Minutes. Board of Trustees Meeting Minutes April 26, 2017 Page 1 of 12

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1 Board of Trustees April 26, 2017 Page 1 of 12 Minutes The Virginia Retirement System Board of Trustees held its regular meeting on April 26, 2017 at the Bank of America Building, 1111 East Main Street, Richmond, Virginia with the following members present: Robert L. Greene, Chair Diana F. Cantor, Vice Chair Hon. J. Brandon Bell, II Wallace G. Harris W. Brett Hayes William H. Leighty Joseph W. Montgomery (entered at 10:28 a.m.) Mitchell L. Nason Troilen G. Seward Also present were: Trish Bishop, Ron Schmitz, John Alouf, Stephen Adelaar, Rory Badura, Farley Beaton, Parham Behrooz, Richard Brooks, Jeanne Chenault, Michael Cooper, Harriet Covey, Jordan Evans, Barry Faison, Josh Fox, Bryan Gardiner, Brian Goodman, J. T. Grier, Dane Honrado, K.C. Howell, Robert Irving, Ross Kasarda, LaShaunda King, Matt Lacy, Steve McClelland, Scott Mootz, Laurie Nelson, Walker Noland, Andrea Peeks, Steve Peterson, Laura Pugliese, Jennifer Schreck, Capri Stanley-Smith, Dan Whitlock and Cindy Wilkinson. Guests present were: Liz Myers with the Office of the Attorney General; Kimberly Sarte and Joe McMahon with the Joint Legislative Audit and Review Commission; Sarah Herzog with the Senate Finance Committee; Mary Jo Fields and Janet Areson with the Virginia Municipal League; Kristy Scott with the Auditor of Public Accounts; Jose Fernandez, Eric Gary, and John Garrett with Cavanaugh Macdonald Consulting, LLC; and Eric Belfi, Jonathan Gardner, Carol Villegas, and Francis McConville with Labaton Sucharow, LLC. Mr. Greene called the meeting to order at 10:00 a.m. APPROVAL OF MINUTES Upon a motion of Mr. Leighty, with a second by Ms. Cantor, the Board approved the minutes of the Board of Trustees meeting of February 9, 2017 and the retreat minutes of March 14 and March 15, 2017.

2 Board of Trustees April 26, 2017 Page 2 of 12 CIO REPORT Mr. Schmitz began his report with a market update. He noted the global economies continue to show strength, with the emerging economies leading the way. He also noted that geopolitical risks seemed to be increasing, especially around the Korean peninsula. Next, Mr. Schmitz discussed asset allocation. He noted VRS is maintaining a mildly defensive position. Specifically, the portfolio is underweight in public equity, fixed income, real assets and private equity, and overweight in credit strategies, cash and the Strategic Opportunities Portfolio. Mr. Schmitz then reviewed plan performance. He noted the total fund was outperforming the benchmark for all time periods. In addition, he noted all asset classes except for Private Equity were outperforming their benchmarks for the five year period. Mr. Schmitz also discussed fund volatility, tracking error, and information ratio all of which are within Board approved levels. In conclusion, Mr. Schmitz reviewed the New Investments and Terminations Report, the Quarterly SWAM Report and the Quarterly External Investment Manager Referral Report. Mr. Greene thanked Mr. Schmitz for his report. REPORT OF THE DEFINED CONTRIBUTION PLANS ADVISORY COMMITTEE (DCPAC) Administration The Board received the Defined Contribution Plans Advisory Committee report of March 23, 2017 and placed it on file. Mr. Hayes advised that the Committee received an overview of monthly reports, specifically highlighting the following: The total assets and number of accounts under management in the fourth quarter of 2016; New information on unique participants who may have a balance in one or multiple plans; New plan adoptions for fourth quarter 2016 and first quarter 2017, and upcoming plan adoptions in the second quarter of 2017; ICMA-RC annual statistics, including participant contact summary information highlighting field services staff activities throughout the Commonwealth, and call center and web usage statistics;

