Chicago Police Sergeants' Association
Pension News
By: Sgt. Michael Lazzaro
Recording Secretary & Pension Fund Representative
Retirement Board Policemen’s Annuity and Benefit Fund – City of Chicago
Important Information
Prior to the 1970’s, the Policemen’s Annuity and Benefit Fund of Chicago was invested very conservatively in government, municipal and high quality corporate bonds, as were most pension funds. During the 1970’s, several key developments took place pertaining to pension fund investing. The first is the Prudent Person rule became part of federal pension law through the passing of the Employee Retirement Income Security Act (ERISA) of 1974. ERISA governs private sector benefit plans, but the enabling legislation of many public pension plans was subsequently after ERISA including those in Illinois. The Prudent Person rule states that fiduciaries must discharge their duties with the care, skill, prudence, and diligence that a prudent person acting in a like capacity and familiar with such matters would use under the prevailing conditions (A fiduciary is any person who has authority or control with respect to the management or administration of plan assets). The second important development was wider adoption of portfolio theory as a means for investing pension assets, which shifted the focus from the evaluation of securities on a standalone basis to the role they plays in the broader portfolio. For example, the return of an individual stock may be highly volatile on a standalone basis but when combined with other securities whose returns behave differently, it can actually decrease the risk of the overall portfolio. Along these lines, the Fund was granted authority to invest in equities to a limited degree in the early 1970s but the overall investment policy continued to be highly regulated by Illinois State Law.
In the 1980s, several additional key developments took place. The Illinois Pension Code incorporated the Prudent Person rule for the Fund which states that fiduciaries must discharge their duties with the care, skill, prudence, and diligence that a prudent person acting in a like capacity and familiar with such matters would use under the prevailing conditions (A fiduciary is any person who has authority or control with respect to the management or administration of plan assets). The Prudent Person rule was a key development as it allowed Trustees to consider investments that were perceived to be too risky for pension funds historically, but actually improved the risk adjusted performance when incorporated into a well diversified portfolio.
The other important developments that occurred in the early 1980s were the Trustees hired an investment consultant to help them better diversify the portfolio and hire outside advisors to manage those investments. Prior to this, the Funds investments were managed internally by the Fund’s staff and Trustees. Working with the investment consultant, the Trustees developed an investment policy that eventually led to investments in real estate, international equity and private equity managed by dedicated outside professionals.
How a Pension Fund Works?
Simply stated, a defined benefit pension plan is a system whereby contributions to the fund are invested to pay future promised benefits to its participants. In order for this to work, assumptions must be made as to how much the pension fund will reasonably earn, how long and how much the annuitants will draw upon the fund and how much must be contributed in order to grow the assets enough to make the contributions at the future date.
Important Websites
The Illinois Municipal Pension (IMRF) has an excellent website. Pension 101 is very helpful in understanding how Public Pensions function.
There are two websites that are very helpful to Public Pensions. NCPERS (National Conference on Public Employee Retirement Systems) is a nationwide organization that is the largest trade association of Public Pensions in the U.S. The IPPFA (Illinois Public Pension Fund Association) is an organization founded in 1985 that assists the Police and Fire Pension Fund in Illinois.