840 CMR 18: Formation of Investment Policy And Statement of Investment Objectives

Summary

840 CMR 18.00 requires every retirement board to file a statement of investment objectives with PERAC and to periodically update it. Before designing an investment program, boards must consider their most recent actuarial valuation, consult with their investment consultant, and address questions about the system's growth stage, liability stream, demographic forecasts, and funding status. Asset allocation decisions must be made using a liability-sensitive approach that tailors the portfolio to the system's liability profile. The required statement of investment objectives (filed on Form 18) must be signed by each board member and include detailed information about fiduciaries, terms of employment, investment policies, and performance benchmarks.

Full Text

840 CMR 18.00 is the standard rule for the formation of investment policy and statement of investment objectives promulgated by the Public Employee Retirement Administration Commission pursuant to M.G.L. c. 7, § 50 and M.G.L. c. 32, §§ 21 and 23.

18.01 General Requirement

(1) Every board shall file a statement of investment objectives with the Public Employee Retirement Administration Commission.
(2) Before designing an investment program and writing a statement of objectives, every board shall consider its most recent actuarial valuation, meet with the board's consultant, if any, and address the following questions:
(a) What stage of growth best describes the system: start-up, early growth, sustained growth, maturity, or decline?
(b) What are the estimates of growth in the workforce, benefit increases, inflation and other economic factors?
(c) What is the projected level of cash payments to beneficiaries for the next 20 years (the "liabilities stream")?
(d) What assumption regarding "real investment return" (total return less wage inflation rate) is used by the actuary to make funding estimates?
(e) Is the system underfunded?
(f) What has been the history of employer and employee payments into the system? Is there any reason to expect that these will change?
(g) What is the long-term demographic forecast for the system area? What may affect the tax base including such factors as population and business growth, rate of growth or decline and condition of housing stock and industrial facilities?
(3) Asset allocation decisions shall be made based on a liability-sensitive approach which tailors asset allocation for the portfolio to the system's liability profile. Boards shall conduct an initial study of the asset universe and establish the asset allocation in a manner that recognizes the financial structure of the system. Asset allocation decisions shall establish target levels and ranges for asset percentages.

18.02 Matters to be Included in Statement of Investment Objectives

Every statement of investment objectives shall be filed on Form 18, shall be signed by each board member and shall include the following information:

(1) Fiduciaries. The name, address, background and responsibilities of every retirement board fiduciary, including every qualified investment manager employed or expected to be employed by the board.
(2) Terms of Employment and Compensation. The terms of employment and compensation of every: (a) qualified investment manager; (b) consultant employed by the board; (c) custodian bank employed by the board; (d) actuary employed by the board.
(3) Investment policies including asset allocation targets, permissible investment categories, and performance benchmarks.
(4) Identification of any existing or potential conflicts of interest.

18.03 Updates of Statement of Investment Objectives

Every board shall review its statement of investment objectives at least annually, and shall update the statement when there are material changes in the system's financial condition, investment objectives, or investment manager arrangements.

REGULATORY AUTHORITY: 840 CMR 18.00: M.G.L. c. 7, § 50; c. 32, §§ 21 and 23.