Fresno County Employees Retirement Association Strategic Planning Session

Fresno County Employees’ Retirement Association Strategic Planning Session Presented by Tom Iannucci Cortex Applied Research October 17, 2007

Agenda 1. Why plan? 2. The planning process: – – 3. Preliminary discussions: – – 4. Strategic planning Business planning Mission statement Strategic positioning Strategic threats Business planning projects Conclusion and next steps 2

Benefits of an Effective Planning Process § Clarifies/ confirms our strategy Ø what business we are in Ø our general approach to that business Ø our priorities § Aligns how we spend our time and allocate resources with strategy § Focuses the organization (Board and Staff) § Improves efficiency § Allows us to gauge progress § Orients new board members/staff 3

The Planning Process Clarify Our Strategy & Threats (What kind of org. will we be? ) Identify Strategic Priorities Statement of Strategic Direction Business Plan (Specific projects, timelines, resp. etc. ) 4

Review Periodically Outcomes Mission Statement Concise description of our business (1 paragraph) Statement of Strategic Direction More detailed description of what kind of organization we will be and how we will approach our business (5 -6 pages) (long-term view/ seldom changes) (long-term view/ changes slowly) Business Plan Detailed description of specific projects we will undertake to achieve our Mission and Strategic direction over the coming 18 months: - Projects - Timelines - Responsibilities - Resources (short-medium term view/ changes often) 5

Strategic Planning § Is about strategic thinking Ø Defining your business and any threats to it § In private sector, it involves identifying: Customers Ø Needs Ø Markets Ø Ownership structure Ø § For public sector funds, above issues are generally set in statute 6

The Pension Business Discount Rate High Liabilities High Contributions Efficient Frontier Low Risk High 7

Public Retirement Systems Instead, retirement systems should focus on continually ensuring clarity around other strategic issues such as: Ø Role in influencing legislation Ø Role in corporate governance Ø Commitment to service quality Ø Scope of member communications (narrow vs. holistic) Ø Approach to risk management Ø Investment management vs. investment oversight Ø Independence vis-à-vis sponsor 8

Strategy Investments Risk Management Investments Customer Human Resources Customer Service Stakeholder Relations Board Governance Corporate Governance 9

Identifying Threats to the Current Business § Funding/contribution levels § Employer withdrawals § Misinformed sponsors/stakeholder § Competing pension arrangements § Succession § Drains on the fund § Internal governance/management 10

Business Planning § Strategic programming § Defining those projects that will either: Ø Move the organization in the desired direction Ø Address threats to the business § Defining project parameters: Ø Deliverables Ø Timing Ø Responsible parties Ø Reporting Ø Etc. 11

An Example Statement of Strategic Direction XYZCERA will be very proactive in engaging with stakeholders (City Council, City Administration) Business Plan Projects 1. Develop a Stakeholders Relations Plan. Project description: § Deliverables § Timing § Responsibilities § Budget Implications 2. Hire Stakeholder Liaison Project description: § Deliverables § Timing § Responsibilities § Budget Implications 12

Mission Statements A mission statement should clearly and concisely describe what business an organization is in: What Ø needs to meet products/services to provide customers we serve market(s) we serve 13

FCERA’s Mission Statement § In essence: To administer the retirement benefits provided for by law to the members and beneficiaries of the Fresno County Employees’ Retirement Association in a prudent, accurate, and timely manner consistent with fiduciary duties. 14

Preliminary Discussions

Stakeholder Relations

Discussion 1 § To what extent if any do you believe FCERA requires greater autonomy or authority to carry out its mission? Budget Ø Human resources Ø Legal services Ø Management information services Ø 17

Discussion 2 § Who are FCERA’s primary stakeholders? § Do we need to be more stakeholder-focused as an organization (i. e. more effort/resources)? Ø If so: – – Which groups shall we emphasize? What types of efforts do you foresee? 18

Customer Service Quality

Customer Service § All retirement systems say they are committed to service quality § Retirement systems are monopolies; therefore commitment and service quality need to be well defined § Significant implications for: Ø Organizational structure Ø Staffing Ø Training & development Ø Technology 20

Discussion 3 Please indicate the appropriate benchmarks for a) identifying best practices and b) assessing customer service quality: Benchmark A B Fresno City Retirement System Other 37 Act retirement systems Other US retirement systems Private sector financial institutions Private sector service organizations Custom internal benchmarks None of the above 21

Customer Service Criteria 1. Customer service culture 2. Performance evaluation tied to customer service 3. Service quality measurement & reporting 4. Customer service benchmarks 5. Staff training 6. Supporting technology 22

