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Strong TRS Response to COVID-19 Pandemic

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Issue: The COVID-19 virus spread rapidly throughout Illinois in February, March and April of 2020 and continued to vex the state throughout the summer. Responding to this challenge required an aggressive response from Teachers’ Retirement System.

Discussion: On March 11, TRS began encouraging telephone counseling sessions in lieu of face-to-face meetings at our offices in Springfield and Lisle. Only a few days later, TRS banned all visitors to its offices. The prohibition included members seeking counseling appointments, business partners and outside vendors.

Following the lead of Gov. JB Pritzker, on March 16 TRS closed its offices in order to protect the health of staff, their families and friends, The System implemented preplanned “work from home” procedures. The top TRS priority during this emergency situation was to continue paying all benefits as usual to retired members and beneficiaries. TRS was designated an “essential” state service by Gov. Pritzker because of the monthly economic impact of TRS benefits in communities across Illinois.

However, the successful transition of TRS from its normal operational posture to a work-from-home status was not accomplished in a weekend.

For example, when Executive Director Dick Ingram first came to TRS in 2011, he toured the System’s offices in Springfield and entered a large room on the lower level that was called the “Record Center.” He was confronted with hundreds of metal storage shelves crammed with more than 384,000 hard-copy member records – all on paper, microfilm or microfiche.

“What’s the back-up?” Ingram asked. He was told there was none.

The realization that irreplaceable member records could be lost forever to a fire or from a record merely being misplaced in the catacombs of physical records was a risk he wasn’t willing to accept. That led to a multi-year project to digitize each paper record; preserving them forever and making them easier for staff to find and use.

Fast-forward to 2020. The Record Center and its paper and plastic are gone, replaced with a “cloud”-based digital system that is more than 11 terabytes in size – approximately 12 million separate images.

The TRS digital record system played an important role during the response to the coronavirus pandemic. For weeks, TRS staff fulfilled the System’s priority functions from home: Member benefits were paid on time and in full. Retirement claims were processed. The System’s Call Center handled an average of 3,000 telephone requests for assistance and approximately 700 emails every week.

Along with digitizing all records, over the last 10 years TRS prepared numerous contingencies for an emergency that required the System’s offices to be closed. During this time, TRS:

  • Invested in the technology that enables staff to work remotely. The Member Services staff can administer benefit payments from home. The Investment and Finance departments can remotely oversee the TRS investment portfolio and move funds between accounts.
  • Joined with TRS members to develop an external email system that allows us to contact close to 300,000 members quickly with up-to-date information.
  • Created a detailed “Business Continuity Plan” which imagined the closure of TRS offices. While most staff thought a tornado or a fire would likely initiate the BCP, the plan’s initial use turned out to be a response to a pandemic.
  • Delegated the responsibility for preparing a business continuity plan to a management-level executive who constantly updated all checklists, led training and annual practice sessions and helped all TRS departments coordinate their actions.
  • Moved information technology functions to “the cloud,” which enhances remote work.
  • Ran annual tests of TRS computer systems to confirm that all critical functions, especially the payment of benefits, could be accomplished in a “work from home” environment.
  • Developed an internal “message tree” that enables TRS management to reach all staff with vital information via telephone or text in case the System’s offices are disabled.

Consequently, TRS was able to accomplish a swifter transition to Work-from-home than other public pension systems in Illinois. The System also began enhancing its on-line member services to make it easier for users on both ends of the retirement process to conduct business.

For instance, for the first time TRS members now can electronically upload all completed TRS forms and documents to our offices. Before this expansion, members had to mail paper forms to TRS. Now, all TRS documents can be completed and uploaded directly, including completed retirement applications, health insurance participation forms and depository agreements for TRS benefit payments.

Direct transmission cuts down on the paper mail that TRS receives daily and must scan by hand into its computer system. Since the expansion of the upload service, incoming paper mail to TRS has been reduced by 24 percent.

