Board of Trustees Meeting Minutes September 19, 2017 Page1of 13

Transcription

1 Vuginia Page1of 13 A regular meeting of the Virginia was held on in Richmond, Virginia with the following members present: Board members present: Mitchell L. Nason, Chair Diana F. Cantor, Vice Chair Hon. J. Brandon Bell, II Wallace G. Harris W. Brett Hayes 0 'Kelly E. Mc Williams, III Joseph W. Montgomery Troilen G. Seward Also present were: Rod Smyth, VRS Investment Advisory Committee (entered at 2:03 p.m.); Trish Bishop, Ron Schmitz, Rory Badura, Farley Beaton, Richard Brooks, Jeanne Chenault, Michael Cooper, Harriet Covey, Pam Elam, Barry Faison, Josh Fox, Bryan Gardiner, Jay Gentry, J. T Grier, Brian Goodman, Dane Honrado, Robert Irving, LaShaunda King, Matt Lacy, Chung Ma, Curt Mattson, Steve McClelland, Laurie Nelson, Walker Noland, Andrea Peeks, Steve Peterson, Laura Pugliese, Jennifer Schreck, Jillian Sherman, Justin Smith, Capri Stanley-Smith, Dan Whitlock and Cindy Wilkinson. Guests present were: Josh Laws with the Office of the Attorney General; Joe McMahon with the Joint Legislative Audit and Review Commission; Michael Martz with the Richmond Times-Dispatch; Jody MacIntosh with the CEM Benchmarking, Inc.; Kristy Scott with the Auditor of Public Accounts and Sandy Harrington with the Virginia Municipal League. The meeting convened at 1:45 p.m. APPROVAL OF MINUTES PROPOSED COMMITTE ASSIGNMEN REPORT OF THE CHIEF INVESTMENT OFFICER Upon a motion of Ms. Cantor, with a second by Mr. Montgomery, the minutes of the August 15, 2017 meeting were approved. Upon a motion of Ms. Cantor, with a second by Mr. Montgomery, the Proposed Committee Assignments were approved. Ron Schmitz reported that the economic data continues to be positive with second quarter GDP coming in right around 3% due to increases in both consumer and business spending. Unemployment is strong at 4. 4%. He

2 IVuginia Page 2 of 13 anticipates that hurricanes Harvey and Irma will have some impact on September's and following month's numbers. Harvey took out 25% of the US refining capacity which has resulted in an increase in gas prices. This will most likely distort inflation readi ngs in the months ahead. Texas and Florida will have a large number of displaced workers for a while which will have an initial negative effect on the employment readings coming out of that area, but those numbers are likely to increase as rebuilding efforts kick in. Uncertainty and tension still exist due to politics in Washington and geopolitics surrounding Korea. Despite all of the above, the markets remain resilient, returns continue to be robust, and three- and five-year volatility numbers have been relatively low. The world stock market performance is about 5% quarter-to-date (unhedged), or 4.2% on a 50% hedged basis. Despite being hurt by our underweight to equities, the overweight in non-us markets and emerging markets has worked out well for our porifolio. Mr. Schmitz gave a hurricane update and made a correction on an earlier that mentioned an apartment building in Texas that was originally reported to have had 100 flooded cars in the parking deck but which has actually turned out to have about 700 cars that were flooded. Personal auto insurance should cover most of the damage, but renters may try to subrogate their deductibles against rent. He noted that there may be some downside impacts from that, but it should not be extensive. More concerning is that there were elevator and fire suppression systems damaged. While early reports were that about units may have had water leakage, that number has turned out to be 115. All-in-all that means about $1.0-$1.2 million in losses. VRS estimates that insurance will cover about half of that. It is too soon for early estimates relating to damage in Florida due to hurricane Irma, but water damage is expected similar to what was experienced with hurricane Harvey in Texas. VRS did suffer some losses in trees and/or fruit in orange groves in the Orlando area. Insurance exists for about half of {hose replanting costs and for current seasonal loss of fruit, but longer-term loss of income from fruit and newly planted trees is not something that insurance covers. The exact net loss is undetermined at this point. VRS also most likely has peach and pecan groves in Georgia that had some damage as well. While VRS does not have anything solid yet, it is anticipated that the damage will be minor compared to the Orlando orange grove situation. The upper damage estimate is about $4 million, with insurance offsetting some of that, but that amount is not yet confirmed.

3 gvrrginia Pagel of 13 Mr. Schmitz pointed out that risk measures are all within the Board approved levels, with volatility tracking with what has been reported in recent years below long-term expectations and fairly close to the index. Looking at the performance report, the fund and the asset classes for the first month of the fiscal year look a bit disappointing, but there is a lot of noise in short-term market returns and relative returns, and we have income only in the July numbers for private market assets not marked to market. The asset allocation report shows that VRS remains underweight in equities and overweight in credit, however the credit asset class has recently been a source of cash needs for benefit payments and will likely continue to be such. As has been the case for several years now, the private asset market classes are lagging the desired exposures because the managers are being cautious about putting money out to work in this high-priced environment. While that is a good thing, it has kept VRS from getting those extra few percentage points that would otherwise be possible. The Strategic Opportunities Portfolio (SOP) is sitting at about 2.5% which is the reason why some of the other classes are underweight. Mr. Schmitz indicated that as we move in to subsequent fiscal years, there should be a discussion about addi ng SOP as a poli cy asset class to the policy portfolio and have a discussion about the appropriate benchmarks due to the current seasoning of the SOP and placement of mangers and strategies. Mr. Schmitz mentioned the new manager hires and terminations report and stated that a real assets manager had been hired and that there have been no terminations. ANNUAL CEM BENCHMARK REPORT ON BENEFIT ADMINISTRATION The Board received the Annual CEM Benchmarki ng Report on Benefit Administration and placed it on file. Jody MacIntosh from CEM Reported that the VRS total pension administration cost was $69 per active member and annuitant. This was $25 below the peer average of$94 and $58 below the universe average of $127. This is largely due to lower transactions per member, higher transactions per FTE, and lower back-office costs. Despite an increase of

