5% Private Equity 0.0% 0.0% 7.5% 5.0% 7.5% Private Credit 0.0% 0.0% 0.0% 5.0% 7.5% Real Estate - Core 15.0% 15.0% 12.5% 10.0% 7.5% Total Alternative 15.0% 25.0% 25.0% 25.0% 30.0%
10 Year Expected Return (Arithmetic) 6.4% 6.7% 7.1% 7.1% 6.9% 10 Year Expected Return (Geometric) 6.0% 6.2% 6.6% 6.6% 6.5% Standard Deviation 9.4% 10.1% 10.8% 10.5% 9.4% Sharpe Ratio 0.39 0.39 0.40 0.42 0.45
20 Year Expected Return (Arithmetic) 6.8% 7.1% 7.5% 7.5% 7.4% 20 Year Expected Return (Geometric) 6.4% 6.7% 7.0% 7.0% 7.0% 20 Yr Prob Achieving at Least 6.75% 43.6% 48.6% 54.2% 55.0% 54.3%
* Notes: Model portfolios are included for illustrative purposes.; Expected return excludes net-of-fee alpha that may be generated by active management.
Illustrative 28 Assessment Stochastic Projections Example – Mix 2 Annual Contributions ($m) Present Value of Contributions (PVC)
Economic Cost ($m) Funded Ratio
Illustrative 29 Assessment Market Risk Stress Test Example
Financial Market Shock (ROR%) Policy Mix 1 Mix 2
5% 0.3% 0.2% 0.5% 0% -5% -10% -6.9% -6.4% -6.4% -5.4% -5.2% -5.2% -15% -20% -25% -30% -35% -30.4% -29.5% -29.7% Bear Stearns Collapse (4Q07 - Lehman Brothers Failure and Sudden Rise in 10-Year U.S. China Concerns, Oil Downturn 1Q08) Contagion (3Q08 - 1Q09) Treasury Yields (2Q13) (3Q15)
Historical Asset Mix Performance (Based on Common Time Frame Across Each Mix) From January 1, 2007 To December 31, 2016 (40 Quarters; 10 Years) Policy Mix 1 Mix 2 Annualized Return 5.4% 5.2% 5.4% Annualized Risk 12.9% 12.4% 12.4% Sharpe Ratio 0.4 0.4 0.4 # of Negative Years 1 1 1 Downside Deviation 8.0% 7.9% 8.3% Maximum Drawdown -36.1% -34.8% -34.7% Quarterly VaR (95%) -8.6% -8.3% -8.2% Quarterly MVaR (95%) -9.6% -9.2% -9.3% Quarterly CVaR (95%) -11.1% -10.7% -10.7%
Illustrative 30 Measures Key Performance and Risk Measures
Pension Fund Risk Exposures
Market Liquidity Operational Asset Liability
• Equity Market • Cash Flow • Transaction Processing • Contribution Shortfalls • Interest Rates • Investment Period • Valuation Processes • Demographic Changes • Foreign Exchange • Redemption Terms • Legal / Compliance • Investment Experience • Inflation • Alternative Assets • Fees and Expenses • Assumption Changes
Sample Risk Measures
Market Risk Liquidity Risk Operational Risk Asset/Liability Risk • Beta • Negative Cash Flow • Audit Exceptions • Unfunded Liability • Standard Deviation • Unfunded Commitments • Reconciliations • Funded Percentage • Leverage • Illiquid Asset Exposures • Failed Transactions • Unfunded Liability • Issuer Concentration • Redemption Queues • Compliance Failures • Change to Net Assets
Note: Examples. 31 Measures Risk Measure Example: Traditional Asset Classes
32 Measures Risk Measure Example: Alternative Investments
33 Reporting Reporting Framework
Board of Trustees/ Executive Operational Market Staff
Risk Consultant Counsel
Fixed Hedge Private Custodian Equity Real Estate Cash Liquidity Credit Income Fund Equity Bank Managers Managers Manager Managers Managers Managers
Actuarial Reports Comprehensive Annual Financial Report Executive Director’s Report Investment Consultant’s Reports Annual Report Custodian’s Reports Counsel’s Reports (may be verbal) Investment Managers’ Reports Audited Financial Statements. Regulatory Updates.
Note: Examples. 34 Reporting Reporting Example: Balanced Scorecard
Annual Administration Result Trend Completed Annual Actuarial Report by December 31 Neutral Processed 100% of Pension and other Benefit Payments on Pay Date Positive Investments Net of Fee 3-Year Annual Rate of Return Meets of Exceeds Benchmark Neutral Completed Investment Policy Statement Review Neutral Member Services Call Center Answered 80% of Calls in 30 Seconds Or Less Neutral 85% of More of Surveyed Members Rated Service “Good” or “Excellent” Positive Audit & Compliance Annual Audit found no Material Exceptions (Unqualified Opinion) Neutral Obtained IRS Letter for Amended and Updated Plan Document Positive
Note: Example. 35 ESG Implementation Tools: Risk Management Framework
Flexibility in Implementation
Investment Proxy Shareholder Manager Policy Voting Engagement Selection
• Objectives • Proxy Policy • Proposals • Philosophy • Risk Management • Vote Execution • Meetings • Process • Selection Criteria • Rationale • Advocacy • Security Selection • Required Reporting • Robust Reporting • Alliances • Risk Management
ESG Integration (OECD Definition)* • Recognition in the institutional investor’s investment policy or principles that ESG factors may impact portfolio performance and so affect the fiduciary’s ability to meet its obligations and; • Using analysis of those impacts to inform asset allocation decisions and securities valuation models (or employing third parties to do so).
