Vermont Strengthens Governance of State Pension Investment Commission

Vermont lawmakers have taken significant steps this year to boost the independence of the commission that manages the state’s public pension investments and strengthen its governance.

Governor Phil Scott (R) signed bipartisan legislation in June that had been approved by the Democratic-controlled Legislature to overhaul the workings of the Vermont Pension Investment Commission (VPIC), the entity that invests state retirement plan assets worth $4.6 billion. Known as Public Act No. 75, the law establishes a 12-member task force to examine the benefits, design, and funding of Vermont’s state employee and teacher retirement systems. It also creates a pension oversight committee in the Legislature.

Currently under the state treasurer, VPIC manages assets for three statewide pension plans covering state employees, teachers, and municipal workers. Each has a separate board that oversees the noninvestment aspects of pension plan management, a common division of labor between administrative and investment functions used in about half of states.

Under Act 75, VPIC will become an independent state agency. To support this independent structure, the law expands the commission from seven to nine members and requires some of them to have expertise in institutional fund management. Additionally, the measure grants VPIC sole authority to set key pension plan assumptions, including the expected rate of return on investments. Currently, that expected rate is 7%.

Adding two members will bring VPIC in line with the median board size for public pension retirement systems, according to the National Association of State Retirement Administrators. It also will align the setup with best practices cited by the Center for Retirement Research at Boston College, and is within the range recommended by the Government Finance Officers Association. All sitting commissioners, as well as the four alternates, also are now required to participate in trainings on investments, securities, and fiduciary responsibilities.

The new law also requires two commissioners and the VPIC chair to have financial expertise, specifically, “material expertise and experience in institutional fund management, or other significant pension or other relevant financial expertise.” This is a common practice among public plans; 46 funds in 30 states require at least one board member with financial experience. These two members also must be independent, meaning they do not have a direct or indirect material interest in the state retirement systems. Although specifics are still being finalized, the commission is updating the requirements to serve as chair and is expected to seek additional expertise, particularly in leadership and governance.

Implementation of Act 75 is underway. As outlined in the new law, the Vermont League of Cities & Towns and Vermont School Boards Association each appointed a member to the expanded commission. Members hired a third-party consultant to assist in the transition to an independent entity, and they expect a report early in 2022 with findings and recommendations based on analysis of current operations and peer investment boards. Commissioners are searching for a new chair and discussing requirements for the position.

These efforts are timely. As of 2019, research by The Pew Charitable Trusts showed that Vermont’s investments have historically underperformed, ranking in the bottom 25^th percentile of state plans based on 10-year performance. Additionally, the state had only 64% of assets on hand to pay for retirement benefits promised to its public workers, ranking 39^th among the states.

Since 2009, nearly all states have made some type of reform to the benefits and design of their public pension systems; however, few have enacted policy changes to board governance comparable to those in Vermont. With Act 75, the state took meaningful steps to strengthen its pension investment board practices and structure to help it confront its public retirement challenges.

Greg Mennis is the director, Gerald Lindrew is a senior officer, and Andrea Wales is a senior associate with The Pew Charitable Trusts’ public sector retirement systems project.