3 Board of Trustees April 26, 2017 Page 3 of 12 An update on the fourth quarter 2015 and fourth quarter 2016 communication initiatives, including statement and account access messaging, targeting those participants with a single investment option; ICMA-RC s Realize Retirement Tour coming to the Commonwealth in May 2017 which coincides with National Public Service Week, including tour stops in Richmond, Tidewater, and Northern Virginia; The DCP rebranding initiative planned for Summer 2017, and the intent to carry the DCP logo across various communication materials in the unbundled line-up; and The hybrid paycheck calculator that includes functionality and parameters for participants to determine an estimated payroll deduction based on voluntary contribution variables. Auto Escalation ORPHE Transition Update 2016 NAGDCA Survey Results Investments Mr. Hayes reported that the Committee received an update on auto-escalation and the impact on the Hybrid Retirement Plan as of January 1, 2017, including those participants who took active control and made a specific election, as well as those who opted out of auto-escalation. In addition, the Committee was also advised that DC Plans is exploring ways to encourage members to increase contributions over a predetermined period of time, including account access messaging upon login, and options to prompt an active election. Mr. Hayes reported that staff advised that VRS completed the necessary contract amendments with TIAA and Fidelity regarding pricing and other contract provisions. Communications to affected ORPHE participants were sent by Fidelity in December 2016 and TIAA in January At the time of the meeting, quarterly statements had not yet been distributed, but reflect a flat fee credit and corresponding debit. Neither provider reported any participant complaints or issues as a result of the updated contract provisions and transition communications. Mr. Hayes advised that the Committee received an overview of NAGDCA s benchmarking survey results, including administrative and investment findings. Mr. Hayes reported that staff provided an overview of the January 2017 performance reports to the DCPAC. Staff apprised the Committee that BlackRock will be making changes to their target

4 Board of Trustees April 26, 2017 Page 4 of 12 date portfolios underlying domestic equity component in an effort to reduce transaction costs and tracking errors at the end of March. In addition, staff provided a draft Fidelity ORPHE performance report because Fidelity did not link returns of Class K shares to standard fund returns as instructed by VRS during contract negotiations. Mr. Hayes noted that staff escalated the need to link returns and will provide the DCPAC with a Fidelity performance report when the situation is resolved. Legislative Update Future Meetings Next, Mr. Hayes reported that the Committee received an update on the Commission on Employee Retirement Security and Pension Reform, including proposed changes to the Hybrid Retirement Plan and legislation regarding a stand-alone optional defined contribution retirement plan (HB 2251), both of which did not pass in the General Assembly. Last, Mr. Hayes stated the next meeting of the DCPAC will take place on May 17th, with future meetings on September 8th and December 7th from 10:30 a.m. to 1:30 p.m. In addition, the ORPHE Annual Employer Update is scheduled for September 21, 2017, but is not a meeting of the DCPAC. Mr. Greene thanked Mr. Hayes for the report. REPORT OF THE ADMINISTRATION AND PERSONNEL COMMITTEE Request for Board Action: Reappointment of IAC Members Absolute Return Adjustment The Board received the report of the Administration and Personnel Committee of April 24, 2017 and placed it on file. Upon motion by Ms. Cantor, with a second by Mr. Harris, the Board approved the following action: The Board approves the following reappointments to the Investment Advisory Committee: Michael Beasley is reappointed to an additional two-year term that expires June 20, 2019, Thomas Gayner is reappointed to an additional two-year term that expires February 19, 2019 and Rod Smyth is reappointed for an additional two-year term that expires June 20, Mr. Greene advised that Mr. Schmitz discussed the options for consideration in response to the conclusions of the December 2016 JLARC report on the absolute return provisions of the VRS Investment Professionals Pay Plan. Mr. Greene reported that the Committee requested that, in response to JLARC s request, language be added to the Pay Plan to explain in more detail the

5 Board of Trustees April 26, 2017 Page 5 of 12 purpose and impact of the absolute return provision and that the proposed language be provided to the Committee for review at its June meeting, but that the provision not be changed. Request for Board Action: Women and Minority (WAM Policy) Mr. Greene reported that Mr. Schmitz and Mr. Howell presented and discussed a formal Women and Minority (WAM) policy created by the Investment staff. Upon motion of Mr. Harris, with a second by Mr. Nason, the Board approved the WAM policy as presented. VRS Diversity and Inclusion Changes to the Administrative Pay Plan Salary Scales and Salary Increase for Eligible Full-time and Wage VRS Employees Request for Board Action: Approve Increase to Salary Scales in the Administrative Pay Plan and a Salary or Base Rate Increase for Eligible Full-time and Wage VRS Employees Budget Variance Report REPORT OF THE BENEFITS AND ACTUARIAL COMMITTEE Mr. Greene reported that Ms. Bishop presented a Demographic Summary to show the composition of VRS Administrative staff and how it compares with the classified state workforce as a whole. Mr. Greene noted that Ms. Bishop s conclusion was that VRS compares favorably to the classified state workforce and will work to create opportunities for career ladders to move employees in supporting roles to higher levels. This information expanded upon the report she gave the Committee on the VRS Diversity and Inclusion Program in January. Next, Mr. Greene reported that Ms. Bishop briefed the Committee on compensation changes for staff relating to the 2017 Appropriation Act which includes providing a 3% across the board salary increase for eligible full-time and wage employees, and requires the Department of Human Resource Management (DHRM) to increase salary bands in the Commonwealth Classified Compensation Plan by 3% plus an additional $6,793 (to account for the State Police adjustment). Upon motion by Mr. Nason, with a second by Ms. Cantor, the Board approved the following action: The VRS Board of Trustees approves the 3% increase (plus $6,793 for each grade maximum) to salary scales in the Administrative Pay Plan, and a 3% salary or base pay rate increase for eligible full-time and wage VRS employees. In conclusion, Mr. Greene reported that Mr. Faison presented the July 2016 to March 2017 Budget Variance Report. The Board received the report of the Benefits and Actuarial Committee of April 24, 2017 and placed it on file.

