RD519 - Virginia Retirement System Comprehensive Annual Financial Report for the Year Ended June 30, 2015

Executive Summary:
I am pleased to present the Virginia Retirement System (VRS) Comprehensive Annual Financial Report for fiscal year 2015. VRS achieved a 4.7% net return on its investment portfolio for fiscal year 2015, allowing the trust fund to end the year with a net position of $68.2 billion, representing an increase of $2.0 billion over the previous year.

During fiscal year 2015, the public equity program returned 5.5%; the private equity program returned 8.3%; the real assets program returned 11.8%; the credit strategies program returned 1.1%; and the fixed income program returned 1.9%. The portfolio included $29.1 billion in public equity; $12.2 billion in credit strategies; $12.3 billion in fixed income; $7.7 billion in real assets; and $5.1 billion in private equity, as of June 30, 2015. Approximately 35% of the fund is managed internally and 65% of the fund is externally managed under VRS supervision.

VRS is now in the third year of a five-year phase-in to a new asset allocation policy for the trust fund, in which we are increasing assets allocated to private equity and real assets and decreasing assets allocated to fixed income and credit strategies. Our goal is to achieve slightly higher returns at similar risk levels.

VRS’ funding levels continued to improve due to investment gains as well as support from you on increasing contributions to the plans. As of June 30, 2014, the last plan valuation, funded ratios stood at 80.6% for local political subdivisions (aggregate); 67.9% for state employees; 66.8% for judges; 65.4% for teachers; 64.3% for state police and 58.1% for Virginia law officers.

Your actions as Governor and General Assembly members accelerated the funding schedule to 90% of the board-certified rates one year ahead of schedule by providing additional funds to four of the state plans. As a result, the state employee plan will recognize long-term savings of approximately $85 million over the next 20 years, and the Commonwealth has taken an important step toward funding contribution rates at 100% of the board-certified levels by fiscal year 2019.

By approving a special one-time contribution of $193 million to the teacher retirement plan, you effectively lowered employer contribution rates to the plan, saving employers approximately $34 million in contributions over the next five years. The contribution rate for fiscal year 2016 was reduced from 14.50% of payroll to 14.06%.

Starting with the Governor’s budget proposal and continuing with the actions of the General Assembly, you demonstrated a unified commitment to strengthening the retirement system – a commitment that continues to be viewed positively by the bond-rating agencies. We are grateful that you recognize the importance of our shared goal of fully funding the rates and providing an avenue of support for the system that augments investment returns.

Following the launch of the Hybrid Retirement Plan in 2014, VRS began the fourth phase of its ongoing agency modernization effort in fiscal year 2015. We are replacing the existing mainframe system with a web-based system to efficiently serve members, employers and staff.

With these enhancements to myVRS, our members will be able to perform financial-based transactions online and take advantages of other services. The features include a personalized retirement planner, just-in-time counseling and a high degree of self-service, including the ability to make online requests for a refund, and, eventually, apply for retirement benefits online. Education and counseling will be tailored to members based on information in their records, aiding them in making informed decisions. To help ensure accurate identification of each member and manage account access, VRS is deploying a complement of authentication processes, tools and data sources. Updates to provide members with improved functionality begin in spring 2016.

VRS also has implemented the Governmental Accounting Standards Board (GASB) Statement Number 67, Financial Reporting for Pension Plans, which addresses financial reporting for state and local pension administrators, and Statement Number 68, Accounting and Financial Reporting for Pensions, which establishes new accounting and financial reporting requirements for state and local governments that provide their employees with pensions.

The new standards require the net pension liabilities of cost-sharing plans, such as VRS’ teacher retirement plan, to be apportioned to each of the participating local governing bodies. In fiscal year 2015, employers that issued financial statements were required by the new standards to report their net pension liability (NPL) and their proportionate share of pension expense (PE) as participants in VRS. To aid employers in meeting the new standards, VRS created an online resource center that includes financial reporting guidelines and resources, GASB 68 audit opinions and disclosure guidance, contribution rates, valuation reports and GASB guidance documents and presentations.

The past fiscal year also saw implementation of a new Roth 457 retirement savings option for members. The Roth option allows Commonwealth of Virginia 457 Deferred Compensation Plan participants to make contributions on an after-tax basis, rather than the traditional pre-tax contribution. The new Roth option is available to participants at all state agencies and to approximately 60 political subdivisions and school divisions that have adopted the Commonwealth’s 457 deferred compensation plan.

VRS launched a communications campaign to increase voluntary contributions by members in the Hybrid Retirement Plan, which was recognized with awards from the Public Relations Society of America (PRSA) and the National Association of Government Defined Contribution Administrators (NAGDCA). Through this collaborative effort of VRS staff and ICMA-RC, members’ voluntary contributions increased from 3.99% to 7.99% at the close of the campaign.

This fiscal year also brought changes in VRS leadership. Robert P. Schultze, VRS Director since 2005, resigned in February 2015 to work in the private sector. Following a nationwide search for his successor, the Board of Trustees appointed Patricia S. Bishop, former VRS Deputy Director for Customer Relationships, as VRS director in June 2015.

In May 2015, I was appointed to a two-year term as VRS Board Chairman, after serving on the board since 2008. I am honored to serve in this leadership role and am grateful for the opportunity to assist our members and retirees in planning today for a financially secure tomorrow.

On behalf of the Board of Trustees and the VRS staff, I would like to thank you for your leadership and continuing support of our efforts. By working together we will ensure that the beneficiaries of the Virginia Retirement System enjoy the financial strength and security they have worked so diligently to earn.


/s/ Robert L. Greene
Virginia Retirement System