Policy and Procedure
Subject:
City Pension Investment Policy
Index:
Finance & Administrative Services
Number:
202-2
Effective Date:
Prepared By:
Finance & Administrative Services
Supersedes:
December 18, 2013
Approved By:
Exhibit AExhibit A
Exhibit A
Exhibit A
1.0 PURPOSE:
The purpose of the City’s Pension Investment Policy is to establish: (1) an appropriate set of objectives and goals regarding the investment of the assets of the City of San Clemente Pension Plan (hereafter referred to as the Pension Trust Fund); and (2) investment policies and practices designed to permit the continuing financial obligations of the Fund to be satisfied.
2.0 ORGANIZATIONS AFFECTED:
All City departments/divisions
3.0 REFERENCES:
Investment Advisory Act of 1940
Civil Code Section 2261, et seq.
Government Code Section 53600, et seq.
Code of Ethics Policy, Administrative Policy #102-1
4.0 POLICY:
4.1 The policy of the City of San Clemente (“the City”) to invest the pension retirement trust funds in a manner which will provide a market rate of return while meeting the financial obligations of the fund and conforming to all applicable Federal, State and City statutes governing the investment of public funds, as referenced in section 3.0.
4.1.1 Scope: This pension investment policy applies to all financial assets of the City of San Clemente Pension Plan. These funds are accounted for monthly investment report presented to the Investment Advisory Committee.
4.1.2 Statement of Responsibilities: The following parties associated with the Fund shall discharge their respective responsibilities in accordance with all applicable fiduciary standards as follows: (1) in the sole interest of the Fund participants and beneficiaries; (2) with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent individual acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and of like aims; and (3) by diversifying the investments so as to minimize the risk of large losses.
4.1.2.1 City Investment Advisory Committee: The members of the City Investment Advisory Committee will review and propose an Investment Policy for the approval of the City Council and provide direction as to the investment strategy and Pension Trust Fund assets.
4.1.2.2 City Pension Committee: The City Pension Committee are plan fiduciaries and delegated authority to implement the approved Investment policy and daily administration of the City of San Clemente Employee Retirement Plan (“the Plan”). The members of the Committee include: City Manager, Assistant City Manager/or Administrative Services Director, the Human Resources Manager, and the Finance Manager. These individuals are responsible for the Pension Trust Fund operations and administration. This includes assets reporting and oversight, contributions, retiree payments, vendor payments, actuarial reports and other administrative requirements.
4.1.2.3 Investment Management: The investment managers are delegated the responsibility of investing and managing the Fund’s assets in accordance with this Investment Policy and all applicable laws. Investment Managers are selected by the Investment Advisory Committee. Each investment manager must either be; (1) registered under the Investment Company Act of 1940; (2) registered under Investment Advisors Act of 1940; (3) a bank, as defined in that Act; (4) an insurance company qualified under the laws of more than one state to perform the services of managing, acquiring or disposing of Fund assets; or, (5) such other person or organization authorized by applicable law or regulation to function as an investment manager.
4.1.2.4 Investment Consultant: The investment consultant is charged with advising the City Investment Advisory Committee on investment policy, the selection of appropriate investments, and providing performance analysis, and monitoring services.
4.1.2.5 Investment Custodian: The investment custodian is the company holding Pension Trust Fund assets. The custodian will generally report on a monthly and quarterly basis the various assets and assist with the rebalancing of the asset classes. The custodian will facilitate funding payments to the retirees and paying approved administrative costs of the Pension Trust Fund.
4.2 Statement of Investment Philosophy:
4.2.1 City Investment Advisory Committee: The City Investment Advisory Committee is committed to: (1) protecting the corpus of the Fund; (2) obtaining adequate investment returns in order to protect and pay the benefits promised to the participants; (3) complying with applicable law; and (4) controlling administrative costs.
4.2.2 Pension Trust Fund: The Fund shall be managed in a prudent manner recognizing risk and return trade-offs, while concerned with avoiding undue risk. Accordingly, investments shall be chosen to maximize the return on invested assets and overall safety of funds over the long term. Sufficient liquidity shall also be maintained to fund expenses and benefit payments.