6 Board of Trustees April 26, 2017 Page 6 of 12 Quadrennial Experience Study of Plan Assumptions and Methods Mr. Harris advised that the Committee received information from Cavanaugh Macdonald Consulting on the experience study results and recommended changes. Mr. Harris noted that the study is required by statute to be performed at least once every four years to validate assumptions and make any necessary adjustments based on a comparison of actual VRS experience to the expected experience based on current assumptions. The study reviews economic and demographic assumptions, actuarial methods, and funding policies providing gain/loss analysis over the prior 4 years as well as cost impact analysis of any proposed changes. Mr. Harris advised that the changes that are being proposed are mostly related to demographic assumptions, with the most impactful changes related to moving to a newer mortality table which includes additional margins for future mortality improvement. In addition to the mortality table change, proposed changes were also made to retirement, termination, and disability decrements. Mr. Harris reported that Cavanaugh Macdonald is also proposing changes to the actuarial method used to develop the plan s normal cost rates. The first change would adjust the covered payroll used to create the contribution rate as a percentage of pay by removing compensation related to members expected to leave during the year. The second method change makes an adjustment to reflect the increasing hybrid payroll that occurs between the rate setting valuation and the actual collection of contributions. Both of these method changes are a more conservative assumption which will increase the amount of contributions being collected to cover plan costs. In addition to these changes, smaller adjustments were also made to assumptions specific to other post-employment benefits (OPEBs) associated with the LODA program, the health insurance credit plans, and the VSDP and VLDP disability plans. Last, Mr. Harris reported the economic assumptions of the plan were also reviewed, with no proposed changes to price inflation, wage inflation, payroll growth, or the long-term investment rate of return. Based on a 10-year capital market outlook provided by the VRS investment group, the long term expected rate of return of the fund was estimated to be approximately 6.84% using a 2.50% inflation rate. The best estimate range of a reasonable return around the 25th and 75th percentiles was from 5.87% to 7.79%,

7 Board of Trustees April 26, 2017 Page 7 of 12 respectively. The current return assumption of 7.0% is within a reasonable range, but will continue to be monitored in the coming months as additional studies are scheduled for 2017 including plan stress testing. Request for Board Action: Actuarial Assumptions Based on 7/1/12 to 6/30/16 Experience Study Approximate Normal Cost Rates for Purchase of Prior Service Next Committee Meeting REPORT OF THE AUDIT AND COMPLIANCE COMMITTEE VRS 2016 CAFR Audit Employer Assurances (GASB 68) Upon motion of Mr. Leighty, with a second by Mr. Nason, the Board approved the following action: The VRS Board of Trustees approves its plan actuary s recommendations as presented in the Experience Study (7/1/2012 to 6/30/2016) to change various assumptions, including: certain demographic assumptions regarding mortality rates, retirement rates, withdrawal rates, and disability rates; method changes regarding development of normal cost rates and reflection of increasing hybrid plan payroll, as well as various Other Post- Employment Benefits (OPEB) specific assumptions related to the Line of Duty Plan, Health Insurance Credit program, and the VSDP and VLDP disability programs. Next, Mr. Harris reported that the approximate normal cost rates will be updated and brought before the Committee for approval at its next meeting, following Board approval of new recommended assumptions. In conclusion, Mr. Harris reported that the next meeting of the Committee will be June 7, 2017 at 1:30 p.m. The Board received the report of the Audit and Compliance Committee of March 2, 2017 and placed it on file. Mr. Leighty reported that the Auditor of Public Accounts (APA) completed their audit of the 2016 VRS Comprehensive Annual Financial Report (CAFR) and had issued an unmodified opinion on VRS's financial statements. Mr. Leighty also noted that as part of their audit, a report on internal controls over financial reporting was issued, which contained a single finding regarding the classification of cash and investments as reported to the Department of Accounts for presentation in the Commonwealth s CAFR. Mr. Leighty reported that the APA provided an overview of its upcoming examinations and resulting reports designed to provide participating employers and their auditors the assurances