4 g Virginia Page 4of 13 $9 per member over the last four years, the VRS cost per member is in the bottom quartile of CEM's global universe. The VRS service score was 82, which is above the peer median of 80. VRS' service score increased from 79 to 82 over the last four years due to improvements in group counseling, purchase of prior service, and its public website and member portal. In sum, VRS provides service above the peer median at a lower cost. REPORT OF THE INVESTMENT ADVISORY COMMITTEE REPORT OF THE DEFINED CONTRIBUTION PLANS ADVISORY COMMITTE Custom Target Date Project Update Administrative Reports and Communication Update Rod Smyth gave the report.from the Investment Advisory Committee (IAC) and touched on four main points: I) monetary policy has inflated asset prices, but not the real economy; 2) the markets are tilting away from regulation to deregulation; 3) currently, domestic policies win out over global ones; and 4) there are accelerating tensions globally. The IAC advised that an expected 7% return is still the correct policy goal for the fund and that they believe that the fund has the correct amount of assets invested in high risk funds, but cautioned that the Board will need to ride out any future downturn in the market in order to see 7% growth longterm. The Board received the Defined Contribution Plans Advisory Committee report of September 8, 2017 and placed it on file. Brett Hayes reported that at the September 8 th meeting of the DCPAC, staff provided its annual investments review to the DCPAC that included a review of the DC Investment Beliefs Statement, an overview of the DCPAC duties and responsibilities as it relates to investments, and a review of Defined Contribution (DC) investment trends and best practices. Staff also discussed preliminary findings on the target date portfolio customization project, specifically 1) that the Hybrid Plan will be used when determining a custom glide path; 2) that based on current VRS demographic ieformation age 65 will serve as the glide path's retirement age; and 3) that staff will continue to use a flat rather than a sloping glide path starting at the glide path 's retirement age. The DCPAC also reviewed the current Self-directed Brokerage Account requirements, and an overview of monthly reports, specifically, 1) the total assets and number of accounts under management in the second quarter of 2017; 2) an update on the ICMA-RC 2017 Strategic Plan; 3) an update on the second quarter 2017 communication initiatives, including an overview of National Security Week; 4) new plan

5 Virginia Page 5 of 13 adoptions and transition of assets for second quarter 2017; upcoming plan adoptions for the third quarter of 2017; 5) an update on the Hybrid 457 voluntary participation rate, including the auto-escalation population and number of participants with maximum of voluntary contributions; and 6) an award recognition for the Auto-Escalation Campaignfrom the International Academy of Interactive & Visual Arts (AIVA). ORPHE Update Motion-DCPAC Charter Changes ICMA-RC Contract Renewal Proposed 2017 Meetings Also discussed at the DCPAC Committee meeting was the ORPHE update, specifically, 1) the total ORPHE assets for the second quarter 2017, and assets by plan provider (DCP, TIAA, and Fidelity); 2) an update on the second quarter 2017 ORPHE enrollment statistics based on newly eligible employees between the three providers; 3) an update of myvrs ORPHE enhancements completed in second quarter 2017, and upcoming initiatives for the fourth quarter of 2017; and 4) an update on Fidelity's response to the DOL Fiduciary Rule, and VRS' transition to an education-only service model. Staff provided the Committee with an overview of recommended changes to the Committee Charter for the Defined Contribution Plans Advisory Committee (DCPAC) as part of an effort to ensure that the various governance documents are consistent. Staff shared with the Committee that similar recommended changes would be presented to the other committees and motions taken to accept the ch anges prior to presenting them to the Administration and Personnel Committee and the Board of Trustees. The DCPAC approved the proposed cha nges, and referred its recommendation on to the for its consideration. Staff apprised the Committee of the intent to exercise the first of two three-year renewals with ICMA-RC. Staff indicated they are satisfied with the level of service provided under the current contract, and noted the short window of opportunity to undertake a formal bidding process prior to the existing contract term date of December 1, Staff shared that a bidding process would require significant agency resources and would add an additional layer of risk given current agency-wide efforts to migrate away from a main.frame to client-server technology platform. The next meeting of the DCPAC will take place on December 7th, from 10:30 a.m. to 1:30 p.m. Mr. Nason commended the committee for their excellent work. REPORTOFTHEAUDITAND COMPUANCE COMMITTEE The Board received the Audit and Compliance Committee report of September 7, 2017 and placed it on file.