4.3 Investment Objectives: The Investment Objectives for the Pension Trust Fund will be for the asset value, exclusive of contributions or withdrawals, to grow over the long run and earn, through a combination of investment income and capital appreciation, a rate of return (time-weighted total return gross of fees) tracking the designated benchmarks at a minimal cost utilizing a passive income strategy.
4.3.1 Performance Objectives:
4.3.1 Total Fund Objective: The objective of the Pension Trust fund is to invest in assets and achieve returns comparable to other Pension Trust Funds and exceeding the Pooled City Investments and maintaining liquidity needs of the fund.
4.3.2 Total Fund Return: The total fund return goal is to meet or exceed the actuarial assumption rate or discount rate over a multiple year period.
4.3.3 Rate of Return: The objective of the total fund is to earn a rate of return of the indices weighted in accordance with the current target asset allocation.
4.3.4 Investment Risk: The objective of the investment policy is to manage portfolio risk through a diversified pool of assets while ensuring proper liquidity.
4.4 Asset Strategy and Classes: The Pension Trust assets will be invested with a variety of diversification to minimize the risk of any one asset class and improve overall long-term performance, while comparing individual returns to benchmarks or indexes. The following asset classes may be participated in through mutual fund, exchange traded funds, or other investment options to minimize costs.
4.4.1 Large Capitalization Equity: The objective of the large cap equity segment of the Fund is to earn a rate of return tracking of the Russell 1000 Index. This index is comprised of the top 1,000 companies by market capitalization.
4.4.2 Small Capitalization Equity: The objective of the small cap equity segment of the Fund is to earn a rate of return tracking the Russell 2000 Index. This index is comprised of the smallest 2,000 companies by market capitalization.
4.4.3 Core Fixed Income: The objective of the fixed income segment of the Fund is to earn a return that exceeds the rate of return of an Aggregate Bond Index as well as the median fixed income return in a representative performance universe. This category includes both short and long-term rated debt instruments.
4.4.4 Treasury Inflation-Protected Security (TIPS): The objective of the TIPS segment of the Fund is to provide inflation protection and diversification within the fixed-income portfolio while generating a long-term rate of return consistent with the TIPS asset class.
4.4.5 International Equity: The objective of the international equity segment of the Fund is to earn a rate of return tracking the MSCI EAFE Index or other international equity return in a representative performance universe.
4.4.6 Stable Value: The objective of the stable value portion is currently invested similar to a cash equivalent with a benchmark rate of return comparable to the Bankers Trust 3-year GIC Index, or comparable index.
4.4.7 Other Assets: The objective of this approach is tactical asset allocation in inflation-sensitive investments, including debt, commodities, equities or leveraged assets.
4.4.8 Cash/Cash Equivalent: The objective of the cash portion of the portfolio is to provide liquidity resources as needed to pay short-term costs of the Pension Trust Fund.
Other investments options may be added, if allowed by law, with the approval of policy revisions approved by the City Council.
4.5 Asset Allocation: Asset allocation involves establishing asset class allocation policy targets. The Pension Trust Fund Asset Allocation is determined by the Investment Advisory Committee. The target allocation will be addressed in this Policy and the assets will be rebalanced on a quarterly basis automatically. The investment allocation or target allocation is to be in compliance with the following guidelines.
Asset Class Target Minimum Maximum
Cash/Cash Equivalent 0% 0% 5%
Core Fixed Income 20% 10% 30%
TIPS 3% 0% 10%
Small Cap Equity 5% 0% 10%
Large Cap Equity 32% 25% 45%
International Equity 15% 0% 20%
Stable Value 20% 0% 40% Absolute Return 5% 0% 5% Total 100%
4.6 Investment Guidelines: It is the intention of the City Investment Advisory Committee to allow the investment manager full investment discretion within the scope of these investment guidelines, the applicable Investment Manager Agreement, and any laws that supersede either of these documents.
