 (Woodbridge)
– The State Investment Council today adopted rules and procedures
for New Jersey’s Alternative Investment Program (AIP) which firmly
establish vigilant oversight, ethical integrity and checks and balances
as the guiding principals.
The
Council’s action today follows the November 2004 adoption of a
policy to allocate 13 percent of New Jersey’s pension portfolio,
currently valued at about $70 billion, to alternative investments. Under
this policy, the 13 percent threshold would be reached over a period
of 5 to 7 years through investments in the alternative classes of Private
Equity, Real Assets and Absolute Return strategies, or Hedge Funds.
The objective of the policy is to enhance risk-adjusted returns for
New Jersey’s pension portfolio through diversification.
“Portfolio
diversification provides New Jersey with the ability to significantly
improve its overall risk-adjusted returns and better meet the financial
obligations of the public pension system,” said Treasurer McCormac.
“An alternative investment program provides the right balance
to protect the long term interests of the taxpayers of the state and
the participants of the system against swings in the market that elevate
risk for traditional investments in stocks and bonds,” he said.
The
Treasurer said the approval of the policy and procedures represents
a significant step toward stabilizing and strengthening New Jersey investment
program, adding that today’s vote marks a concluding chapter in
a methodical reform process.
Previous
steps include the commission of an independent operational review of
the investment program in 2002, the implementation of recommendations
of the review consultant in 2003, the procurement of a general investment
consultant, an asset allocation study, and the adoption of the toughest
“pay to play” safeguards for public investment programs
in the country in 2004.
“We
have been deliberate and thorough in diagnosing problems,” McCormac
said. “We have been methodical and open-minded about prescribing
solutions, and today we are prepared to move forward with sound, well-reasoned
reforms,” he said.
The
policy sets clear goals and guidelines for each new asset class and
prescribes risk control responsibilities for the State Investment Council,
the Division of Investment and the Department of the Treasury.
The
procedures make clear that alternative class investments will be made
by the Division of Investment with assistance from investment consultants,
including the State’s General Investment Consultant and special
consultants retained under State procurement law to provide advice regarding
specific asset classes.
The
Investment Division with oversight of the Investment Council will monitor
and endeavor to control the overall risk of the AIP and ensure compliance
with the AIP Policy. The procedures also establish criteria and detailed
steps for the selection of outside managers for the alternative investment
classes. The procedures require that each alternative investment made
be monitored on an ongoing basis throughout the life of the alternative
investment.
Finally,
the procedures establish clear roles and responsibilities for monitoring
and implementing each step of the AIP for the State Investment Council,
the Division of Investment, asset class consultants and the general
consultant.
“Each
step of the AIP process has built-in protections to ensure integrity,
internal controls, vigilant supervision and risk management. The beneficiaries
who rely on the solvency of pension assets, and the taxpayers of New
Jersey who guarantee that solvency, deserve nothing less,” McCormac
said.
“Today’s
approval strikes a solid balance between upholding the highest standards
of integrity and management for our investment program while meeting
our fiduciary responsibilities to the pension fund,” he said.
The
full text of the new policy and procedures will be available next week
on the Treasury Department homepage, www.state.nj.us/treasury.
The policy and procedures will be implemented upon the adoption of formal
regulations.
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