RD11 - Annual Financial Report on the Virginia Retirement System


Executive Summary:
According to Wilshire Associates, the median return among U.S. public pension plans in FY 2006 was 9.44%. Wilshire ranked VRS' one-year investment return of 12.4% in the top 13th percentile; its three-year return of 14.0% in the upper 8th percentile; and its five-year return of 7.1% in the upper 28th percentile of all public plans.

The fund's private equity and real estate investments produced outstanding returns in FY 2006 at 28.6% and 23.4%, respectively. The system also saw a 15.3% return in public equity (U.S. and international stocks); a 5.3% return in credit strategies; and a -0.6% return in fixed income. The Board salutes the work of the VRS investment staff for its outstanding achievement on behalf of VRS members, retirees and beneficiaries.

Notwithstanding the VRS fund's recent performance, the Board of Trustees is less optimistic about future investment returns. To that end, the Board lowered the actuarial return expectation from 8.0% to 7.5%. On a more positive note, however, the Board also lowered the long-term inflation expectation from 3.0% to 2.5%. In addition, the Board certified new contribution rates for state employees, teachers and other public employees for FY 2007 to support future retirement obligations. Thanks to you, former Governor Warner and the members of the 2006 General Assembly, rates for state employees increased to 5.74% of payroll (from 3.91 %) and for teachers to 9.20% (from 6.62%), effective July 1, 2006.

These rate increases will help offset the impact of the 2001-2003 soft market on VRS' Trust Fund reserves and protect benefits for Virginia's future public employees.

VRS also achieved several outstanding administrative milestones during FY 2006. The agency launched myVRS in May, providing active and deferred members secure online access to their retirement records. Members can verify their VRS records with service, compensation, and member contributions updated monthly. They can create retirement estimates using actual data and simulate retirement income options with a new automated benefit estimator. They also can check the status of an application for retirement, purchase of prior service or refund.

In another milestone for customer service, the Customer Contact Center significantly reduced its abandoned rate on inbound telephone calls. For the last two years, the rate has averaged 22% to 23% of inbound calls going unanswered. The abandoned call rate for FY 2006 averaged 7.3%.

VRS runs efficiently. CEM Benchmarking, Inc., a research and assessment service for national and international public pension systems, reported that VRS' total adjusted cost of administration in 2005 was $37 per active member and annuitant, down from $40 in 2004. This compares to a peer group average of $77 for public pension systems participating in the study.