OHIO PUBLIC EMPLOYEES RETIREMENT SYSTEM 277 EAST TOWN STREET, COLUMBUS, OH PERS (7377)

Transcription

1 OHIO PUBLIC EMPLOYEES RETIREMENT SYSTEM 277 EAST TOWN STREET, COLUMBUS, OH PERS (7377) MEMORANDUM DATE: July 1, 2004 TO: FROM: RE: OPERS Retirement Board Members Neil V. Toth EK+A Contract Renewal Purpose This memorandum provides background information to the hiring of Ennis Knupp as OPERS general investment advisor, a summary of trustee comments of Ennis Knupp s consulting performance, proposed contract changes, and contract renewal options for board consideration. Background Ennis Knupp + Associates was hired as OPERS general investment advisor under a retainer agreement beginning July 1, Their selection followed a comprehensive RFP and selection process conducted in the first half of 2001 that was led by Cooper Consultants (on behalf of the board) with assistance from the investment staff. The process evaluated all leading investment consultants and resulted in the identification of three finalists: Ennis Knupp + Associates Richards & Tierney Wilshire Associates The evaluation process used by Cooper Consultants assessed the following factors: Personnel and resources Proposed senior and support consultants Tools, research, and processes Performance (client satisfaction) Independence (conflicts of interest) 1

2 Of the finalists, Ennis Knupp was the highest-scoring firm overall, garnering 82 of a possible 100 points in the RFP process, and had the highest rating for independence, achieving a 1A score on Cooper s independence rating scale. The 1 in the 1A score indicates that EKA is solely in the business of selling advisory services to clients, and receives income solely from these clients (full alignment and non-conflicted). The A in the 1A score indicates that the firm received the highest rating for the implementation of policies and practices to address, disclose, and mitigate any potential conflicts of interest. Based on extensive due diligence by Cooper and the investment staff, and following finalist presentations to the OPERS board, the board selected Ennis Knupp to be OPERS general investment advisor. EK+A was hired at a retainer contract rate of $530,000 per year for an initial three-year term. The retainer covers the defined benefit plan only. The scope of the retainer is summarized below: Quarterly performance reporting Ongoing manager evaluation Regular board meeting attendance Phone consultation with staff / board OPERS access to EKA research product Special projects related to the DB asset pool (within some limitations), including periodic A-L studies, policy development Training, education, and client relations Trustee Comments At the June, 2004 Investment Committee, I offered to call trustees individually to discuss EK+A s performance. Seven of the nine trustees elected to comment on EKA s performance. The feedback I received is summarized in the points below, with the (number) indicating the frequency a similar comment was heard: Favorable Comments Satisfied or very satisfied with EK+A (5) Independence of firm is an important plus factor (3) Strong ability to explain investment concepts (2) Good with client service and advice (2) Willingness to go beyond scope of contract (1) Display a true interest in what the board is trying to accomplish and in OPERS success (1) Proactive, dedicated to account (1) 2

3 Professional (3) Maintains even balance with staff (1) Willing and able to offer unequivocal position on issues (1) Areas for Improvement Consultant works too closely with staff and is therefore limited in its ability to offer an independent opinion / counsel to board; Consultant play too large a role in setting overall investment strategy for OPERS, and is therefore limited in its ability to critique strategy (1) Need to improve in manager research area (1) Other comments, unrelated to consultant performance, but nonetheless relevant to the contract renewal discussion were as follows: Procedure being used to gather trustee comments on consultant performance is not sufficiently independent. Should be conducted by someone independent of the consultant staff relationship. (1) Consultant should regularly disclose any perceived or real conflicts of interest, payments or revenue received from money managers or other lines of business apart from traditional plan-sponsor consulting, honoraria (1) Related to the preceding bullet point, it should be noted that the investment staff recently requested from each of OPERS money managers a disclosure of payments made in 2003 to OPERS consultants, including EKA. All of our money mangers responded to our request. EKA was not identified by any of our money managers as having received from them any form of remuneration in National Survey Results As part of the evaluation process, I spoke with a national consulting firm that specializes in the evaluation of investment industry firms including consultants, money-managers, and brokers. The firm indicated that Ennis Knupp ranked very high among the ten largest plan-sponsor consultants for overall quality. The quality measure encompasses all key dimensions of the consulting relationship. Proposed Contract Changes As indicated, the current retainer agreement is for the defined benefit program only. For the defined contribution program, we have retained Callan Associates for performance measurement services. With the pending split of the health care assets into a separately managed investment fund, Ennis Knupp has presented us with a revised retainer agreement for our consideration that would cover consulting for the defined benefit program and the health care fund for an annual fee of $600,000. 3

4 Next Steps There is a high degree of satisfaction among the OPERS board members with the consulting work provided by Ennis Knupp. Notwithstanding that support, the board may wish to consider the following options for renewal: 1. Renew agreement and incorporate language in revised contract to require periodic disclosures of conflicts or potential conflicts. 2. Delay renewal pending the completion of a uniform, written survey of board members on various dimensions of consultant performance, with the completed surveys routed to an independent party (such as a trustee) for summarization and discussion with the Committee. Should option two be preferred, staff is available to work with the Committee to develop a uniform survey. Neil V. Toth 4

5 MEMORANDUM To: Investment Committee Ohio Public Employees Retirement System From: Richard Ennis, CFA Brady O Connell, CFA Date: July 8, 2004 Re: Support for Proposed Fee Increase Neil Toth requested that we furnish support for the proposed fee increase in connection with the renewal of our contract. Our retainer fee for the last three years has been $530,000 per year. We are requesting a fee of $600,000 going forward, or an increase of $70,000. Two factors accounts for the increase. One is a cost-of-living increase and the other is for additional work in connection with the separation of the OPERS assets into two distinct portfolios, one for pensions and the other for health care. We are seeking an increase of 5% in the fee for our services in support of the defined benefit pension investment program. This is a cumulative cost-of-living adjustment for the three years and amounts to $25,000. The remaining $45,000 is for the incremental work in support of the new $10 billion health care investment portfolio. We anticipate additional work in four areas related to the health care (HC) portfolio: Annual Asset Allocation and Solvency Review. Each year we will need to conduct a review of the solvency of the plan, incorporating any changes in the plan as well as changes in asset levels. This will be very similar in nature to the study we recently conducted in connection with review of investment policy of health care. This critically important work accounts for approximately half of the HC-related charges. Performance Reporting. With the advent of an entirely separate investment portfolio for HC, we will begin to prepare a separate report on the performance of that portfolio. While much of the managerlevel information will be similar to the pension fund, there will be many unique aspects that may require a separate report: asset allocation, unique managers and strategies (such as TIPS). In addition to the standard information currently included in the performance report, this would also include mapping of the market value and solvency period over time as well as cash flow reconciliation. Ennis Knupp + Associates vox South Riverside Plaza, Suite 700 fax Chicago, Illinois

6 Unique Manager Monitoring. The HC portfolio will have some unique managers and strategies that will require additional review and possibly reporting. Miscellaneous HC-Related Issues. Through the year miscellaneous matters related to the health care portfolio will come up. EK will need to be involved in these discussions. For example, we will need to spend time reviewing and commenting on the Annual Plan proposed for the health care portfolio. Providing these additional services for the fee proposed will require us to work on a fairly tight budget for the HC work. We are confident, however, that we can provide the same high quality services for health care as we have been providing all along in connection with the pension investment program. G:\July 2004\I.E. EKA Supportforproposedfeeincrease - EKA memo.doc Ennis Knupp + Associates 2