North Carolina in need of ALM study, staff

The North Carolina Retirement System is in need of a formal asset liability study and is fundamentally understaffed, according to an independent review by Ennis Knupp commissioned by the State Treasurer.

The report said while the asset allocation had been established in a prudent manner, no formal asset liability study had been completed by an independent consultant.

It also specifically said the allocations to private equity and hedge funds may warrant reconsideration to evaluate whether they should be higher or lower, and that the separation of these two asset classes from the alternatives allocation should be considered.

While Ennis Knupp said the fund’s rebalancing policy appeared complete and conformed with best practice, the total fund’s actual allocations had not consistently been within the allowable ranges, indicating a possible deficiency in either the rebalancing mechanism or compliance procedures.

The report found the investment management division to be understaffed, even if it was filled to its capacity 26 positions.

“For a fund the size and complexity of the NCRS, Ennis Knupp would expect to see a significantly larger staff dedicated to asset management, even if the fund relied heavily on outside investment consultants. Given that the NCRS has used consultants to a minimal degree in the past, the existing staff size is barely adequate to fulfil all the duties required of prudent experts.”

It said the fund’s overall size of $70.5 billion and with a substantial allocation to internal management, along with a high number of private equity and real estate funds handled by the IMD staff, a staff size greater than the average of 30 was expected.

Since the report was completed, a chief investment officer, Shawn Wischmeier formerly CIO at the Indiana Public Employees’ Retirement Fund, has been hired.

The private equity unit, which manages a portfolio of more than $3 billion with more than 85 funds, has one staff member only. The consultant recommended between four and eight staff members was appropriate.

The Treasurer has responded to the review and is in the process of recruiting.

The review, completed in April and now made public, was conducted to evaluate the governance and investment practices of the NCRS to provide the Treasurer with recommendations for improvement.

It recommended investment policies be reviewed in light of the report’s recommendations, updated where appropriate, and consolidated into one comprehensive investment policy statement for the Treasurer’s consideration and formal approval.

A methodology to regularly monitor and report policy compliance to the Treasurer should also be discussed, it said.

Generally the report said: “After extensively examining the investment program of NCRS, we conclude that it is fundamentally sound and follows many practices that fall in line with common practices of other large institutional investors. We did, however, find room for enhancement in areas generally described as risk mitigation, transparency, organisational effectiveness, accountability, ethics and documentation.”