RD152 - Virginia Retirement System Comprehensive Annual Financial Report for the Year Ended June 30, 2011

Executive Summary:
The Virginia Retirement System (VRS) experienced a net return of 19.1% on its investment portfolio for fiscal year 2011, ending the year with $564.6 billion in assets. Combined with the 14.1% return of last year, the fund has earned back losses resulting from the market collapse of 2008 and 2009. The current and previous fiscal years were, indeed, a period of recovery for VRS and, with the pension reforms effective July 1, 2010, a period of strengthening the future of the System.

During fiscal year 2011, the fund's public equity program returned 27.2% and the real estate program returned 23.2%. The private equity program returned 17.6% and the credit strategies program returned 14.7%, while fixed income and emerging market debt allocations returned 5.9%. The portfolio included $26.1 billion in public equity, $11.7 billion in fixed income, $7.7 billion in credit strategies, $4.8 billion in private equity and $3.7 billion in real estate, as of Jun 30, 2011.

The investment staff did a remarkable job by achieving these results after the board reduced the portfolio's risk as a defensive measure to better protect the fund from big market swings. The administrative staff also put forth a tremendous effort to implement all the features of the new Plan 2 defined benefit plan resulting from last year's pension reform legislation, including process and programming modifications and new handbooks for members hired on or after July 1, 2010.

Although not at the $58.3 billion of fiscal year 2007, the VRS fund is well positioned to pay benefits for current members and retirees for many years to come. Nevertheless, the Board of Trustees continues to believe that future growth in the economy and the markets will not return to the levels of the past. Therefore, in June 2010, the Board lowered its long-term investment return assumption from 7.50% to a more realistic 7.00%.

In addition, VRS again experienced higher than normal retirements with 12,123 retirement inceptions over the fiscal year, 4,090 of which were effective July 1, 2011. This trend continues to outpace previous years owing not only to the aging of the membership but also to members leaving in the face of the recession's threat to their job security.

The more sober investment return assumption and the present low level of appropriated contributions mean that we will need to continue to require increased contributions to sustain the System. This is not an unrealistic expectation. VRS's pension costs currently represent 1.65% of the Commonwealth's General Fund Budget, significantly lower than the average of 3.80% nationally.

The VRS Board remains deeply committed to its sole responsibility - to protect the fund on behalf of members, retirees and beneficiaries, both current and future. Therefore, our highest priority will be to continue working with you to fully fund the Board-certified rates for the state and teacher plans.