6 Virginia Page6 of 13 Exit Conference with the Auditor Of Public Accounts (APA) on their Employer Assurances Audit Audit Reports Ms. Cantor gave the report from the Audit and Compliance Committee stating that they had an exit interview with the Auditor of Public Accounts (AP A), during which AP A reported that they have concluded their Employer Assurances audit work. This audit covers the data VRS prepares and supplies to employers and their auditors to support required financial reporting over pension plans under Government Accounting Standards Board (GASE) Statement No. 68. The APA reported they have issued unqualified audit opinions on all the Schedules of Employer Allocations and related ieformation as prepared by VRS for GASE 68 purposes. The AP A also discussed the audit and resource implications of implementing GASB 74, this year for the plan, and GASB 75, next year for employers. These statements address the financial reporting requirements for the other post-employment benefit plans administered by VRS. The Committee received four audit reports. The review of Actuarial Data and Services noted that effective processes existed to generate valid, accurate, and complete data used for annual actuarial valuations. Additionally, the examination validated that the fees paid under the contractual agreement with VRS's actuary were accurate. The review of Refunds, the first review since the refund payment process was enabled in myvrs, determined that refunds processing controls are appropriately designed and operating effectively. The On-site Review of Bank of New York Mellon found an appropriate operating environment and general controls to support the safeguarding of assets and recordkeeping processes at the Master Custodian. Further, the review validated that VRS and the Master Custodian had complied with their contractual agreement, including any related amendments. The Investment Balances and Performance Reporting examination noted that investment balances and performance reporting were accurate and agreed to the ieformation recorded by the Master Custodian. Additionally, the review verified that performance information presented in the June 30, Popular Annual Financial Report (PAFR) was complete and accurate. Proposed Revisions to the Audit and Compliance Committee Charter The Audit Director provided the Committee with an overview of proposed revisions to the Audit and Compliance Committee Charter to ali gn the Charter with changes to the International Standards for the Professional

7 Vuginia September 1.9, Page 7 of 13 Practice of Internal Auditing issued by the Institute of Internal Auditors, introduced in January 2017, and ensure the Charter's consistency with the ' various governance documents. The Audit Director noted that similar recommended changes for consistency with the governance documents would be presented to the other committees and motions taken by the respective committees to accept the changes prior to presenting them to the Administration and Personnel Committee and the in one group. After a brief discussion about the Committee's oversight roles and responsibilities relative to Enterprise Risk Management, a motion was passed to approve the recommended changes. Proposed Revisions to the Internal Audit Charter Annual Report on the Audit Recommendation Follow-Up (AFRUS) Internal Audit Annual Report Revisions to the Internal Audit Charter governing the Internal Audit Department were also presented to the Committee for review. As with the Committee Charter changes, the revisions were proposed to align the Charter with the 2017 International Standards for the Professional Practice of Internal Auditing issued by the Institute of Internal Auditors as well as to ensure consistency with the Board's other governing documents. A motion was passed to adopt these changes as presented. The Committee received the Annual Report on the Audit Recommendation Follow-Up (ARFUS) as of June 30, At the beginning of the year, ARFUS held five recommendations. Nine additional recommendations were added during the year. During the year, ten recommendations were represented as implemented, tested and released. As of June 31, 2017, there were four outstanding recommendations in ARFUS. The Audit Director provided the Committee with a recap of the Department's accomplishments over the past year as well as a brief overview of the Department's initiatives and challenges for the coming year. She recognized the contributions of the internal audit team, noting she believes the Department is positioned well for the future. The Audit Director explicitly co,ifirmed to the Committee that the VRS Internal Audit Department and its staff are organizationally independent of the activities they examine, and that the Department is adequately staffed. Annual and long-range audit plan progress and proposed FY 2018 audit work plan The Committee received the annual audit plan results for the fiscal year ended June 3 0, 2017, along with the status of the long-range audit plan for the four years ending June 30, The Auditor Director noted that as of the conclusion of the first fiscal year of the long-range plan, the

8 gvirginia Page8of13 Department was on schedule to complete all of the work originally approved in the overall plan. The only changes are to the timing and/or duration of certain examinations to align resources with audit requirements. The Committee received the proposed audit plan for fiscal year 2018, which is a component of the long-range plan. The Audit Director noted that some adjustments to the plan have been made to reflect the movement of examinations for the reasons previously noted. The Committee then approved the plan as presented and recommended that the plan be presented by the Audit Director to the for its consideration and approval. Annual and Long-Range Audit Plan Progress Report and Proposed Annual Plan for 2018 Ms. Schreck discussed the annual and long-range audit plan progress as well as the proposed annual plan for The long-range plan is driven by formal risk assessment with input from the Board Members, CIO and director, the executive leadership as well as the front line managers to be able to ensure that the audit team is appropriately considering the risks of VRS. Ms. Schreck also highlighted the fact that the governance poli cy provides the Audit Director with the latitude to make adjustments annually to the approved plan "to accommodate changing needs and unexpected events. " The long-range plan covers a four year period that began in After some minor adjustments, all 2017 projects were initiated and completed as planned. The 2018 plan was derived.from the long-range plan. It has captured input from management regarding continuing and emerging risks affecting VRS and addresses the impact of carry forward projects from the 2017 audit plan and movement of projects planned for 2018 moved to either an earlier or later period. Upon a motion of Mr. Montgomery, with a second by Mr. Harris, the Audit and Compliance 2018 Long Range Audit Plan was approved. Quarterly Report on Fraud, Waste and Abuse Hotline Cases Ms. Cantor then reviewed the A & C Committee quarterly report on fraud, waste and abuse hotline cases. A list of Fraud, Waste and Abuse Hotline complaints reported to Internal Audit via the Office of the State Inspector General during the period of May 1, 2017 to July 31, 2017 was presented to the Committee (two in total). One allegation concerning noncompliant employment of retirees was partially substantiated and appropriate actions are being taken by management. The second allegation surrounded disability retirement and as of the date of the

