Tom Beyna President of the Pension Board

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In the February FOP magazine, I wrote an article pertaining to the current state of our pension fund. The
article detailed factual reasons that contributed to the severely underfunded position our Fund is in today. The
article addressed sources of funding and the contributions from the City having the most significant impact to
our Fund. This is the first year we are receiving actuarial based funding, the City owes our Fund $737.5 million
and we have received $450 million to date. The employee contributions to our Fund equal approximately $9
million per month. This article focuses on the goals and strategy of our investment portfolio and investment
returns.
Historically, the Fund has utilized the services of professional institutional Investment Consultant who acts as a
fiduciary and advisor to the Board. Currently, the Fund’s Investment Consultant is NEPC. NEPC was founded in
1986 and is one of the largest independent investment consulting firms in the industry. Headquartered in
Boston, with offices in Atlanta, Charlotte, Chicago, Las Vegas, Portland OR and San Francisco, NEPC advises on
a total of $1.4 trillion amongst 402 retainer clients. Specific to public funds like us, they advise 69 clients
representing approximately $757 billion.
Kevin Leonard is the lead consultant on our Fund and has worked in the investment consulting industry since
1994. Kevin, a Partner of the firm, is the team leader for the NEPC Public Fund Consulting Practice and is also a
member of NEPC’s Due Diligence Committee and Large Cap Equity Research Advisory Committee. Kevin was
recognized as the 2012 Public Plan Consultant of the Year by Money Management Intelligence and was named
on Chief Investment Officer magazine’s 2019 Knowledge Brokers list as one the world’s most influential
investment consultants.
The services NEPC and the team assigned to our Fund provide include: development, refinement, review of
our Investment Policy Statement, objectives and guidelines; liability based asset allocation studies; asset -
based allocation studies; traditional and alternative asset manager searches; investment manager fee
negotiation, custodian searches; monthly and quarterly performance evaluation; alternative assets consulting;
educational seminars; and participation at our monthly meetings.
The primary goal of our investment portfolio is to exceed our assumed rate of return over the long term by
building a diversified portfolio that seeks to maximize return and income while assuming prudent levels of risk.
The assumed rate of return is recommended by the Fund’s actuary, and it is determined through analysis of
capital market assumptions and forward - looking measures of likely investment return outcomes for the asset
classes in the current investment policy.
The Fund’s Investment Policy Statement outlines our investment philosophy and objectives. The Fund’s assets
are prudently invested with consideration of liabilities, funding sources, liquidity and portfolio size.
Diversification is a key determinant of return and a disciplined rebalancing program is followed to maintain
appropriate asset allocation ranges.
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Annually, an asset allocation review is conducted ensuring
proper diversification is achieved among managers and asset
class. The table represents the Fund’s current Asset Allocation
Policy. Relative to Policy, the Fund is currently under allocated
to Private Equity and Private Debt. This is a result of the Fund
halting investments into illiquid asset classes such as private
equity, private debt and real estate after the financial crisis of
2008 due to liquidity concerns. It was determined that the significant mismatch between contributions coming into the Fund versus money
going out to pay pensions did not allow for the prudent use of illiquid asset classes. In 2016, as contributions
into the Fund began to increase and the liquidity profile of the Fund improved, the Board slowly began
reallocating back into illiquid asset classes. The Board plans to continue building out its private equity, private
debt and real estate portfolios into the future as we continue to receive increased contributions from the City.
As of June 30, 2021, the Fund retains approximately 45 external Investment Managers that provide
investment services and invest the Fund’s assets according to specific guidelines and objectives. A
comprehensive list of Investment Managers can be located on the Fund’s website, chipabf.org. The Board
hires Investment Managers through a Request for Proposal (RFP) process providing competitive selection,
objective evaluation, due diligence and full disclosure and in accordance with the Pension Code. The Pension
Board ultimately makes investment decisions with guidance and advice provided by NEPC.
The goal of each Investment Manager is to outperform their established benchmarks/goals and objectives, on
a net of fee basis. NEPC and the Board reviews manager performance on a monthly and quarterly basis. In
early 2019, the Board terminated two active US Large Cap managers resulting from performance concerns. It
has been difficult for managers to outperform benchmarks in this asset class due to the efficiency in this part
of the market. Market efficiency occurs at a high level when news on companies travels fast through sources
resulting in the current stock price to reflect all information. The Board decided to move towards passive
management in this asset class and aim to track benchmark returns while saving on investment management
fees.
In 2020, NEPC conducted a formal asset liability study which reviewed the current and projected financial
status of the Fund by projecting pension liabilities, benefit payments, asset growth and contribution levels.
The study also assessed the appropriateness of what was the current asset allocation relative to the expected
progress of liabilities and cash flows. As a result of the study, and to strengthen the positioning of the portfolio
in the current market environment, the Board made modifications to the asset allocation including an increase
in US equities, a decrease in actively managed fixed income, termination of the global asset allocation
mandate and the addition of an allocation to passive Treasuries.
The Fund’s portfolio has made strong returns in recent years, posting a return of 16.3% in calendar year 2019
and 12.3% in calendar year 2020. As of June 30, 2021, on an annualized basis, the portfolio returned
approximately 25% over trailing 1- year, approximately 10% over the trailing 3 - year period, approximately 10%
over the trailing 5 - year period, and approximately 8% over the trailing 10 - year period. Since January 1984, the
Fund has returned approximately 8.7% on an annualized basis.
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Although the Fund’s portfolio is well positioned, we are certainly staying vigilant of the risks in the markets
and what the future may hold. We have been through one of the longest bull markets in history for US
equities and risk assets in general. We know that the market moves in cycles and the “good times” don’t last
forever. Today, interest rates/yields are at historic lows and that creates challenges for income generation
which this Fund relies on. As we move past COVID, it is expected that interest rates will increase resulting in a
low return environment for fixed income assets. In general, we expect the next ten years to be a more
challenging return environment then we experienced over the past ten years. In our work with NEPC, and the
investment managers we work with, we will strategically make the necessary changes to our asset allocation
to best position the portfolio. We will also be consistently working with our actuary to make sure we are
prudently fund ing the Fund through the actuarily required contributions of the City.
All pension funds face the same fundamental challenge - contributions plus investment earnings must equal or
exceed obligations. Obligations are defined as benefits and operating expenses. Over time the Fund’s
investment returns exceed the actuarial assumed rate of return. However, it is not possible to invest our way
out of decades of insufficient funding by the City. It is the future required contributions that are critical to
sustaini ng the viability of the Fund. Therefore, the Police Officer Trustees continue to demand that the Fund
receive the required actuarily determined contributions from the City. We are committed to doing all we can
do to continue to improve the funding status o f the Fund so that current and future Chicago Police Pensioners
receive their hard earned and well - deserved benefits.
Thank you,
Tom Beyna
Tom Beyna, MBA Finance
Elected Tustee Representing Active Police Officers
PABF Board President