36 Shareholder Engagement Example: Opioid Supply Chain
54 Members with $3.5 Trillion in assets under management and advisement Aberdeen Standard Calvert Research and Interfaith Center on Corporate School Employees Retirement Adrian Dominican Sisters Management Responsibility System of Ohio Aegon Asset Management Catholic Health Initiatives International Brotherhood of Segal Marco Advisors Teamsters Æquo Shareholder CTW Investment Group Seventh Generation Interfaith Engagement Services City of Philadelphia Public JLens Investor Network Coalition for Responsible Investment American Federation of Employees’ Retirement System Mercy Investment Services Teachers Pension Plan Congregation of St. Joseph NEI Investments Sisters of St. Francis of Philadelphia Aquinas Association Connecticut State Treasurer’s Neuberger Berman Office The Socially Responsive Bailard, Inc. New York State Common Investing Group of 1919 Benedictine Coalition for Daughters of Charity, Province Retirement Fund Investment Counsel of St. Louise Responsible Investment Northwest Coalition for Socially Responsible Bon Secours Mercy Health Dignity Health Responsible Investment Investment Coalition Boston Common Asset Diocese of Springfield, IL OIP Trust / Missionary Oblates Trinity Health Management Domini Impact Investments Office of the New York City UAW Retiree Medical Benefits Bricklayers & Trowel Trades Dominican Sisters of Comptroller Trust International Pension Funds Springfield, IL Pennsylvania State Treasurer’s United Church Funds Office California State Teachers’ Guidestone Financial Vermont State Treasurer’s Retirement System Resources of the Southern Region VI Coalition for Office Responsible Investment California State Treasurer’s Baptist Convention Walden Asset Management Office Hermes Equity Ownership Rhode Island State Treasurer’s Office Wespath Benefits and Services Investments Illinois State Treasurer’s Office West Virginia State Treasurer’s Office Zevin Asset Management, LLC
Source: IOA Website, available at: http://uaw trust.org/IOA 37 Shareholder Engagement Example: Corporate Policy Changes
IOA members have filed 33 resolutions, and settled 30 proposals 10 companies to issue board risk reports 2 companies addressed excluding opioid litigation from incentive pay for executives
38 Best Governance & Risk Oversight Practices Capital Markets Challenges and Opportunities Changing Risk Environment NCPERS Best Practice Recommendations Risk Management Framework Takeaways Appendix
39 Takeaways
Institutional investors’ risk exposures are changing due to increasingly diverse asset allocation structures, evolving markets and external factors, including reliance on technology
Public retirement systems continue to implement leading edge governance and risk management practices to position their funds for long-term returns for the benefit of members and beneficiaries
Effective practices include enterprise risk management (ERM), chief risk officer roles, enhanced asset liability modeling (ALM), enhanced risk analytics, stress testing and liquidity assessment
In support of these initiatives, NCPERS and Segal Marco released a set of model risk management practices in an update to NCPERS Best Governance Practices for Public Retirement Systems
ESG integration may be viewed as a risk management tool that is implemented through multiple mechanisms including corporate governance and proxy voting, which is a recommended practice
NCPERS governance guidelines encompass practices that are designed to position public pension funds for risk-adjusted performance across functions through changing economic and market cycles.
40 Best Governance & Risk Oversight Practices Capital Markets Challenges and Opportunities Changing Risk Environment NCPERS Best Practice Recommendations Risk Management Framework Takeaways Appendix
41 Terms and Definitions*
Best Practices: Generally, the means by which organizations achieve top performance. Best practices are a critical input to developing process and structure improvements.
Governance: The structures and relationships that drive organizational performance and system by which organizations are directed and managed.
Charter: A document adopted by the Board that outlines the purposes, organizations and functions of a specific committee.
Committees of the A subgroup of a board organized to help manage the Board’s work. Committees of a corporate Board: board typically include corporate governance, personnel, audit and risk.
Mission Statement: Defines an organization’s purpose and directs its future. It helps the Board and staff focus on the organization’s goals and educate others about the organization.
Risk: Risk is the chance of something happening that will have an impact on organizational objectives. It is measured in terms of probability and impact.
Control: Any action which reduces the probability of a risk occurring or reduces its impact if it does occur.
Enterprise Risk The process of coordinated risk management that places emphasis on coordination among groups Management: to manage the organization’s full range of risks across categories and functions.