9 a Virginia September 1.9, Page 9 of 1.3 report was under review. Subsequently, it was determined that the allegation was unsubstantiated and the investigation was closed. Management's quarterly travel expense and per diem report Review of agency operating objectives and standards Audit director's performance evaluation Request/or Board Action: Review and Approve Internal Audit Director's Performance and Bonus Polling/or the 2018 meeting schedule and next meeting REPORT OF THE ADMINISTRATION AND PERSONNE COMMIITEE Requests for Board Action Review Revised Board Governance Policy and Committee Chaners The Committee reviewed the quarterly travel expense and per diem report. Internal Audit reviewed management's representations regarding the Agency Performance Outcomes and Agency Operating Standards for the fiscal year ended June 30, 2017, noting that no items came to its attention that indicated that the outcomes and standards were not met for the fiscal year. The Committee met in closed session to review the Audit Director's performance for the fiscal year ended June 30, On a motion.from Ms. Cantor and a second.from Mr. Harris, the VRS approved a 5.0% performance bonus to the Audit Director. The Audit Director will poll the Committee via regarding the 2018 meeting schedule and present the results at the Committee 's next scheduled meeting, December 14, 2017 at 10 a. m. The Board received the Administration and Personnel Committee report of and placed it on file. Mr. Nason delivered the report of the Administration and Personnel Committee. The Committee reviewed and discussed recommended staff amendments to the Board's Governance Policy and all committee charters. The Committee concurred in the amendments and will recommend them to the full Board for approval. Mr. Nason commended staff for their efforts on the committee charters, specifically mentioning the level of detail that went into amending the charters to be consistent across all the committees. Mr. Nason then recapped Ms. Stanley-Smith's report to the A & P Committee on the status of the FY2017 Agency Performance Outcomes (AP Os) and Agency Operating Standards. The Committee discussed the FY2017 results and agreed that the AP Os and the requisite number of standards were met. The gain-sharing bonus percentage is 2.5% and the approximate cost for the FY2017 APO and gain-sharing bonus payments is $482,

10 Vrrginia Page 10of 13 Request for Board Action: Review and Approve Attainment of FY2017 APOs and Operating Standards Request for Board Action: Reappointment of /AC Members On a motion.from Mr. Nason and a second.from Ms. Cantor, the Board approved (i) the attainment of FY2017 APOs and Operating Standards and (ii) a lump-sum bonus equal to 2.5% of salary for eligible administrative employees and eligible Investment Department operations and administration employees. On a motion.from Mr. Nason and a second.from Ms. Cantor, the Board reappointed to the Investment Advisory Committee: Hance West for a two-year term ending December 31, 2019; and W. Bryan Lewis for a twoyear term ending March 31, The Committee met in closed session to discuss FY2017 Incentive Pay for Investment Professionals. Request for Board Action: Review and Approve FY2017 Incentive Pay for Investment Professionals The Committee came out of closed session and on a motion.from Mr. Nason and a second.from Mr. Harris, the Board approved payment of an incentive amount of$6, 757, for 2017 to VRS investment professionals as authorized by the Investment Professionals Pay Plan. Mr. Nason then recapped Ms. Stanley-Smith's request to approve individual lump-sum performance bonuses for eligible Administrative and Investment Department operations and administration employees who received an overall rating of "exceptional" or "exceeds", with a 2% bonus for exceeding expectations and a 4% bonus for exceptional performance. The approximate total cost for the FY2017 bonus payments is $333, The bonuses are paid in accordance with the Administration Pay Plan and the Investment Operations and Administration Staff Pay P Ian. Request for Board Action: Approve Performance Bonuses for Eligible Administrative and Investment Operations and Administration Employees Request for Board Action: Review and Approve Director's Performance Bonus On a motion.from Mr. Nason and a second.from Ms. Cantor, the Board approved performance lump-sum bonuses for eligible administrative employees and eligible Investment Department operations and administration employees. Mr. Nason then reported that the A & P Committee met in closed session to discuss the VRS Director's salary supplement. The Committee is very pleased with the performance of the Director and recommends a bonus and supplemental payment to reward her performance. On a motion.from Mr. Nason and a second.from Mr. Harris, the VRS approved a performance bonus for the VRS Director

