State of Wisconsin Investment Board (SWIB) Trustees awarded incentive compensation based on more than $2.2 billion of net outperformance generated by SWIB staff over the last five years for the fully funded Wisconsin Retirement System (WRS). Due to SWIB’s strong investment performance, WRS retirees will see a Core Trust Fund annuity adjustment of 7.4% and Variable Trust Fund annuity adjustment of 15.0%.
In recognition of staff outperformance, the Trustees awarded incentive compensation payments totaling approximately $24 million. Cost-effective internal management that generated strong investment returns has helped the WRS remain among the best-funded public pension plans in the country. Over the last twenty years, SWIB’s active management and its diversified holdings generated $34.3 billion for the Core Trust Fund above what it would have earned by simply investing in a passive portfolio consisting of 60% global equities and 40% domestic bonds.
In 2021, SWIB beat its one-, five- and ten-year benchmarks for the Core Trust Fund. The one-year net return for the Core Trust Fund, the larger of the two WRS trust funds, was 16.9%. The five- and ten-year returns net of external manager fees were 12.5% and 10.1%, respectively. By exceeding the WRS actuarial target return for both the five- and ten-year periods, SWIB also helps provide continued stability in employer and employee contribution rates.
“The WRS trust funds had another strong performance year despite the ongoing impacts of the pandemic on both our workplace and the markets,” SWIB Executive Director/Chief Investment Officer Edwin Denson said. “We remained committed to our long-term strategy and capitalized on market opportunities to continue to generate added value for the WRS. The level of collaboration and innovation across the organization and commitment by staff to deliver on our mission over the past year was both satisfying and impressive.”
“Trustees have put in place a market-based incentive compensation plan that is successfully attracting and retaining top quality staff to implement and manage SWIB’s complex and sophisticated investment strategy,” David Stein, chair of the independent SWIB Board of Trustees, said. “We know we have to pay competitively, especially as the pandemic has generated record levels of workforce mobility, but we also believe our strong pay-for-performance culture benefits the WRS and its participants.”
Incentive compensation, the pay-for-performance part of employee compensation, was awarded to 220 employees and is based on an employee’s contributions to the overall success of the organization and trust fund performance after deduction of all costs. The incentives equate to less than 5% of all of SWIB’s costs for managing the WRS. Incentives are based on delivering value above industry benchmarks set by the Trustees with the help of an outside independent consultant, a practice used throughout the industry. The plan sets total compensation targets using peer group data and primarily focuses on five-year returns, a longer-term measure that aligns with SWIB’s long-term investment strategy and the period used to calculate retiree adjustments. Compensation to SWIB employees provides a considerable cost savings advantage for the WRS over the fees charged by external investment managers. According to an independent cost consultant, SWIB has saved $1.1 billion of costs compared to its peers in the last 10 years.
SWIB’s strong management of the WRS trust funds has helped fuel one of the only fully funded public pensions in the country for about 652,000 current and former employees of state agencies, the university system, school districts, and most local governments. The WRS consistently ranks among the 10 largest public pension funds in the U.S. SWIB provides a strong, steady economic pillar for the state of Wisconsin by growing the trust funds under its management, managing risk, and optimizing costs over the long term. As of Dec. 31, 2021, the WRS accounts for approximately 89% of the more than $165.6 billion of total assets under management at SWIB. In addition to the more than $147 billion in WRS trust funds, SWIB also serves the state by investing the State Investment Fund, University of Wisconsin System Trust Funds, Injured Patients and Families Compensation Fund, State Life Insurance Fund, and Historical Society Trust Fund. For more information about SWIB, visit www.swib.state.wi.us.