Nov 16, 2017
DENVER – The Denver Employees Retirement Plan has performed well when compared to its assumed return objective and compared to peer public pension funds of similar size. Its anticipated rate of return of 7.5 percent is reasonable, according to an evaluation of the pension plan commissioned by Denver Auditor Timothy M. O’Brien, CPA.
Auditor O’Brien praised the responsible investment of the more than $1 billion retirement plan for city employees.
“Denver’s retirement plan supports thousands of retirees and current employees,” Auditor O’Brien said. “I am pleased to see its investments are performing above expectations and continuing to protect the future of the people who work hard for our city.”
Auditor O’Brien directed locally sourced investment consulting firm Ellwood Associates to evaluate the Denver Employees Retirement Plan, or DERP, and analyze the appropriateness of the investment policies based on industry standards. The analysis found the investment plan is comprehensive and that the investment portfolio has performed well relative to the assumed rate of return and compared to peer public pension funds greater than $1 billion.
The consultants examined the structure of decision-making for the plan and performance in recent years compared to expected outcomes for investments over time. At the beginning of October, a city ordinance lowered the assumed rate of return from 7.75 percent to 7.5 percent. The fund is expected to exceed that target with an expected rate of return of 7.66 percent and with an expected 12.3 percent standard deviation over the past 10 years. Despite a difficult year in 2015, longer-term results have been above median peer results. The report found the plan is on track to meet the targeted return rate and that there is no need for change in investment structure.
“Overall, the DERP Total Fund investment portfolio has performed well relative to the assumed return objective and relative to the benchmark policy index as well as compared to peer public pension funds greater than $1 billion,” the report said.
Currently, the plan measures performance against peers on a gross of fee basis while the assumed return target is measured on net of fees. That means comparisons of performance relative to other similar peer funds could be skewed. Auditor O’Brien and Ellwood Associates recommend plan managers start using net of fee comparison for performance measurements.
“I recommend making comparisons on a net of fees basis to enhance transparency, accuracy and clarity of performance review reporting,” Auditor O’Brien said. “It would be worth the money and effort to make sure the investments are performing up to standards compared to peers.”
The agency did not agree. It acknowledges net of fee measurement and comparison is preferred, however it says there are few options for obtaining the data and making the change could be cost prohibitive.
Auditor O’Brien recommends managers of the retirement fund review the investment policy to update unclear or imprecise language and to verify procedures. Based on the report’s findings, he would also like to see uniform timeframes for managed accounts to allow for more consistent benchmark comparisons. Managers have agreed to this recommendation and plan to complete the review before the board meeting this month. They also agreed to update language reflecting changes to duties and delegations.