RD73 - Annual Financial Report on the Virginia Retirement System


Executive Summary:
I am pleased to announce that the Virginia Retirement System (VRS) fund returned 12 percent for fiscal year 2005, ending with assets totaling $44 billion. VRS is now the 27th largest public or private pension system in the United States and the 48th largest internationally.

Each of the fund’s asset classes earned a positive return for the fiscal year. Real estate led the way posting a 24.4 percent return, closely followed by private equity at 21.5 percent. The public equity portfolio experienced a 12.3 percent return, and the hedge fund portfolio had a 9.0 percent return. Credit strategies returned 7.6 percent, and fixed income returned 7.2 percent.

In FY 2005, Cost Effectiveness Measurement, Inc., which provides research and assessment of national and international public pension systems, reported VRS’ total adjusted cost of administration to be $40 per active member and annuitant. This compares to a peer median of $68. We believe VRS delivers services more efficiently than most public retirement systems.

We were very fortunate to welcome new leadership to VRS and the Board of Trustees, with the selection of Robert P. Schultze as VRS Director and Charles W. Grant as Chief Investment Officer, as well as the appointment of Dr. J. Alfred Broaddus, Jr. and Palmer P. Garson to the Board. The Commonwealth can be confident that public employees and retirees of Virginia are being well served by these experienced, knowledgeable and innovative leaders.

Among the activities of the fiscal year was the Board’s reevaluation of agency governance in conjunction with recommendations by the Joint Legislative Audit and Review Commission (JLARC). To protect against the potential for conflicts of interest and imprudent behavior, the Board approved a bylaw revision that any member of the Board or the Investment Advisory Committee (IAC) is ineligible for employment at VRS until five years after termination from either the Board or the IAC. In addition, the Board enacted new policy that determines severance pay for VRS employees in accordance with the Commonwealth’s Workforce Transition Act, as provided for all state employees.

Our mission to provide financial security for our members and retirees depends on positive and prudent investment management, cost-effective administration, innovations in customer service and, above all, the Board’s commitment to its fiduciary duties. The investment and administrative achievements of FY 2005, combined with the Board’s actions to strengthen agency governance, will sustain our ability to fulfill that mission.

On behalf of the Board of Trustees and the VRS staff, I would like to express our gratitude to you for your continued support and leadership.

/s/ Paul W. Timmreck
Chairman
Virginia Retirement System