Blazing the Oregon Pension Trail

Oregon hopes to be the first state to create a professional investment management corporation to run its pension assets.


A movement is afoot to change the way the Oregon Public Employees Retirement System is managed. If pension officials get their wish, the Oregon Investment Council (OIC), the body that oversees a combined $80 billion in pension and other state trust fund assets, will become the Oregon Investment Corp., a quasigovernmental entity with greater control over the state’s assets.

“There have been increasing concerns among Treasury staff and OIC members that Oregon’s investment operations, which historically have generated strong returns and served Oregonians well for decades, are becoming insufficient and inadequate in a now global and increasingly complex investment arena,” OIC chairman Keith Larson wrote in a recent e-mail exchange with Institutional Investor. The current fund management structure was put in place in the 1970s with about $1 billion in assets.

When Oregon Treasurer Ted Wheeler took the bold move early this year of submitting Senate Bill 120, formally named the Investment Modernization and Cost Reduction Act, to the senate finance and review committee of the Salem-based state legislature, he had the full support of Larson and the four other investment council members, as well as that of CIO John Skjervem.

After the departure of the state Treasury’s previous CIO, Ronald Schmitz, in September 2011, the investment council began a review of its business model and governance structure. Two consultant reviews and one comprehensive internal audit pointed to the need for greater organizational independence. In a March 11 address to the senate committee, Larson, an executive at Intel Capital, the venture capital arm of tech giant Intel Corp., cautioned that, “as consultants told us, the portfolio could face significant risks if we fail to modernize and strengthen the management of it.”

The new fund management structure would give a newly created investment corporation powers that the investment council currently lacks. For example, the staff of the corporation would report to a fully independent board rather than to just the treasurer. The board would take budgetary authority away from the legislature, be able to scrutinize the cost of the entire program and prioritize human capital and technology resources, Larson told the senate committee.

The new corporate structure would allow the investment office to update risk management and back-office functions — an increasingly dire need. “The division’s current framework for evaluating and monitoring portfolio-level and operational risk is no longer adequate relative to the significant size and ever-increasing complexity of the state’s investment activities,” CIO Skjervem told II in an e-mail, pointing to the importance of being nimble and flexible in the complex global financial markets.

The corporate structure would also make it easier to increase staff ranks and change their compensation, because such requests would no longer have to wend their way through the legislative process.

The Oregon pension system has not been immune to the financial crisis and market gyrations. Last month the pension board voted to reduce the system’s assumed rate of return by 25 basis points, to 7.75 percent, acknowledging the ongoing challenge of investing in a low-interest-rate environment. Still, Oregon’s pension fund returns have been above average. PERS’s ten-year annualized return for the year ended December 31, 2012, was 8.7 percent, compared with a 7.96 percent median return for pension systems with more than $5 billion in assets in Wilshire Associates’ Trust Universe Comparison Service. The state’s one-year return of 14.3 percent is almost a full point above the 13.43 percent TUCS median.

When the 2013 annual legislative session ended in early July, the bill that would create Oregon Investment Corp. had not reached a vote. That’s not unusual, say state officials, given that the legislation competed with upward of 35 other bills concerning the $61 billion state pension fund.

What are the chances that SB 120 will pass next session? “We have heard that the proposal as currently constructed is perceived as too complicated,” says CIO Skjervem. “Hence we are working to better educate decision makers about both the proposal details as well as the guiding rationale for these important structural changes.” Officials are also working to simplify the act. Skjervem believes the proposed investment model will be adopted and other state systems will follow suit.

For his part, OIC chairman Larson, speaking at a recent board meeting, expressed his belief that the bill will likely be heard and voted on in the 2014 legislative session that starts early next year.

Though OIC officials are optimistic, they will face a challenge in pushing their agenda in 2014 given that the Oregon legislature meets for only 35 days in even-numbered years.