Discussion 4 Please indicate with an X the number of customer service criteria listed in the previous slide that you feel are currently satisfied at FCERA. Current 0 3 6 23

Discussion 5 Please indicate with an X the number of customer service criteria you believe FCERA should strive to satisfy over the coming 2 -3 years: Target 0 3 6 24

Discussion 6 Assuming FCERA has approximately $100 000 available for new discretionary projects, what amount would you be prepared to dedicate to enhancing customer service over the coming year (e. g. customer service training, establishing service quality benchmarks, measuring service quality; but not technology projects). Such funds, of course, would be permanently unavailable to fund plan liabilities a) b) c) d) e) Less than $25, 000 - $50, 000 - $100, 000 - $150, 000 Greater than $150, 000 25

Investments & Funding

Discussion 7 § How do you hope the FCERA investment program will look in 5 years: Ø Ø Ø Internal investment resources Consulting resources Asset classes Risk management practices Board practices Other 27

Risk Management

Two Basic Approaches Boards and/or organizations can be focused on: performance management, Ø risk management, or Ø they can allocate effort to both. Ø 29

Risk Management Focus Examples: Ø Ø Ø Ø Defining risks Asset allocation and diversification Policy (investment/operations) Risk budgeting Planning Due diligence process and oversight Business continuity and disaster recovery Internal controls and audit: – – Investment controls Operational controls Investment compliance Ø Monitoring service providers Ø Organizational structure Ø 30

Performance Management Focus Examples: Ø Ø Ø Manager interviews Manager selection Manager allocations Conducting due diligence Resolving member complaints Approving purchases and contracts 31

Discussion 8 § How does the Board currently define the risk associated with the investment portfolio? § To what extent is the Board able to measure and control the amount of risk in the investment portfolio? 32

Discussion 9 § To what extent do you believe FCERA needs to devote more resources to evaluating the performance of its advisors and service providers: Ø Ø Ø Actuary Investment consultant Custodian Investment managers Other 33

Discussion 10 § Please discuss the need for, or feasibility of, establishing an internal audit function at FCERA in the foreseeable future 34

Discussion 11 Please provide a general indication of how you believe the Board allocates its time among risk management and performance management currently and ideally: Today Ideally Risk management: _____% Performance mgmt. : _____% TOTAL 100 % 35

Discussion 12 § What sorts of risk management activities, if any, would the Board like to devote more resources to? 36

Role in Pension Benefit Policy

Discussion 13 Role in Benefit Policy § § Retirement boards normally do not have authority over benefit design/levels Boards may however attempt to play some role influence Boards may decide to stick to one strategy or switch strategies over time Please indicate FCERA’s position on the scale below (both currently and ideally) Administer Benefits Only Expert source of Info. on Request Provide Info. Proactively Advocate 38

Role in Benefit Policy Administer Only Provide Info. on Request Provide Info. Proactively Advocacy ü Focus on operations. ü No need for an internal policy function. ü Rely on actuary/investment consultant as needed ü Need to have policy function capability even if there are no requests. ü Need to build policy function ü Develop a process to determine which issues will be addressed ü Need to develop ability to present info in an evenhanded manner ü Need to build policy function ü Develop a process to determine priorities ü Develop expertise in persuasion 39

Corporate Governance/ Shareholder Activism

Corporate Governance § Retirement systems are major shareholders in the U. S. and world economies and have a duty to exercise their duties as shareholders § There a range of approaches retirement systems may take to exercising their duties 41

Range of Approaches Low-level activism § Vote proxies in the best interests of the beneficiaries Mid-level activism § Active in CII § Letter campaigns § Class action lawsuits High-level activism § Meet with corporate mgmt. § Lead plaintiff status § Proxy battles 42

Discussion 14 With respect to shareholder activism: 1. Please indicate how active you believe FCERA is today: – 2. Low Medium High How active should FCERA be in the future? – Low Medium High 43

Strategy, Core Competencies, and Threats

Discussion 15 § In what ways do you believe FCERA should differentiate itself (if at all) from other retirement systems of similar size? 45

Discussion 16 § What specific skills or expertise do you believe FCERA needs to develop or refine over the next five years in order for the organization to most effective or successful? 46

Discussion 17 § What are the biggest threats facing FCERA over the coming 2 -3 years? 47

Strategic Priorities

Discussion 18 § Please identify the top 3 issues you believe FCERA should focus on in the next 12 -18 months. 49

Next Steps To be discussed 50