Early Signs of How Investment Fund Transfers Will Work

by Michael B. Weinstein

In the year since Public Act 101-0610 (S. B. 1300) became effective, much has been accomplished, at least with respect to downstate firefighter pension funds.1 The Firefighters Pension Investment Fund (FPIF) transition board set three priorities for its first year of existence.

First, was the hiring of an Executive Director and other important staff. Thus, William Atwood, the former Executive Director of the State of Illinois Investment Board, was hired early on and the board subsequently hired a Chief Operating Officer as well as a Chief Financial Officer. Second, the board established bylaws and appointed committees. Finally, the transition board held an election for the permanent board, the results of which were included in our last newsletter.

The main objective of FPIF for 2021 is the consolidation of the assets of the 296 participating funds. Thus, in September 2020, the transition board issued a Request for Proposals (RFP) for an investment consultant. Seven proposals were received from various investment firms and four final candidates were interviewed. As a result of this process, Marquette Associates, a Chicago, Illinois firm, was awarded the investment consultant contract.

By statute, the assets of the 296 downstate firefighter pension funds must be transferred to the FPIF by June 30, 2022. The total assets to be transferred are over $6 billion. While there is much to be determined about the exact timing, process, and structure of the transfer and transition process, we do have a general idea as to how the process will play out.

A picture containing text, person, computer, computer Description automatically generated At the present time, FPIF and Marquette believe that the transfer of funds will commence in late summer of this year. The process will require that FPIF secure custodial and transition management services, confirm contact information for each of the 296 funds, and obtain accurate data from the current funds’ custodial and investment advisors. To that end, FPIF recently requested each of the individual funds to send authorization letters to its custodial and investment advisors to allow the FPIF staff and investment consultant to obtain current and accurate information on each fund’s investment portfolios. The goal of this initial information sharing phase is to provide FPIF a better understanding of the nature and scope of the asset transition project.

Additionally, FPIF has proposed a draft rule that would require each participating fund to appoint an “authorized agent” who would be responsible for promptly forwarding to the Board of Trustees of their participating pension fund all communications, notices, reports, and other documents delivered to the authorized agent by the FPIF and executing “authorizations and consents for the treasurer, custodian, investment professionals, and other vendors to share with the FPIF and/or its agents, including but not limited to the FPIF’s custodian, investment consultant, and transition manager, all investment account related information and such other information relating to the participating pension fund as is necessary for the administration of the FPIF.” In this regard, the authorized agent position appears to be somewhat like the position of “authorized agent” used by the Illinois Municipal Retirement Fund.

At that point, FPIF and Marquette will conduct an analysis of the local fund portfolios to develop an initial investment policy as well as an initial asset allocation policy. FPIF will then have to adopt a transfer process consistent with Generally Accepted Accounting Principles (GAAP) and accounting best practices. The transfer process will have to ensure an accurate accounting of portfolio assets and will need to determine the Net Asset Value (NAV) for each fund portfolio. FPIF will also need to adopt a consistent reporting process to keep its constituent funds apprised of their assets.

For their part, the individual pension funds will need to ensure that the authorized signers for their investment, custodial, and banking accounts are correct and up to date. Additionally, the individual funds will need to respond to FPIF data and information requests in a timely manner. Moreover, the funds will need to identify any Investment Fund Transfers holdings, such as certificates of deposit or annuities, that cannot be easily transferred. Finally, the individual funds will need to establish cash flow schedules of contributions and benefit payments and expenses.

It is anticipated that individual participating fund assets will be transferred “in kind.” Upon receipt by FPIF the assets will be transitioned into the asset allocation structure that is adopted by FPIF. However, initially, the investments will likely be funneled into passively managed index funds while the FPIF engages in an extensive RFP processes to identify active and alternative investment managers. Once the custodian and transition managers are hired, we should have a better idea as to the exact details of the transition process.

Nevertheless, there remain several questions that will need to be answered as part of the second phase of the consolidation, namely the actuarial process that FPIF will handle after the completion of the asset transition process. First, will the Illinois Municipal League be successful in persuading the General Assembly to modify the current funding requirement of 90% funding by 2040, and instead adopt a funding requirement of 80% funding by 2050? Second, will the FPIF promulgate actuarial valuations for individual funds based upon sound actuarial practices or will it simply adopt “statutory minimum” calculations? Third, will local pension funds still need to prepare their own actuarial valuations? Finally, does the political will exist to require the front-loading of contributions to improve the financial health of the FPIF and, in turn, the financial health of the individual funds? These questions and more will need to be resolved in the coming months and years.