8 Board of Trustees April 26, 2017 Page 8 of 12 necessary to prepare their own annual financial statements in accordance with Governmental Accounting Standards Board Statement (GASB) No. 68. Mr. Leighty advised that in this regard, the APA will issue the following three reports for the period of July 1, 2015 June 30, 2016: 1. Report on Census Data Maintained by the Plan: To express an opinion on whether assertions regarding the completeness and accuracy of census data provided to the actuary are fairly stated in all material respects. 2. Reports for Agent Multiple Plan Employers: To form an opinion and report on the Schedule of Changes in Fiduciary Net Position as a whole and on each employer including related notes to the schedule. 3. Reports for Cost-Sharing Employers: To form an opinion and report on the schedule of Employer Allocations and related notes to the schedule, and to form an opinion on the Schedule of Pension Amounts by Employer and related notes to the schedule. Mr. Leighty noted the APA anticipates completing its audit work and issuing its audit opinions on these matters on or about July 31, Audit Reports Next, Mr. Leighty advised that the Committee received the following two audit reports: The Mainframe General Controls review noted that that the overall control environment for mainframe computer processing was adequate. Additionally, the report contained one written recommendation where controls could be enhanced with regard to contract employees. The Global Public Equity review determined that Management s administration of the portfolio complies with its Investment Policy Statement. Additionally, VRS is identifying, monitoring and minimizing the various risks associated with in the Global Public Equity Portfolio. Finally, the related accounting transactions were valid, accurate, complete and recorded timely.

9 Board of Trustees April 26, 2017 Page 9 of 12 Annual Report on the Code of Ethics Quarterly Review on Modernization Program Phase 4 Audit Plan Progress Report Review of Cost of Living Adjustments Mr. Leighty reported that the Committee received an update on the Code of Ethics and Professional Conduct Policies as required by the Audit and Compliance Committee Charter and reminded the Committee that due to an unexpected upgrade by the Department of Human Resource Management to its online learning software the deadline for Benefits and Operations personnel to complete the annual code of ethics training was extended to December 31, Mr. Leighty then reported that all VRS staff had completed the annual code of ethics training. Mr. Leighty advised that the Committee received a report on the Modernization Program - Phase 4 through January 27, 2017, along with an update as of February 28, 2017, via a flash report. Mr. Leighty noted the Phase 4 scope, budget and schedule were represented as progressing in accordance with the re-baselined schedule. However, management acknowledged that planning for the Retirement work stream is undergoing an extended review due to the complexity and significance of the functionality on VRS s operations. Management is presently reviewing to determine the necessary developmental and implementation steps and will present the Committee with an updated perspective on the work stream and any potential impacts to the planned schedule during the June meeting. Internal Audit then presented their Quarterly Review as of February 1, 2017 and indicated nothing had come their attention to cause them to believe that the schedule, budget or scope of the Modernization Program - Phase 4 as reflected in Management s Modernization Quarterly Report was not progressing as represented, including the thorough review of the Retirement work stream. Mr. Leighty advised that the Internal Audit Director reported on the progress on the annual Audit Plan as of December 31, 2016, the mid-point of the fiscal year. He noted while there were some necessary changes to the planned timing of certain examinations, Internal Audit expects to complete a similar amount of work as called for in the original audit plan. Mr. Leighty reported that Internal Audit reviewed the proposed "Cost of Living Adjustments" as calculated by VRS's actuary, Cavanaugh Macdonald Consulting, LLC. The adjustments will become effective July 1, 2017.

10 Board of Trustees April 26, 2017 Page 10 of 12 Fraud, Waste and Abuse Hotline Quarterly Report Travel Expense and Per Diem Quarterly Report Audit Director Performance Plan Next, Mr. Leighty reported that three Fraud, Waste and Abuse Hotline complaints reported to VRS via the Office of the State Inspector General during the period of November 1, 2016 to January 1, 2017 were presented to the Committee. Two of the alleged complaints were not substantiated and the third remains under investigation. Mr. Leighty advised that the Committee reviewed the quarterly travel expense and per diem report. Last, Mr. Leighty advised that the Committee discussed and approved the Audit Director's performance plan for the fiscal year ended June 30, Mr. Greene thanked Mr. Leighty for his report. REPORT OF THE DIRECTOR New Coverage Agency Roadmap Update Ms. Bishop provided a report on new coverage, noting that Bedford Regional Water Authority elected to participate in the Tax-deferred Purchase of Prior Service, Capital Region Airport Commission elected to participate in the 1.85% multiplier for the Enhanced Hazardous Duty Benefit, and BVU Authority and the Town of Vienna elected to participate in the 457 Commonwealth of VA Deferred Compensation Plan. Ms. Bishop provided a status report on the Agency Roadmap. She noted that a lot of tasks have been completed, however, there are still some areas marked as yellow and one item marked as red which require additional focus. Plans are in place to ensure satisfactory completion of all tasks. A suggestion was raised relating to the item list of the Agency Roadmap report. It was suggested that a color code be added in the item list to distinguish modernization items and items that are processed annually. City of Petersburg Mr. Harris noted that the City of Petersburg has issued an RFP to outsource its entire human resources operation. Ms. Bishop reported that The Bobb Group, which is the group assisting the City of Petersburg during this financially stressful situation, has set up a payment plan for the City employer group. She noted the schools have also agreed to a payment plan and they should have their payments caught up by June 30 and the City

