Who should manage the OPEB funds?

You probably are like many other South Carolinians who haven’t heard of the little-known OPEB trust fund.  The OPEB, Other Post Employment Benefits, trust funds consists of:  a health insurance trust fund ($582.4 million) and a life and long-term disability ($35 million) trust fund. Currently, the State Treasurer manages the funds, whose unfunded liability was $9.145 billion as of June 2010.  In a Senate Finance Subcommittee meeting last week, one Senator asked State Treasurer Curtis Loftis about the unfunded liability and why the funds were not managed by the S.C. Retirement System Investment Commission.

It’s a good question, given the role of the Commission is to serve as the fiduciary entity who manages assets held for the participants and beneficiaries of the South Carolina Retirement System.  According to Treasurer Loftis, the funds must be invested with strict restrictions to the types of investments that can be made.  When the Commission was created in 2005, the Chief Investment Officer declined to manage the funds due to the restrictive investment limitations.  A constitutional referendum introduced to alleviate those restrictions failed in 2009.

Treasurer Loftis also indicated his office is more successful in acquiring a higher rate of return on the investments of the fund.  He cited the Commission’s most recent flash report that shows a 5 year annualized return of 6.36%, while the OPEB 5 year annualized return was roughly 6.85% under Treasurer Loftis.

The Retirement Commission is comprised of six members, which includes the Treasurer.  The collective experience of the members logically lends itself to more exhaustive and sound decisions regarding investment.  And, the restrictions the Treasurer references are only placed on the funds because he is the one managing it.  According to the Treasurer, the SC Code of Laws restricts his office’s investments to domestic, investment grade fixed income, whereas the Commission’s fixed income funds can be invested in more diversified investments.

It seems logical, therefore, to move the responsibility of management of the funds to the Retirement Commission.  1)  It’s their job as the fiduciary entity responsible for managing the assets of the members of the retirement system and 2) they can invest in much more diversified investments.