Residual Risk: The risk that remains after a control has been instituted.
* Sources: Various. 42 Sample Terms and Definitions* continued
Reputation Risk: Risk that the organization’s brand will be diminished. Reputation risk is often the result of risk in other categories. Compliance failures are the biggest source of reputation risk.
Deterministic A deterministic model of a phenomenon is a stochastic model in which a given event is assumed to Model: occur with certainty.
Stochastic Model: A model for estimating probability distributions of potential outcomes by allowing for random variation in one or more inputs over time.
Risk Appetite: Refers to an organization’s attitude toward taking risk and whether it is willing and able to tolerate either a high or low level of exposure to different risk categories and specific risks.
* Sample definitions. Not all inclusive. 43 Presenters
Julian Regan Maureen O’Brien Sr Vice President / Vice President, Public Sector Market Leader Corporate Governance Director
Expertise Expertise Julian joined Segal Marco Advisors in 2009 as part of the firm’s continued Maureen joined Segal Marco Advisors in 2011 and currently serves as Vice commitment to public and multi-employer benefit plans. Between 2001 and President, Corporate Governance Director were she leads corporate 2006, Julian served as Executive Director for the New York State Deferred engagements on behalf of SMA’s clients and analyzes proxy voting issues. Compensation Board, where he ran the state’s then $8 billion supplemental Maureen’s work in shareholder advocacy began in 2003 as a Research Analyst retirement plan and administered regulations that governed 250 local plans. for the Investor Responsibility Research Center. Since then, she has specialized Julian also served as Vice President, Risk Governance and Strategy for in engaging companies on behalf of investors. Most recently, Maureen was Fidelity Investments, and as Assistant General Manager and Budget Director Head of Engagement at Conflict Risk Network, where she held dialogues with for the Massachusetts Bay Transportation Authority. companies operating in Sudan and other conflict zones. Professional Background Professional Background From 2005 to 2008, Julian was a member of the U.S. Internal Revenue Maureen also served as Research Director at the Center for Political Service (IRS) Advisory Committee on Tax Exempt and Government Entities. Accountability, a non-profit, non-partisan organization, where she promoted He is co-author of the NCPERS Best Governance Practices for Public transparency in corporate political spending. Maureen co- Retirement Systems, and contributing author to the IFEBP Trustee founded LINC Negotiations, a Washington, D.C.-based consultancy that Handbook, among other publications. provides training in negotiation and mediation. In 2015, Maureen was appointed Education / Professional Designations to the Council of Institutional Investors Corporate Governance Advisory Council. Education/Professional Designations Julian received his MBA and BSBA from Suffolk University and studied at Georgetown University. Julian is a 2008 recipient of the IRS TE / GE Maureen received her M.A. from American University in Washington, D.C. and “Commissioner’s Award” and a 2004 “Plan Sponsor of the Year” award her B.A. from the University of Missouri-Columbia. recipient.
44 Presenters
John Ross Senior Vice President / Pam Dubuc, CFA Co-Head of Risk Management Senior Consultant
Expertise Expertise John is a Senior Vice President and the Co-Head of ALM and Risk Ms. Dubuc is a Senior Consultant in Segal Marco Advisors’ Boston office with Management in Segal Marco Advisors’ Darien office. He has over 24 years over fifteen years of experience in investment consulting. She provides of experience in the investment industry within a professional career that consulting services to corporate, multiemployer, and public defined benefit and spans 32 years. Risk Management is responsible for the ongoing monitoring defined contribution plans, foundations, and endowment funds. Ms. Dubuc of long-, intermediate- and short-term views on strategic asset classes, works with plan sponsors to build a common understanding of the needs of the anticipating macro investment themes, and formulating capital markets fund, provide a careful design of the investment structure, and perform manager assumptions and objective-driven investing. John leads the firm in selection and monitoring. establishing model portfolios and incorporating best ideas related to asset allocation implementation. John manages the team responsible for the Ms. Dubuc also supports Segal Marco Advisors’ largest and most complex discretionary alternative investment programs, overseeing portfolio development completion of client asset allocation and asset liability studies. He is also a and monitoring, cash management, performance reporting, client audit support, member of the firm’s Investment Committee charged with defining, formulating and communicating quarterly and annual capital market outlooks, legal/regulatory requests, and other operational duties. views and opinions to clients. Professional/Education Background Professional Background Ms. Dubuc received a BS in Business from Wake Forest University. She holds John worked for over 12 years at International Paper as a Senior Associate the CFA Institute’s Chartered Financial Analyst (CFA) designation and is a in the Trust Funds Management Group responsible for manager evaluations, member of the Boston Security Analysts Society. quantitative and qualitative analysis on private equity offerings and managing the administration of a $2 billion corporate trust fund. John also worked at Xerox Corporation as a Credit Analyst. Education / Professional Designations John graduated with a BS degree in Economics from the State University of New York, College at Cortland.
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