11 Board of Trustees April 26, 2017 Page 11 of 12 should have their payments caught up by December 31. LODA payments are expected to be current by the end of May. VRS Women s Leadership Event Renovation Project LODA Update Pending Litigation (Closed Session) Ms. Bishop reported that March was Women s History month and VRS held its first Women s Leadership Panel which consisted of Senator Jennifer McClellan, Secretary Nancy Rodrigues, and Secretary Dietra Trent. She noted that the event was a huge success. Ms. Bishop reported that the renovation project at 1200 E. Main Street has made significant strides in moving staff into their permanent locations. She noted that the 3 rd floor executive offices and the offices on the 2 nd and ground floors of the 1204 side of the building are complete and occupied. Employees on the 1 st floor are being relocated so that work can began in that area. Ms. Bishop reported that this is a partnership between DHRM and VRS, which will take over the program July 1 from the Department of Accounts. She noted that DHRM mailed packets to LODA participants March 27and enrollment forms were due April 14. VRS is developing its communications and outreach efforts, which will include a new LODA website, a guide for participants, videos and other outreach to employers, stakeholders and participants. Mr. Bell moved, with second by Mr. Nason, that the Virginia Retirement System Board of Trustees convene a closed meeting under the Virginia Freedom of Information Act for the purpose of consultation with legal counsel about actual, pending litigation pursuant to the exemption contained in Virginia Code (A)(7). Upon return to open meeting, Mr. Bell moved, with second by Ms. Cantor, the following resolution: WHEREAS, the VRS Board of Trustees convened a closed meeting on this date pursuant to an affirmative recorded vote and in accordance with the provisions of The Virginia Freedom of Information Act; and WHEREAS, of the Code of Virginia requires a certification by the Board that such closed meeting was conducted in conformity with Virginia law;

12 Virginia Retirement System Board of Trustees Aprtl 26, 2017 Page12of12 NOW, THEREFORE, BE 11' RESOLVED, that the Board certifies that, to the best of each member's kmnvledge, (i) only public business matters lawfolly exempted from open meeting requirement.y under!his chapter were discussed in 1he closed meeting to which this certification resolution applies, and (ii) only such public business matters as were identified in the motion by which the closed meeting way convened were heard, discussed or considered by the Bo(l]'d The Board approved the resolution upon the following roll call vote: J.1r. Greene: Aye Ms. Cantor: Aye Mr. Bell: A)'-e 1\u. Harris: Aye Mr. Hayes: Aye lvh. I.eighty: Aye Mr. Montgomery: Aye Mr. Nason: A)''ll 1\,fs. Seward: Aye ADJOURNMENT Thete being no further business to discuss, the Board meeting adjourned at approximately 12:22 p.m.

13 REPORT OF THE DEFINED CONTRIBUTION PLANS ADVISORY COMMITTEE For the Committee Meeting on Thursday, March 23, 2017 The Defined Contribution Plans Advisory Committee met on Thursday, March 23 rd, and took up the following matters: Administration: Administrative Reports and Communication Update Staff provided an overview of monthly reports, specifically highlighting the following: (1) The total assets and number of accounts under management in the fourth quarter of 2016; (2) New information on unique participants who may have a balance in one or multiple plans; (3) New plan adoptions for fourth quarter 2016 and first quarter 2017, and upcoming plan adoptions in the second quarter of 2017; (4) ICMA-RC annual statistics, including participant contact summary information highlighting field services staff activities throughout the Commonwealth, and call center and web usage statistics; (5) An update on the fourth quarter 2015 and fourth quarter 2016 communication initiatives, including statement and account access messaging, targeting those participants with a single investment option; (6) ICMA-RC s Realize Retirement Tour coming to the Commonwealth in May 2017 which coincides with National Public Service Week, including tour stops in Richmond, Tidewater, and Northern Virginia; (7) The DCP rebranding initiative planned for Summer 2017, and the intent to carry the DCP logo across various communication materials in the unbundled line-up; and (8) The hybrid paycheck calculator that includes functionality and parameters for participants to determine an estimated payroll deduction based on voluntary contribution variables. Auto-Escalation Staff provided an update on auto-escalation and the impact on the Hybrid Retirement Plan as of January 1, 2017, including those participants who took active control and made a specific election, as well as those who opted out of auto-escalation. Staff advised that DC Plans is exploring ways to encourage members to increase contributions over a predetermined period of time, including account access messaging upon login, and options to prompt an active election. Report of the Defined Contribution Plans Advisory Committee Meeting of March 23, 2017 Page 1

