IMRF Investment Practices: investing for your future

By IMRF Executive Director Louis W. Kosiba

October 20, 2009

Last week, the California Public Employee Pension System announced it was calling for a special review of fees paid to individuals, known as “placement agents,” who were successful in winning business from the pension fund for investment firms.

Also last week, the former head of the U.S. Securities and Exchange Commission said President Barack Obama should create a “blue ribbon” panel to investigate “pay-to-play” at public pension funds because these practices are “pervasive… in pension funds all around America.”

First, let me say IMRF does not use placement agents and we do not engage in “pay-to-play.” But before I explain how IMRF invests our $21 billion portfolio on behalf of members and employers, I want to clarify what a placement agent is and how pay-to-play works.

Placement Agents

Very few large public pension funds manage their investments internally. Typically, they hire outside investment firms to invest money on their behalf. A placement agent (also called a “third party marketer”) is a company that specializes in marketing investment firms and investment products to investors, like pension funds.

An investment firm may not have professional marketing or client services personnel on staff. By hiring an outside company to market its investment products, the investment firm can focus on managing investments rather than selling its products.

In some cases, the placement agent is paid only when the investment firm receives business from an investor. In this case, the fee paid is considered a “contingent” fee.

Investing through placement agents by pension funds—when the agent is paid via contingent fee only—is prohibited in Illinois.

Pay-to-play

Pay-to-play, also known as payola, is a phrase that has been used for a variety of situations in which money is exchanged for services or the privilege to engage (play) in certain activities.

It always refers to a form of bribery called commercial bribery. Some uses refer to illicit activities, such as the exchange of money for influence in politics. Corrupt placement agents have been connected to pay-to-play schemes involving pension funds.

IMRF has never been involved in a pay-to-play scheme.

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IMRF Investment policies

The IMRF Board of Trustees is responsible for making investments that will provide superior total long-term rates of return within acceptable levels of risk.

To achieve this goal, the Board developed a diversified investment portfolio. Currently, 68 professional investment firms handling 82 separate accounts manage IMRF’s investment portfolio in compliance with the Illinois Pension Code and IMRF’s policies. IMRF works with an investment consultant, EnnisKnupp, to oversee our investment managers.

When selecting an investment manager to invest money on behalf of our members and employers, IMRF follows a strict policy that has been in place for many years. IMRF does not allow prospective investment managers to use placement agents, nor do we allow “pay-to-play” in our investment manager searches.

Instead, if IMRF needs to hire a new investment manager, it works with EnnisKnupp to develop a Request for Proposal (RFP).

Request for Proposal

The RFP is posted to our website. IMRF investment staff and investment consultant review the proposals to identify qualified candidates; the reviews are based solely on the criteria listed in the RFP.

The “Four P’s”

During the selection process, investment firms who submit proposals are evaluated and ranked on four primary factors:

1. People - stability of the organization, ownership structure and documented experience of key professionals
2. Process - clearly defined, reasonable and repeatable investment strategy
3. Performance - documented ability to meet investment performance benchmarks
4. Pricing - fee schedule and associated costs

In addition, IMRF staff, investment consultant and IMRF trustees may interview all, some or none of the firms who responded to the RFP. They may visit the firms’ offices or investigate the firms’ operations and management to conduct due diligence.

“Quiet Period”

While the RFPs are being reviewed and before a final decision is made, a “Quiet Period” is established. During the quiet period, firms who submit proposals may not contact IMRF Board members. Instead, they are told to contact me, IMRF’s Director of Investments, or IMRF’s Investment Manager.

The purpose of the Quiet Period is to ensure that all prospective investment firms have equal access to information regarding the search, that communications are consistent and accurate, and to make the search process and selection process efficient, diligent and fair.

RFP results

During a public meeting of the IMRF Board of Trustee Investment Committee, IMRF staff and investment consultant present a written report of the results of the RFP process. This report may include a recommendation of finalists to be interviewed by the Investment Committee.

The Investment Committee interviews finalists and determines if it should recommend hiring one of the candidates. If the Investment Committee recommends IMRF hire one of the firms, the full Board must take action to accept that recommendation and hire the firm.

No gifts, no donations

In addition to stringent policies surrounding investment manager searches, the IMRF Ethics Code and Standards of Conduct and Conflict of Interest do not allow IMRF staff or Board members to accept a gift having a value over $25 or to solicit any gift, favor, or service from any third party which has, is, or may do business with IMRF.

In addition, IMRF staff and trustees cannot solicit or accept political contributions or donations from any person, organization or entity that does, has done, or may do business with IMRF.

Public Act 96-0006

On April 3, 2009, Illinois Public Act 96-0006, the pension ethics reform bill, became effective.

One of the reforms adopted in Illinois is a ban on contingent fee arrangements and placement fees to influence the outcome of an investment decision or the procurement of investment services by an Illinois state or local retirement system, pension fund or investment board.

Transparency is key

IMRF’s investment policies and practices can be found in the Investments area of our website, www.imrf.org. You can also read Board and committee meeting minutes.

All records of investment transactions are available for public inspection and copying as provided by the rules under the Illinois Freedom of Information Act.

IMRF recognizes that we are working to secure the financial futures of more than 250,000 active and retired members. We will continue to ensure our actions are worthy of your trust.

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