11 Virginia Page11of13 payable on October 16, 2017 and a supplemental payment made December 1, 2017, as authorized in the 2017 Appropriation Act. REPORT OF THE BENEFITS AND ACTUARIAL COMMITJ' OPEB Plans Group Trust Request/or Board Action: Approve Group Trust Document Governing Administration of Certain OPEBs Benefits and Actuarial Committee Charter Changes The Board received the Benefits and Actuarial Committee report of September 18, 2017 and placed it on file. Mr. Harris gave the report from the report from the Benefits and Actuarial (B & A) Committee. Staff advised the Committee that GASB 74 establishes financial reporting standards for state and local government OPEB plans, and GASB 75 requires that OPEB plans have certain accounting treatment if they are administered through trust arrangements. GASB 74 and 75 require different treatment ojopeb fonds not held in a trust, which would be very different from VRS 'present accounting for the pension plans. Outside benefits counsel recommended that a trust document be prepared that would govern the administration of the Basic Group Life Insurance Program, the Virginia Sickness and Disability Program, the Virginia Local Disability Program, the Health Insurance Credit and the Line of Duty Death and Health Benefits Fund. Outside counsel has advised that a trust document is not required for the pension plans because the combination of the Constitution of Virginia, Article X, Section 11, and Title 51.1 of the Code of Virginia provide the requisite language to assure compliance with GASB 67 and 68. On a motion from Mr. Harris and a second.from Ms. Cantor, the VRS approved the "Virginia OPEB Plans Group Trust" to govern the administration of the Basic Group Life Insurance Program, the Virginia Sickness and Disability Program, the Virginia Local Disability Program, the Health Insurance Credit, and the Line of Duty Death and Health Benefits Trust Fund to ensure compliance with GASB Statement No. 74. Mr. Harris reported that Staff provided the Committee with an overview of recommended changes to the Benefits and Actuarial Committee Charter to ensure the various governance documents are consistent. Staff shared with the Committee that similar recommended changes would be presented to the other committees and motions taken to accept the changes prior to presenting them to the Administration and Personnel Committee and the. A motion was passed to approve the recommended changes with one addition recommended by the Committee.

12 Virginia Page 12 of 13 GU Minimum and Rounding Rules Cavanaugh Macdonald Contract Renewal Next Committee Meeting REPORT OF THE DIRECTOR Final FY 2017 Roadmap Update Update of Petersburg payments YRS Report Given to the Commission on Employee Security and Pension Reform YRS Award for Auto-Escalation Campaign Staff advised that the GLJ minimum benefit amount discussed with the Committee in June was not rounded The correct rate is $8,111 instead of $8,110. No action is required by the Board. Staff noted that the Cavanaugh Macdonald contract will be renewed effective January 1, 2018 and will be modified to include GASB 74 and 75 actuarial work. Sta.ff advised that background checks for Cavanaugh Macdonald staff with access to VRS data are in progress. The Committee's next scheduled meeting is October 18th. The meeting will begin at 1:00 p.m. and will be held in the VRS Conference Room, Third Floor, 1111 E. Main Street. The actuaries will be presenting the results of the 2017 valuations which are used to set the contribution rates. Ms. Bishop reports that the Financial Literacy contract has been signed and that implementation meetings have started As of June 30th, the implementation for the public website was scheduled for Oct and will be added to the FY 2018 Roadmap. As of June 30th, Quality Monitoring remained in place. On the FY 2018 Roadmap this will be an ongoing activity. As of June 30th, and as discussed at the last Audit Committee meeting, this work stream remains behind schedule. Although considerable work has been completed, the current implementation date will be adjusted. The revised schedule and resource requirements will be discussed in upcoming Audit Committee and A&P Committee meetings. The new Roadmap was approved by the Board in August and the updated schedule is in the FY 2018 Roadmap. There was no new employer coverage. Petersburg continues to make progress on their payment plan which they have committed to complete by the end of the calendar year. They are current on teacher and LODA payments. The Commission on Employee Security and Pension Reform met on September 18'\ and Ms. Bishop provided the Board a copy of the presentation that she delivered. The information shared was well received and focus continues to be on the commitment to ensure that Board certified contribution rates continue to be funded. VRS recently held outreach sessions and received an award for its autoescalation campaign. Ms. Bishop noted that the outreach campaign

13 Vrrginia Page13 of 13 resulted in only a 3% auto-escalation opt-out rate compared to the industry standard of approximately 20%. MEETING ADJOURNED, -- v -- Chair

14 REPORT OF THE DEFINED CONTRIBUTION PLANS ADVISORY COMMITTEE For the Committee Meeting on Friday, September 8, 2017 The Defined Contribution Plans Advisory Committee met on Friday, September 8 th, and took up the following matters: Investments: Annual Investments Review Staff provided its annual investments review to the DCPAC that included a review of the DC Investment Belief Statements, an overview of the DCPAC duties and responsibilities as it relates to investments, and a review of Defined Contribution (DC) investment trends and best practices. Staff informed the Committee it does not have any recommended changes to the two DC investment policy statements (unbundled and bundled structures) that were both last updated February 9, Staff shared the annual investment review highlights for both the unbundled DC plan structure and the bundled DC plan structure. A bundled structure is used by two of the provider companies for ORPHE. Detailed information can be found in staff s DC Plans Advisory Committee Annual Investment Review document provided to the Committee in the Appendix and accompanying DC Plans Investments slide deck, both dated September 8, Custom Target Date Project Update Staff shared preliminary findings on the target date portfolio customization project, including regulatory and industry recommendations that should be considered with such an initiative. Staff informed the Committee: (1) The Hybrid Plan will be used when determining a custom glide path; (2) Based on current VRS demographic information age 65 will serve as the glide path s retirement age; and (3) Staff will continue to use a flat rather than a sloping glide path starting at the glide path s retirement age. Staff reminded the Committee the flat glide path decision was made by VRS with the assistance of Russell Investments Consulting in 2012 and no developments within this area of study warrant a change in VRS current philosophy. Staff stated if VRS determines a custom target date portfolio approach is viable from an operational and cost perspective, a custom approach would afford VRS the opportunity to address VRS demographic changes in a more nimble fashion than an off-the-shelf product. Staff apprised the Committee of next steps in the target date portfolio customization project, which will be shared as part of the December 2017 DCPAC meeting. Report of the Defined Contribution Plans Advisory Committee Meeting of September 8, 2017 Page 1