14 ORPHE Transition Update Staff advised that VRS completed the necessary contract amendments with TIAA and Fidelity regarding pricing and other contract provisions. Communications to affected ORPHE participants were sent by Fidelity in December 2016 and TIAA in January At the time of the meeting, quarterly statements had not yet been distributed, but reflect a flat fee credit and corresponding debit. Neither provider reported any participant complaints or issues as a result of the updated contract provisions and transition communications. NAGDCA 2016 Survey Results Perspectives in Practice Benchmarking Tool Staff provided an overview of NAGDCA s benchmarking survey results, including administrative and investment findings. Investments: Performance Reports Staff provided an overview of the January, 2017 performance reports to the DCPAC. Staff apprised the Committee that BlackRock will be making changes to their target date portfolios underlying domestic equity component in an effort to reduce transaction costs and tracking error at the end of March. Staff provided a draft Fidelity ORPHE performance report because Fidelity did not link returns of Class K shares to standard fund returns as instructed by VRS during contract negotiations. Staff have escalated the need to link returns and will provide the DCPAC with a Fidelity performance report when the situation is resolved. Other Staff distributed a white paper from DST entitled, Collective Investment Trusts A Perfect Storm. Legislative Update: Staff provided an update on the Commission on Employee Retirement Security and Pension Reform, including proposed changes to the Hybrid Retirement Plan and legislation regarding a stand-alone optional defined contribution retirement plan (HB 2251), which did not pass in the General Assembly. Staff noted that HB 1768, which did pass, requires VRS to adopt a formal policy to develop and regularly report sensitivity analyses and stress testing. Proposed 2017 Meetings: The next meeting of the DCPAC will take place on May 17 th, with future meetings on September 8 th and December 7th from 10:30 a.m. to 1:30 p.m. Also, for those who are interested, the Report of the Defined Contribution Plans Advisory Committee Meeting of March 23, 2017 Page 2

15 ORPHE Annual Employer Update is scheduled for September 21,2017, but is not a meeting of thedcpac. That concludes my report to the Board. Submitted to the Board of Trustees on April 26, Brett Hayes, Chair Defined Contribution Plans Advisory Committee Report of tile Defined Contribution Plans Advisory Committee Meeting of March 23, 2017 Page 3

16 REPORT OF THE ADMINISTRATION AND PERSONNEL COMMITTEE Meeting of April 24, 2017 The Administration and Personnel Committee met on April 24, 2017 and discussed the following: Reappointment of IAC Members The A&P Committee recommends reappointments for Michael Beasley, Thomas Gayner and Rod Smyth for additional 2-year terms. Request for Board Action: The Board reappoints Michael Beasley for a two-year term ending June 20, 2019, Thomas Gayner for a two-year term ending February 19, 2019 and Rod Smyth for a twoyear term ending June 20, Absolute Return Adjustment Discussion Mr. Schmitz discussed the options for consideration in response to the conclusions of the December 2016 JLARC report on the absolute return provisions of the VRS Investment Professionals Pay Plan. He presented four Absolute Return Adjustment options and the pros and cons relating to each and also an Appendix of background information and illustrative examples of each option. The Board voted to receive the report and recommended that the absolute return provisions in the Investment Professionals Pay Plan remain unchanged due to the robust and extensive process used in their development in response to the economic downturn. The Committee requested that, in response to JLARC s request, language be added to the Pay Plan to explain in more detail the purpose and impact of the absolute return provision and that the proposed language be provided to the Committee for review at its June meeting. Women and Minority (WAM) Policy Mr. Schmitz presented the formal WAM Policy created by the Investment staff. Details and practical aspects of the policy were clarified by K.C. Howell and a discussion of the Policy followed. After discussion the Committee voted to recommend approval of the WAM Policy. VRS Diversity and Inclusion Ms. Bishop presented a Demographic Summary to show the composition of VRS Administrative staff and how it compares with the classified state workforce as a whole. This expanded upon the report she had given to the Committee on the VRS Diversity and Inclusion Program in January. Her conclusion was that VRS compares favorably to the classified state workforce and will work to create opportunities for career ladders to move employees in supporting roles to higher levels. She noted that VRS is casting a wide net to include the best overall pool for recruitment. Changes to the Administrative Pay Plan Salary Scales and Salary Increase for Eligible Full-time and Wage VRS Employees Ms. Bishop briefed the Committee on the Request for Board Action (RBA) relating to compensation issues. The 2017 Appropriation Act provides for a 3% across the board salary increase for eligible full- Report of the A&P Committee Meeting of April 24, 2017 Page 1 of 2