In the Investment Department, forethought and careful planning also helped TRS successfully navigate the perils and uncertainties of the pandemic’s economic body blow. The System’s strategic focus remained a prudent, long-term allocation of assets to keep investment risk as low as possible, protect assets during the economic downturn and be nimbly poised to take advantage of economic growth possibilities

At the end of June, TRS held $51.2 billion in investment assets, a 4.7 percent increase in assets compared to the $48.9 billion reported at the end of March. Prior to the spread of the pandemic, TRS began the January-June half of 2020 with $54.2 billion in assets.

All public pension systems and institutional investors around the world lost money because of the COVID-19 virus. But compared to public pension systems similar to TRS, the System ranked among the nation’s leaders in its ability to preserve assets.

During the January-March quarter, the TRS investment return was -9.95 percent, net of fees. At the end of December, the TRS investment return for the year was +13 percent. These rates, however, stand favorably compared to other economic measurements of the same period:

  • The Northern Trust Corporation’s analysis of the 300 largest U.S. institutional investors indicated that the median return for public pension plans was -12.6 percent.
  • A similar analysis of public pension systems by Wilshire Associates found that the median quarterly return was -12.8 percent.
  • A customized analysis of 128 public pension systems completed by RVK, Inc., the TRS investment consultant, indicated the median return was -12.1 percent.

Using statistics from the RVK comparison, the TRS portfolio ranked in the top 25 percent of public pension plans during the quarter, meaning that 75 percent of the systems studied ranked below TRS. The System’s rank improved when these comparisons included long-term statistics. For instance, at the end of March the TRS 10-year and 20-year returns ranked in the top 10 of peer systems. TRS long-term investments out-performed 90 percent of similar systems in the United States.

In general, the negative investment returns for various stock market measurements indicated that the TRS portfolio held up comparatively well. Here are some January-March return rates of the three best-known stock market indices:

  • -22.97 percent - Standard & Poor’s 500
  • -26.23 percent - The Dow Jones Industrial Average
  • -17.83 percent - National Association of Securities Dealers Automated Quotations (NASDAQ)

TRS maintains a focus on steady, long-term investment returns. Short-term corrections in the investment markets may get the headlines, but TRS recognizes that the majority of its members maintain relationships with the System that last for several decades.

Even with the effects of the coronavirus pandemic, TRS projects that its long-term investment returns will continue to exceed the System’s long-term assumed investment return of 7 percent. For instance, the 40-year return for TRS at the end of fiscal year 2019 was 9.2 percent and 9.1 percent at the end of calendar year 2019. During calendar 2019, the annualized return for the S&P 500 index was 8.4 percent. Current calculations indicate that at the end of FY 2020 in June the TRS 40-year return rate will be 8.9 percent.

Although no one saw the COVID-19 virus coming, the resulting economic downturn did not catch TRS off guard. For years, economists have predicted that a downturn eventually would occur. So TRS has employed a “defensive” investment strategy to guard against unforeseen drops in the investment markets.

The System has routinely run “stress tests” on the portfolio to help determine how best to protect assets during a downturn. The results of these tests factor greatly into strategic investment decisions. Some examples during the coronavirus pandemic:

  • TRS only had approximately 32.5 percent of its investments in the stock market, which is low for a large public pension system.
  • TRS had a highly diversified portfolio – 26 percent of its assets in bonds, about 15.7 percent in real estate, 13.4 percent in private equity opportunities and about 11.6 percent in investments designed specifically to help lessen the effects of an economic downturn.

In its 81-year history, TRS has survived numerous economy-shattering events, including World War II and the resulting reconstruction of Europe and Asia, wars in Korea and Vietnam, oil supply crises in 1973 and 1979; runaway inflation in the 1970s and 1980s; numerous stock market “corrections”; the Iraqi invasion of Kuwait, the terrorist attacks of September 11, 2001 and five global health epidemics – SARS, Ebola, the Avian Flu, the Zika virus and the Swine Flu.

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