15 Administration: Administrative Reports and Communication Update Staff provided a review of the current Self-directed Brokerage Account requirements, and an overview of monthly reports, specifically highlighting the following: (1) Review of the current Self-directed Brokerage Account minimum core fund and transfer balance requirements for review and consideration based on lower average balances in the Hybrid Plan. The Committee requested additional data on Self-directed Brokerage Accounts from other states, as well as information on current investments for those using this option; (2) The total assets and number of accounts under management in the second quarter of 2017; (3) An update on the ICMA-RC 2017 Strategic Plan, with an emphasis on plan education, asset retention and maximizing savings; (4) An update on the second quarter 2017 communication initiatives, including an overview of National Security Week; (5) New plan adoptions and transition of assets for second quarter 2017, and upcoming plan adoptions for the third quarter of 2017; (6) The success of ICMA-RC s Realize Tour that came to the Commonwealth in early May 2017 to coincide with National Public Service Week, and overview of the 2018 Realize Gateway Tour; (8) An update on the Hybrid 457 voluntary participation rate, including the auto-escalation population and number of participants with maximum of voluntary contributions; and (9) Award recognition for Auto-Escalation Campaign from the International Academy of Interactive & Visual Arts (AIVA). ORPHE Update (1) Total ORPHE assets for the second quarter 2017, and assets by plan provider (DCP, TIAA, and Fidelity); (2) An update on the second quarter 2017 ORPHE enrollment statistics based on newlyeligible employees between the three providers; (3) An update of myvrs ORPHE enhancements completed in second quarter 2017, and upcoming initiatives for the fourth quarter of 2017; (4) Onboarding challenges with ORPHE employers in presenting accurate and updated information to eligible employees to assist in the decision-making process; (5) An update on the ORPHE Open Enrollment 2017 schedule; (6) An update on Fidelity s response to the DOL Fiduciary Rule, and VRS transition to an education-only service model; and (7) An update on the College of William and Mary s Opt-out process Report of the Defined Contribution Plans Advisory Committee Meeting of September 8, 2017 Page 2

16 Other Business: Motion-DCPAC Charter Changes Staff provided the Committee with an overview of recommended changes to the Committee Charter for the Defined Contribution Plans Advisory Committee (DCP AC) to ensure the various governance documents are consistent. Staff shared with the Committee that similar recommended changes would be presented to the other committees and motions taken to accept the changes prior to presenting them to the Administration and Personnel Committee and the. A motion was passed to approve the recommended changes. ICMA-RC Contract Renewal Staff apprised the Committee of the intent to exercise the first of two three-year renewals with ICMA-RC. Staff indicated they are satisfied with the level of service provided under the current contract terms, and advised the window of opportunity to undertake a formal bidding process prior to the existing contract term date of December 1, Staff shared that a bidding process would require significant agency resources and would add an additional layer of risk given current agency-wide efforts to migrate away from a mainframe to client-server technology platform. Proposed 2017 Meetings: The next meeting of the DCPAC will take place on December 7 th, from 10:30 a.m. to 1:30 p.m. Also, for those who are interested, the ORPHE Annual Employer Update is scheduled for September 21, 2017, but is not a meeting of the DCPAC. The DCPAC will also poll for 2018 meetings. That concludes my report to the Board. Submitted to the on. \ V Brett Hayes, Chair Defined Contribution Plans Advisory Committee Report of the Defined Contribution Plans Advisory Committee Meeting of September 8, 2017 Page3

17 Virginia Audit and Compliance Committee Committee Report to the Page 1 of 3 Report The Audit and Compliance Committee met on September 7, 2017 and discussed the following: EXIT CONFERENCE WITH THE AUDITOR OF PUBLIC ACCOUNTS (APA) ON THEIR EMPLOYER ASSURANCES AUDIT The APA reported that they have concluded their Employer Assurances audit work. This audit covers the data VRS prepares and supplies to employers and their auditors to support required financial reporting over pension plans under Government Accounting Standards Board (GASB) Statement No. 68. The APA reported they have issued unqualified audit opinions on all the Schedules of Employer Allocations and related information as prepared by VRS for GASB 68 purposes. The APA also discussed the audit and resource implications of implementing GASB 74, this year for the plan, and GASB 75, next year for employers. These statements address the financial reporting requirements for the other postemployment benefit plans administered by VRS. AUDIT REPORTS The Committee received four audit reports. The review of Actuarial Data and Services noted that effective processes existed to generate valid, accurate, and complete data used for annual actuarial valuations. Additionally, the examination validated that the fees paid under the contractual agreement with VRS s actuary were accurate. The review of Refunds, the first review since the refund payment process was enabled in myvrs, determined that refunds processing controls are appropriately designed and operating effectively. The On-site Review of Bank of New York Mellon found an appropriate operating environment and general controls to support the safeguarding of assets and recordkeeping processes at the Master Custodian. Further, the review validated that VRS and the Master Custodian had complied with their contractual agreement, including any related amendments. The Investment Balances and Performance Reporting examination noted that investment balances and performance reporting were accurate and agreed to the information recorded by the Master Custodian. Additionally, the review verified that performance information presented in the June 30, 2016 Popular Annual Financial Report (PAFR) was complete and accurate. PROPOSED REVISIONS TO THE AUDIT AND COMPLIANCE COMMITTEE CHARTER The Audit Director provided the Committee with an overview of proposed revisions to the Audit and Compliance Committee Charter to align the Charter with changes to the International Standards for the Professional Practice of Internal Auditing issued by the Institute of Internal Auditors, introduced in January 2017, and ensure the Charter s consistency with the various governance

