Illinois Municipal Retirement Fund

The Illinois Municipal Retirement Fund (IMRF), with offices in Oak Brook, Illinois, is a public defined benefit (DB) pension system providing retirement, disability and survivor benefits to the employees of units of local government and school districts throughout Illinois. As of December 31, 2017, IMRF served 2,997 employers, and 419,799 active, inactive or retired members.

Members are classified by “plan” and “tier” depending on their position and participation dates. Members in the Regular Plan contribute 4.5% of their IMRF reportable earnings. Tier 1 Regular Plan members are vested after obtaining eight years of service credit, and Tier 2 Regular Plan members are vested after obtaining 10 years.

IMRF was 98.2% funded on a market basis at the close of its fiscal year ending December 31, 2017. That does not surprise Brian Collins, executive director of the pension fund, as IMRF “has always enjoyed a relatively high funding level of between 90% and 100%, with two-thirds of our pension payments coming out of the investment returns as opposed to larger employer contributions.” Further, over the past 36 years, IMRF has earned an average of 10% on its investment portfolio, Collins says.

By keeping the plan consistently funded at such a high level, “the more money the chief investment officer [CIO] has to invest, and the more money on hand to invest, the more money you will make over time,” says Dan Duquette, deputy executive director of IMRF.

“Some plans have had to sell investments in order to pay benefits. That’s a rare event but a dangerous situation to be in. We are fortunate in that we are nowhere close to that.”

Conservative, Disciplined Investing

Illinois Municipal Retirement Fund is able to achieve such a high funding status through a “very disciplined approach to investing,” Collins says. “Our asset allocation doesn’t change dramatically over time. We don’t react to near-term changes in the marketplace. We take a conservative and committed approach. We also have really high-quality people running the plan. We are proud of our CIO, Dhvani Shah, and her team, as well as past CIOs and teams that preceded her. Those are the ingredients for long-term success.”

In fact, the pension plan has paid 60%, on average, of its benefits directly from its returns, Collins notes. “This is probably on the high side for most pensions. It fluctuates from year to year. Last year, we paid 64% of benefits from the returns.” Certainly, paying nearly two-thirds of pension payments from the plan’s investment returns as opposed to larger employer contributions is one of the strengths of the plan, Collins says.

Four trustees of the eight-member board are elected by the nearly 3,000 employers, Collins says. Three trustees are elected by the 177,000 working active members of the pension plan and one by its 125,000 retirees. “This gives the board a very balanced perspective on everything,” he observes.

“Notably absent from this plan are political appointees, as are often [found] in other pension plans,” he says. “Not having politics enter into this fiduciary relationship has been a strength of ours.

Over the years, the trustees—and I have been here 29 years—really keep in mind what is in the best interest of the pension plan when making decisions.” Moreover, “they receive training each year aimed at fiduciary responsibility.”

The pension plan team includes Callan as consultant and Northern Trust as plan custodian.

The Illinois state legislature granted IMRF statutory authority to set employer contribution rates based on actuarial best practices, and the pension system has the authority to enforce payment if necessary. IMRF can achieve this by going to the state comptroller’s office and taking the money out of the municipal entity’s sales tax revenue, Collins explains. “It’s unusual to have this legislative authority. Having the leverage of this enforcement power has put IMRF in a very strong position whereby we have almost never had to use our intercept authority.

“The state teachers’ plan and the university system are funded either by the state or the city of Chicago,” he continues. “Each year, those governing bodies decide how much to contribute, which may not relate to what is the actuarial requirement. It has been many years since either of those governmental bodies has paid anywhere approaching the required minimum.”

The Actuarial Difference

By comparison with the other two governmental plans, the Illinois Municipal Retirement Plan uses actuarial guidelines and has the guardrail of being able to enforce payment, Collins notes. “The health of our plan is defined not just by the rate of return but by” consistent, reliable and actuarially sound input, he says.

“We have 3,000 municipal entities that participate in our plan,” he says. “Each and every one of those has its obligation recalculated every year by our actuaries. They all realize it is a real-time obligation, and they pay their obligations like clockwork. It has been engrained into their DNA over the past 20 to 30 years. We have always had actuarially required funding. This allows us to be a more conservative long-term investor and keeps us out of short-term cash flow stress. When you combine the funding structure with our disciplined investing, that’s how you come up with exemplary performance.”

IMRF also averages gains and losses over a five-year period so that obligation rates stay relatively stable, Collins says. For example, the pension plan achieved a 15% return in 2017 that earned it over $5 billion, but 2018 was a rough year, with a return of -4.31%.

“Averaging the returns mitigates volatility so that rates stay relatively stable,” Duquette says. “Our employers value consistent rates.”

Moreover, the pension plan will be decreasing the average employer contribution rate from 11.24% of payroll last year to 9.06% this year. “To get contribution rates to the single digits is pretty rare,” Collins says.

“We ended 2018 around 90% funded, which is quite strong on both a statewide and a national level,” Duquette says. In Chicago, some of the pension plans are at a funding level of 40% or less, he observes. “The disparity between our plan and those is extreme.”

“A funding level of 80% or more is considered healthy, so to be anywhere near 90% is unusual,” Collins says. 

Performance Excellence

According to Duquette, IMRF works toward “continuous process improvement.” In 2017, the pension plan was awarded the Illinois Performance Excellence (ILPEx) Gold Award. “Only 14 Illinois-based organizations have received this award over the 22 years of this program,” he says.

“As deputy executive director, one of the things I am most proud of is our journey of excellence—being able to balance everything from senior leadership to workforce engagement. We try to measure everything that we do and aim to be in the top 10% in terms of relative benchmarks.”

In addition to IMRF, Illinois offers its workers a 457 plan and a voluntary additional contribution (VAC) program to save for retirement, Duquette says. Workers may contribute up to 10% of their salary, post-tax, into the VAC. These funds earn 7.25%, with the earnings tied in to the assumed rate of return in the pension portfolio.

“With savings at many banks earning as little as 0.07%, this is a pretty good deal and is a great benefit for our members,” he says. Twenty thousand workers participate in the VAC, he says.

—Lee Barney