After months of controversy, the Ohio State Teachers Retirement System could be turning a corner. At least, according to its outgoing executive director Lynn Hoover, who said that the “fund is going in the right direction.”
“We’ve made very hard decisions,” she told Institutional Investor, adding that she believes the fund is now well managed and has some of the top returns among pensions in the country. (The pension fund returned 10.5 percent net of fees for the fiscal year ended June 30, slightly below its benchmark of 10.75 percent.)
At its October meeting, the $95.3 billion pension plan’s board selected Global Governance Advisors as its new governance consultant after a brouhaha involving one of the finalists and conflicts of interest. Additionally, it approved a $306 million supplemental payment to retirees.
Both of these moves follow months of turmoil for STRS, which has faced corruption allegations, state investigations, internal conflict, accusations of fund mismanagement, and numerous senior staff departures — including the impending exit of Hoover, who announced her plan to retire December 1 after the board deadlocked on a no-confidence vote in senior leadership.
Some of the problems started a number of years ago. Hoover said the Ohio Retirement for Teachers Association, an advocacy group for retirees, has been a vocal critic that has stoked fear among retirees. “There has been an attack on the system for at least four years, during which a lot of misinformation circulated,” Hoover said, adding that this led to accusations leveled against staff and trustees of fraud and incompetence. “We’ve been navigating a communications crisis from this system.”
To assure the public and beneficiaries, Hoover and her team have reviewed its controls and undergone audits and multiple investigations. She said the vetting “confirmed that our controls and processes are solid.”
Robin Rayfield, executive director of the advocacy group, denied spreading misinformation, saying “anything they don’t agree with is misinformation.” According to Rayfield, what the group wants transparency — and for the plan to stop paying for actively managed investment strategies, including alternatives.
According to Hoover, much of the conflict stems from debates over cost-of-living adjustments (COLAs) for retirees. When STRS was nearly fully funded in the late 1990s, the board had approved significant benefit increases for participants, including an ongoing 3 percent COLA. But decades later, market volatility, changing demographics, and a stagnant contribution rate made these benefits unsustainable, even during periods of low inflation.
So, in 2017, the board cut COLAs to zero, which has been a source of tension, particularly as some elected board members have campaigned on promises of COLAs and reduced service requirements.
While the board had approved a plan to offer a 3 percent increase in 2023 and 1 percent in 2024, Hoover pointed out that permanent ongoing COLAs would add approximately $21 billion in liabilities, which she maintains is not sustainable for the system. “Ongoing repeating COLAs are very expensive,” she emphasized.
Even one of the plan’s former consultants agreed that all the chaos stems from the COLAs. “It’s a money grab,” Stephen Nesbitt, CEO of STRS’ former alternatives consultant Cliffwater, told Institutional Investor. “Everything else is just a red herring.”
Nesbitt added that Cliffwater chose not to rebid for STRS’ business, citing irreconcilable differences. “We couldn’t work with these so-called progressive board members,” he said.
Since announcing her intention to leave, Hoover has spoken with Ohio legislators about introducing a bill to raise employer contributions, which haven’t increased since 1984 and require legislative approval. While current election cycles and an upcoming lame duck session may delay immediate action, Hoover sees opportunity with the new Ohio General Assembly in 2025.
While Rayfield acknowledged that STRS cannot currently afford to pay the COLAs, he suggested that “doing away with the active management of our portfolio” and transitioning to passive strategies “would move the needle significantly and give us a better return” — though he admitted he isn’t an expert in finance or investment.
Like many advocates for passive investing, Rayfield argued that index funds would yield similar returns but at a fraction of active management’s cost. He expressed particular concern about alternative investments, which comprise approximately 20 percent of STRS’ portfolio as of June 30, citing the lack of transparency in the value of assets and fees. Rayfield conceded that his proposed solutions — switching to passive strategies and suspending staff bonuses, which the board agreed to do in June — would not bridge the funding gap.
Nesbitt, whose consulting practice focuses on alternatives, believes that this proposed move will hurt performance, since alternatives can provide excess returns.
“Alternatives have returned more than a passive mix. You need qualified staff to support alternatives,” Nesbitt said. “You can’t index alternatives.”
The system continues to face challenges, experiencing a negative net cash flow of $3.5 billion to $4 billion per year. But Hoover maintains that the fund is fiscally strong and responsible. As a result of its sustainable benefit plan — a framework for the board to assess the cost of potential member benefit changes every year, the system has paid over $4 billion in benefit changes for active members and retirees since the plan was implemented. According to STRS’ actuarial consultant Cheiron, the plan’s funded status saw an uptick, thanks in large part to fiscal year 2024 investment returns. The plan’s funded ratio increased to 82.8 percent from 81.3 percent. The funding period also improved, decreasing to 10.1 years from 11.2 years in the previous year’s report.
“I think that when you look at where we are, we’re at the cusp of continued future benefit changes for our members, so we’re absolutely going in the right direction,” Hoover added.