18 Virginia Audit and Compliance Committee Committee Report to the Page 2 of 3 documents. The Audit Director noted that similar recommended changes for consistency with the governance documents would be presented to the other committees and motions taken by the respective committees to accept the changes prior to presenting them to the Administration and Personnel Committee and the in one group. After a brief discussion about the Committee s oversight roles and responsibilities relative to Enterprise Risk Management, a motion was passed to approve the recommended changes. PROPOSED REVISIONS TO THE INTERNAL AUDIT CHARTER Revisions to the Internal Audit Charter governing the Internal Audit Department were also presented to the Committee for review. As with the Committee Charter changes, the revisions were proposed to align the Charter with the 2017 International Standards for the Professional Practice of Internal Auditing issued by the Institute of Internal Auditors as well as to ensure consistency with the Board s other governing documents. A motion was passed to adopt these changes as presented. ANNUAL REPORT ON THE AUDIT RECOMMENDATION FOLLOW-UP SYSTEM (AFRUS) The Committee received the Annual Report on the Audit Recommendation Follow-Up (ARFUS) as of June 30, At the beginning of the year, ARFUS held five recommendations. Nine additional recommendations were added during the year. During the year, ten recommendations were represented as implemented, tested and released. As of June 31, 2017, there were four outstanding recommendations in ARFUS. INTERNAL AUDIT ANNUAL REPORT The Audit Director provided the Committee with a recap of the Department's accomplishments over the past year as well as a brief overview of the Department's initiatives and challenges for the coming year. She recognized the contributions of the internal audit team, noting she believes the Department is positioned well for the future. The Audit Director explicitly confirmed to the Committee that the VRS Internal Audit Department and its staff are organizationally independent of the activities they examine, and that the Department is adequately staffed. ANNUAL AND LONG-RANGE AUDIT PLAN PROGRESS AND PROPOSED FY 2018 AUDIT WORK PLAN The Committee received the annual audit plan results for the fiscal year ended June 30, 2017, along with the status of the long-range audit plan for the four years ending June 30, The Auditor Director noted that as of the conclusion of the first fiscal year of the long-range plan, the Department was on schedule to complete all of the work originally approved in the overall plan. The only changes are to the timing and/or duration of certain examinations to align resources with audit requirements. The Committee received the proposed audit plan for fiscal year 2018, which is a component of the longrange plan. The Audit Director noted that some adjustments to the plan have been made to reflect the

19 Vrrginia Audit and Compliance Committee Committee Report to the Page3 of 3 movement of examinations for the reasons previously noted. The Committee then approved the plan as presented and recommended that the plan be presented by the Audit Director to the for its consideration and approval. QUARTERLY REPORT ON FRAUD, WASTE AND ABUSE HOTLINE CASES A list of Fraud, Waste and Abuse Hotline complaints reported to Internal Audit via the Office of the State Inspector General during the period of May 1, 2017 to July 31, 2017 was presented to the Committee (2 in total). One allegation concerning non-compliant employment of retirees was partially substantiated and appropriate actions are being taken by management. The second allegation surrounded disability retirement and as of the date of the report was under review. Subsequently, it was determined that the allegation was unsubstantiated and the investigation was closed. MANAGEMENT'S QUARTERLY TRAVEL EXPENSE AND PER DIEM REPORT The Committee reviewed the quarterly travel expense and per diem report. REVIEW OF AGENCY OPERATING OBJECTIVES AND STANDARDS Internal Audit reviewed management's representations regarding the Agency Performance Outcomes and Agency Operating Standards for the fiscal year ended June 30, 2017, noting that no items came to its attention that indicated that the outcomes and standards were not met for the fiscal year. AUDIT DIRECTOR'S PERFORMANCE EVALUATION The Committee met in closed session to review the Audit Director's performance for the fiscal year ended June 30, Request for Board Action: Before you is a Request for Board Action to approve a bonus for the Audit Director due to her successful transition of the Department. The Committee recommends that the Board approve this RBA. I ask for a motion for the Board to approve this request. POLLING FOR THE 2018 MEETING SCHEDULE AND NEXT MEETING The Audit Director will poll the Committee via regarding 2018 meeting schedule and present the results at the Committee's next scheduled meeting, December 14, 2017 at 10 a.m. Respectfully submitted to the on. Ms. Diana F. Cantor, Vice-Chair Audit and Compliance Committee

