WRS News Online

Increased Internal Management Benefits WRS

Internal management of the trust funds by State of Wisconsin Investment Board staff has reached an all-time high; the end result has been a significant financial benefit to the Wisconsin Retirement System. SWIB has been building a stronger internal management program over the past several years. Approximately 64% of WRS assets are managed internally today, up from 25% in 2007. SWIB actively manages assets not only to earn more than the passive market indexes, but also to better manage risk and control costs.

SWIB's internal management initiative saves $57 million annually

The objective of our strategy for Core Fund investments: Earn returns comparable to the actuarial objective of 7.2% over the long term, but with less risk than the typical 60% equities/ 40% fixed income portfolio. Diversification is the primary tool for managing risk. Not all investment strategies that are used when diversifying can be passively managed. By actively managing assets and putting in place those diversification strategies, SWIB is working to stabilize returns, contribution rates and annuity adjustments.

The net annual savings from SWIB’s internal management initiative is $57 million, based on what it would cost to hire outside managers to invest SWIB’s public market portfolios. The savings exceeded SWIB’s 2015 operating budget, including all staff compensation costs, of $46.9 million.

“We have reduced our reliance on outside money managers, which has allowed for greater efficiency and effective cost control,” Michael Williamson, SWIB executive director, said. “We have adopted a cost management strategy that emphasizes using SWIB staff to manage assets whenever it is cost effective to do so.”

According to CEM Benchmarking, an independent provider of objective benchmarking for public pension plans, pension funds with more internal management typically perform better on a net return basis over the long term.

SWIB balances its use of internal active management with passive management. SWIB uses more passive management than other large public pension funds, according to CEM Benchmarking. In 2015, 47% of WRS funds were managed passively. Passive management is effective for earning market returns at a lower cost.

SWIB’s combination of active internal management and passive management has helped contribute an additional $1.2 billion to the trust fund above market returns over the past five years.