4.7 Liquidity: The Fund’s cash flow is monitored by the City Pension Committee with sufficient liquidity maintained to fund benefit payment outflows. If reallocations are necessary prior to the next quarterly rebalance, the Investment Advisory Committee will be notified by the Pension Committee. Cash and cash equivalents should equal at least 3 months of monthly disbursements providing for the day-to-day liquidity needs at the time of the portfolio rebalance.
4.8 Proxy Voting: The investment managers shall have the sole and exclusive right to vote any and all proxies solicited in connection with the securities held by the Pension Trust Fund.
4.9 Trading and Execution: The investment managers shall use their best efforts to obtain execution of orders through responsible brokerage firms at the most favorable prices and competitive commission rates.
4.10 Pension Trust Costs: Costs matter and are to be managed. The Pension Committee will manage costs through agreements and other staff actions to minimize investment costs, administrative costs, and other actions. However, costs may be negotiated to achieve ongoing continuity of the pension trust and to ensure proper expertise.
5.0 DEFINITIONS:
None
6.0 PROCEDURE:
6.1 Investment Performance Review, Reporting and Evaluation:
6.1.1 Investment Advisory Committee: The City Investment Advisory Committee will review the investment results of the investment managers at least semi-annually. Performance comparisons will be made against a representative performance universe and the performance objectives set forth in this policy statement.
6.1.2 Review of Strategy: The City Investment Advisory Committee, with the assistance of the investment consultant shall periodically review the qualitative developments of each investment. This evaluation should include: Changes in ownership, personnel turnover, adherence to investment style and philosophy, and any other qualities the City Investment Advisory Committee deem appropriate. This review should also include an assessment as to each investment manager operated within the Investment Policy scope.
6.1.3 Reporting: The quarterly investment report will include the assets held in the Pension Trust, the allocation percentages, and the quarterly return. Information as to the quarterly disbursements will be included in the report and whether minimum liquidity requirements are met.
6.1.4 Disclosures: The investment managers must disclose all major changes in organization or investment philosophy to the City within 30 days. Further, all registered investment advisors must present updated ADV-2 forms on an annual basis to the City Investment Committee and Investment Consultant.
6.1.5 Investment Manager Accountability: The City is desirous of holding each investment manager accountable for the performance of the assets over which they exercise discretion. If an investment manager fails to accomplish the investment objectives as set forth in this Investment Policy over a market cycle (typically three to five years), the City will notify the investment manager in writing that the Committee has placed them on probation. The Committee will continue to monitor the investment results until they determine that removal of probation or termination of the investment manager is warranted. The City still reserves the right to terminate investment managers if they violate this Investment Policy, experience personnel or organizational changes, or if the City Investment Committee determines that a change of investment managers is in the best interests of Plan participants.
6.2 Internal Control: In conjunction with the City’s independent annual financial audit, a review of actual and documented internal controls of the City’s investment program will be coordinated by the Pension Committee. The review will assure that internal controls are adequate and assure compliance with policies and procedures. Any deviations resulting from this review will be reported to the Investment Advisory Committee.
6.3 Policy Changes: The investment consultant shall advise the City Investment Advisory Committee of any restrictions within this Investment Policy which may prevent the investment manager(s)/consultant from achieving the objectives and goals set forth herein. Any violation of the investment guidelines or other sections of this Investment Policy discovered by the investment consultant in the preparation of its regular performance review shall be reported immediately to the City Investment Advisory Committee and discussed at their next regularly scheduled meeting.
6.4 Review and Revisions: The City Investment Advisory Committee reserves the right to amend the Investment Policy as necessary, or to comply with changes in federal and/or state law as these changes affect the investment of the Fund’s assets. This policy will be reviewed on an annual basis by the City Investment Advisory Committee and any revisions or modifications made thereto recommended by the Committee and approved by the City Council. Funds invested in should have ample liquidity to meet any operational needs as determined by the Investment Advisory Committee.
6.5 Authorized Investment Managers: The City Investment Advisory Committee reserves the right to modify investments and managers during the year. Current authorized investment managers include Empower, Dodge & Cox, PIMCO, and State Street Global Advisors. Investment managers of funds may be added or modified upon approval by the Investment Advisory Committee.