20 REPORT OF THE ADMINISTRATION AND PERSONNEL COMMITTEE Meeting of The Administration and Personnel Committee met on and discussed the following: Requests for Board Action Review Revised Board Governance Policy and Committee Charters The Committee reviewed and discussed recommended staff amendments to the Board s Governance Policy and all committee charters. The Committee concurred in the amendments and will recommend them to the full Board for approval. Request for Board Action: Amend the Board s Governance Policy and all committee charters pursuant to the recommendations of staff and the Administration and Personnel Committee, in conjunction with a comprehensive review of the Board s Governance Policy and all committee charters. Requests for Board Action Regarding Compensation for and Approve Attainment of FY2017 APOs and Operation Standards Ms. Stanley-Smith briefed the Committee on the status of the FY2017 Agency Performance Outcomes (APOs) and Agency Operating Standards. The Committee discussed the FY2017 results and agreed that the APOs and the requisite number standards were met. The gain-sharing bonus percentage is 2.5% and the approximate cost for the FY2017 APO and gain-sharing bonus payments is $482, Request for Board Action: The VRS approves (i) the attainment of FY2017 APOs and Operating Standards and (ii) a lump-sum bonus equal to 2.5% of salary for eligible administrative employees and eligible Investment Department operations and administration employees. Requests for Board Action Review and Approve Performance Bonuses for Eligible Administrative and Investment Operations and Administration Employees Ms. Stanley-Smith presented a request to approve individual lump-sum performance bonuses for eligible Administrative and Investment Department operations and administration employees who received an overall rating of exceptional or exceeds, with a 2% bonus for exceeding expectations and a 4% bonus for exceptional performance. The approximate total cost for the FY2017 bonus payments is $333, The bonuses are paid in accordance with the Administration Pay Plan and the Investment Operations and Administration Staff Pay Plan. Request for Board Action: The VRS approves performance lump-sum bonuses for eligible administrative employees and eligible Investment Department operations and administration employees. Requests for Board Action Reappointment of IAC Members The A&P Committee recommends reappointments for Hance West and W. Bryan Lewis for additional two-year terms. Report of the A&P Committee Meeting of Page 1 of 2

21 Request for Board.Action: The VRS reappoints to the Investment Advisory Committee: Hance West for a two-year term ending December 31, 2019, and W. Bryan Lewis for a two-year term ending March 31, Requests for Board Action Regarding Compensation for Investment Professionals and Director (Closed Session) The Committee met in closed session to discuss FY2017 Incentive Pay for Investment Professionals. Mr. Schmitz reviewed the current and historic VRS fiscal year returns, excess returns versus the total fund benchmark; the incentive plan mechanics; significant Investment Department accomplishments and FY2017 returns by program; as well as historical performance versus custom benchmark by program. He reviewed quantitative multipliers FY2016 versus FY2017, and commented on qualitative assessments of staff. The Committee voted to recommend approval of the RBA to the Board. Request for Board.Action: The VRS approves payment of an incentive amount of $6,757, for 2017 to VRS investment professionals as authorized by the Investment Professionals Pay Plan. The Committee met in closed session to discuss to discuss the VRS Director's salary supplement. The Committee is very pleased with the performance of the Director and recommends a bonus and supplemental payment to reward her performance. Request/or Board Acdon: The VRS approves a performance bonus for the VRS Director payable on October 16, 2017 and a supplemental payment made December 1, 2017, as authorized in the 2017 Appropriations Act. Respectfully submitted to the on. <~--- Mitchell L. Nason, Chair Administration and Personnel Committee Report of the A&P Committee Meeting of Page2 of2

22 REPORT OF THE BENEFITS AND ACTUARIAL COMMITTEE For the Committee Meeting on Monday, September 18, 2017 The Benefits and Actuarial Committee met on Monday, September 18 th, and took up the following matters: OPEB Plans Group Trust Staff advised the Committee that GASB 74 establishes financial reporting standards for state and local government OPEB plans, and GASB 75 requires that OPEB plans have certain accounting treatment if they are administered through trust arrangements. GASB 74 and 75 require different treatment of OPEB funds not held in a trust, which would be very different from VRS present accounting for the pension plans. Outside benefits counsel recommended that a trust document be prepared that would govern the administration of the Basic Group Life Insurance Program, the Virginia Sickness and Disability Program, the Virginia Local Disability Program, the Health Insurance Credit and the Line of Duty Death and Health Benefits Fund. Outside counsel has advised that a trust document is not required for the pension plans because the combination of the Constitution of Virginia, Article X, Section 11, and Title 51.1 of the Code of Virginia provide the requisite language to assure compliance with GASB 67 and 68. The Committee recommends that the Board approve the following action, and I so move that: Request for Board Action: The VRS approves the Virginia OPEB Plans Group Trust to govern the administration of the Basic Group Life Insurance Program, the Virginia Sickness and Disability Program, the Virginia Local Disability Program, the Health Insurance Credit, and the Line of Duty Death and Health Benefits Trust Fund to ensure compliance with GASB Statement No. 74. Benefits and Actuarial Committee Charter Changes Staff provided the Committee with an overview of recommended changes to the Benefits and Actuarial Committee Charter to ensure the various governance documents are consistent. Staff shared with the Committee that similar recommended changes would be presented to the other committees and motions taken to accept the changes prior to presenting them to the Administration and Personnel Committee and the. A motion was passed to approve the recommended changes with one addition recommended by the Committee. Informational Items GLI Minimum and Rounding Rules Staff advised that the GLI minimum benefit amount discussed with the Committee in June was not rounded. The correct rate is $8,111 instead of $8,110. No action is required by the Board. Cavanaugh Macdonald Contract Renewal Staff noted that the Cavanaugh Macdonald contract will be renewed effective January 1, 2018 and will be modified to include GASB 74 and 75 actuarial work. Staff advised that background checks for Cavanaugh Macdonald staff with access to VRS data are in progress. Report of the Benefits and Actuarial Committee Meeting of September 18, 2017 Page 1