17 time and wage employees, and requires the Department of Human Resource Management (DHRM) to increase salary bands in the Commonw~th Classified Compensation Plan by 3% plus an additional $6,793 (to account for the State Police supplement). This RBA requests that the Board approve the same increases to the VRS Administrative Pay Plan salary scales and a 3 % salary or base rate increase for eligible full-time and wage employees. The Committee voted to recommend approval of the RBA to the Board. Request for Board Actio11: The VRS Board of1~ 1,.ftees appr<nles the 3% increase (plus $6,793 for each grade maximum) 10 salary scales in the Administrative Pay Plan, and a 3% salary or base pay rate increase for eligible fall-time and wage VRS employees. Budget Variance Report Mr. Faison presented the July 2016 to March 2017 Budget Variance Report. lbe report reflected VRS ye11r to date numbers. Respectfully submitted to the Boaxd of Trustees on April 26, ~ ---obert L. Greene, Chair Administration and Personnel Committee Report of the A&P Committee Meeting of April 24, 2017 Page2 of2

18 REPORT OF THE BENEFITS AND ACTUARIAL COMMITTEE For the Committee Meeting on Monday. April 24, 2017 The Benefits and Actuarial Committee met on Monday, April 24 th, and took up the following matters: Actuarial Valuations Trish Bishop and Rory Badura introduced staff from Cavanaugh Macdonald Consulting, LLC, the Plan Actuary. Mr. Fernandez, Mr. Garrett, Mr. Gary, and Mr. Yonz presented the experience study results and recommended changes. The study is required by statute to be performed at least once every four years to validate assumptions and make any necessary adjustments based on a comparison of actual VRS experience to the expected experience based on current assumptions. The study reviews economic and demographic assumptions, actuarial methods, and funding policies providing gain/loss analysis over the prior 4 years as well as cost impact analysis of any proposed changes. The changes that are being proposed are mostly related to demographic assumptions, with the most impactful changes related to moving to a newer mortality table which includes additional margins for future mortality improvement. In addition to the mortality table change, proposed changes were also made to retirement, termination, and disability decrements. In addition to the demographic changes, Cavanaugh Macdonald is also proposing changes to the actuarial method used to develop the plan s normal cost rates. The first change would adjust the covered payroll used to create the contribution rate as a percentage of pay by removing compensation related to members expected to leave during the year. The second method change makes an adjustment to reflect the increasing hybrid payroll that occurs between the rate setting valuation and the actual collection of contributions. Both of these method changes are a more conservative assumption which will increase the amount of contributions being collected to cover plan costs. In addition to these changes, smaller adjustments were also made to assumptions specific to other post employment benefits (OPEBs) associated with the LODA program, the health insurance credit plans, and the VSDP and VLDP disability plans. The economic assumptions of the plan were also reviewed, with no proposed changes to price inflation, wage inflation, payroll growth, or the long-term investment rate of return. Based on a 10-year capital market outlook provided by the VRS investment group, the long term expected rate of return of the fund was estimated to be approximately 6.84% using a 2.50% inflation rate. The best estimate range of a reasonable return around the 25 th and 75 th percentiles was from 5.87% to 7.79%, respectively. The current return assumption of 7.0% is within a reasonable range, but will continue to be monitored in the coming months as additional studies are scheduled for 2017 including plan stress testing. The Committee recommends that the Board approve the following action, and I so move that: Request for Board Action: The VRS Board of Trustees approves its plan actuary s recommendations as presented in the Experience Study (7/1/2012 to 6/30/2016) to change various assumptions, including: certain demographic assumptions regarding mortality rates, retirement rates, withdrawal rates, and disability rates; method changes regarding development of normal cost rates and reflection of increasing Report of the Benefits and Actuarial Committee Meeting of April 24, 2017 Page 1

19 hybrid pla11 payroll, as well as variotlt Other Post-Emplnymellt Benefits (OPEB) specific ass11mp1io11s relaied to the Line of Dtll)' Plan, Health lnswance Credit program, and the VSDP and VLDP disability programs. Informational Items Approximate NormaJ Cost Rates for Purchase of Prior Service Approximate normal co~t rates will be updat.ed and brought before tlte Committee for approval at lite next meeting, following Board approval of new recommended assumptions. Stress Testing /HB 1768} YRS is working on stress testing analysis and plans to share results with the Committee at the June meeting. Next Committee Meeting The Committee's next scheduled meeting is Jwie 7, 2017 The meeting will begin at 1 :30 p.m. and v,iu be held in the YRS Conference Room, Third Floor, 11 l I E. Main Street. Submitted to the Board of Trustees on April 26,2017..b/&Qp.,, _,\J-)oA < '._ Wallace G. HaJTis, Chair Benefits and Acruarial Committee Report or the Benefits and Actuarial Commiu"" Meeting of April 24, 2017 Page2

20 Audit and Compliance Committee Committee Report to the Board of Trustees March 2, 2017 Page 1 of 3 Report The Audit and Compliance Committee met on March 2, 2017 and discussed the following: FINAL REPORT FROM THE AUDITOR OF PUBLIC ACCOUNTS (APA) ON THE VRS 2016 CAFR AUDIT Representatives from the Auditor of Public Accounts informed the Committee that they had completed their audit of the 2016 VRS Comprehensive Annual Financial Report (CAFR) and had issued an unmodified opinion on VRS's financial statements. They also stated that as part of their audit, a report on internal controls over financial reporting was issued, which contained a single finding regarding the classification of cash and investments as reported to the Department of Accounts for presentation in the Commonwealth s CAFR. ENTRANCE WITH THE APA REGARDING EMPLOYER ASSURANCES (GASB 68) The APA representatives then provided the Committee with an overview of its upcoming examinations and resulting reports designed to provide participating employers and their auditors the assurances necessary to prepare their own annual financial statements in accordance with Governmental Accounting Standards Statement (GASB) No. 68. In this regard, the APA will issue three separate reports for the period of July 1, 2015 June 30, The title and purpose of each report is set forth in the Committee Report before you. 1) Report on Census Data Maintained by the Plan: To express an opinion on whether assertions regarding the completeness and accuracy of census data provided to the actuary are fairly stated in all material respects. 2) Reports for Agent Multiple Plan Employers: To form an opinion and report on the Schedule of Changes in Fiduciary Net Position as a whole and on each employer including related notes to the schedule. 3) Reports for Cost-Sharing Employers: To form an opinion and report on the schedule of Employer Allocations and related notes to the schedule, and to form an opinion on the Schedule of Pension Amounts by Employer and related notes to the schedule. The APA anticipates completing its audit work and issuing its audit opinions on these matters on or about July 31, 2017.

21 Audit and Compliance Committee Committee Report to the Board of Trustees March 2, 2017 Page 2 of 3 AUDIT REPORTS The Committee received two audit reports. The review of Mainframe General Controls noted that that the overall control environment for mainframe computer processing was adequate. Additionally, the report contained one written recommendation where controls could be enhanced with regards to contract employees. The review of Global Public Equity determined that Management s administration of the portfolio complies with its Investment Policy Statement. Additionally, VRS is identifying, monitoring and minimizing the various risks associated with in the Global Public Equity Portfolio. Finally, the related accounting transactions were valid, accurate, complete and recorded timely. ANNUAL REPORT ON CODE OF ETHICS The Committee received an update from the Director on the Code of Ethics and Professional Conduct Policies as required by the Audit and Compliance Committee Charter. The Director reminded the Committee that due to an unexpected upgrade by the Department of Human Resources Management to its online learning software the deadline for Benefits and Operations personnel to complete the annual code of ethics training was extended to December 31, The Director then confirmed that all VRS staff had completed the annual code of ethics training. QUARTERLY REVIEW ON MODERNIZATION PROGRAM PHASE 4 Management presented its status report on the Modernization Program - Phase 4 through January 27, 2017, along with an update as of February 28, 2017, via a flash report. Overall, the Phase 4 scope, budget and schedule were represented as progressing in accordance with the re-baselined schedule. However, management acknowledged that planning for the Retirement s workstream is undergoing an extended review due to the complexity and significance of the functionality on VRS s operations. Management is presently reviewing to determine the necessary developmental and implementation steps and will present the Committee with an updated perspective on the workstream and any potential impacts to the planned schedule during the June meeting. Internal Audit then presented their Quarterly Review as of February 1, Internal Audit indicated nothing had come their attention to cause them to believe that the schedule, budget or scope of the Modernization Program - Phase 4 as reflected in Management s Modernization Quarterly Report was not progressing as represented, including the thorough review of the Retirement s workstream. AUDIT PLAN PROGESS AS OF DECEMBER 31, 2016 The Internal Audit Director reported on the progress on the annual Audit Plan as of December 31, 2016, the mid-point of the fiscal year. She noted while there were some necessary changes to the planned timing of certain examinations, Internal Audit expects to complete a similar amount of work as called for in the original audit plan.

22 Vu:ginia Retirement System Audit and Compliance Committee committee Report to the Board of Trustees March 2, 20i.7 Page3 of3 INTERNAL AUDIT'S REVIEW OF COST OF LIVING ADJUSTMENTS Internal Audit discussed its review of the proposed "Cost of living Adjustments" as calculated by VRS's actuary, Cavanaugh Macdonald Consulting, LLC. The results of this review were originally provided to the Benefits and Actuarial Committee and Board of Trustees in February as a part of the review and approval process for these adjustments which will become effective July l, OUARTERl Y 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 November 1, 2016 to January 31, 2017 was presented to the Committee (3 in total). Two of the complaints were not substantiated, and the investigations were closed. An additional allegation was received regarding the third case, which remains under investigation. MANAGEMENT'S QUARTERLY TRAVEL EXPENSE ANO PER DIEM REPORT The Committee reviewed the quarterly travel expense and per diem report. AUDIT DIRECTOR'S PERFORMANCE Pl.AN The Committee then disrussed and approved the Audit Director's performance plan for the fiscal year ended June 30, Respectfully submitted to the Board of Trustees on April 26, 2017.