Q&A with Pensions Expert Linda Herman

Linda, welcome and good to speak with you today. We are so happy that you could take the time for this exchange.


You wear two hats with regard to pensions – you are a county pension plan executive and you are a representative of county governments on the State Pension Board. You have presented on topics in pensions at MACo’s Conferences and before the MACo Board and Legislative Committee. It is good to have you among the county ranks and working on the state level on behalf of counties.

Let’s start with talking about your work in Montgomery County. You have been the Executive Director of the County’s Employee Retirement Plans since 2004. How did you come to this role?

My work with the County began in 1999 when I was hired as the Senior Investment Officer.  At that point in time, the County’s retirement funds totaled around $2.1 billion and I was the only investment professional on staff. The County’s retirement plans and the OPEB trust fund now total nearly $6 billion in assets and we have an investment staff of five, supported by operations, financial reporting and administrative (benefit payments) staff of twelve. 

Let’s turn to your work on the State Pension Board. You are the first to serve in the county-seat on the State Pensions Board, which was established in 2012. Tell us a little about the role of a trustee of the State Pension System.

Robin, trustees are those entrusted to take care of the System assets and analyze and evaluate investment strategies, asset allocation, procedures and processes to ensure that the assets are managed in a prudent and proper manner based on legal and industry standards. This is done primarily by guarding and improving the System’s assets and ensuring that the assets are there to cover the liabilities. In the case of the State Pension System, the liabilities are all of the employee pensions.

There are several pension plans within the State pension system. These plans cover employees of different State entities, such as teachers, judges, and public safety officers. About half of Maryland’s county governments are also members of the State Pension System, meaning they pay into the State System for pension benefits for their employees.

Where are the Pension Board meetings held, and what are they like?

The meetings are all held at the System’s offices in Baltimore City.

At the meetings, Trustees have an opportunity to review the financial reports reflecting the System’s performance, evaluate proposals on asset allocation and investment strategies proposed by staff and the general consultant hired by the Board, discuss issues facing the System, and develop strategies for the future.

Basically, Trustees meet to carry-out their duties to the System. These include:

  1. Establishing the asset allocation targets
  2. Hiring and evaluating the performance of the CIO & staff
  3. Monitoring the performance of the financial sectors and investment strategies, and
  4. Receiving reports from the System’s actuary on the impact the investment performance has had on the funded status of the System 

Since 2012, all counties support a portion of teacher pension costs through contributions to their local school boards. It was that changed role that lead to MACo’s advocacy for county representation on the Pension Board. As the first to serve in this position, do you have any reflections on the county role and perspective?

The decision made by the in 2012 to shift a portion of teacher pension costs to local governments was one of the actions that the State took in that year in response to a need to balance its own budget during the Great Recession. The shift, however, was permanent, going forward, counties will continue to pay this annual cost – upwards of $250 million across the State, to school boards. Any future economic dip or recession holds the threat of another similar shift of State fiscal responsibility. 

Why is the county voice on pensions key?

MACo having a “seat at the table” as a fiduciary provides the ability to directly impact the investment program through the asset allocation process, hiring the CIO, evaluating strategies and processes.

The funded ratio of the combined State of Maryland pension systems is 72.50% on an actuarial market value basis as of June 30, 2018, an increase from 71.8% at June 30, 2017. The median public pension plan was 71% funded as of June 30, 2017 based on an analysis performed by Wilshire Associates, a national consulting firm. But, in comparison, the Montgomery County pension plan is 95.6% funded as of June 30, 2018. I strive for 100% funding — and that is what I want to see at the State level.

What positive changes have been made on investments since you joined the State Pension Board?

While I am frustrated that we haven’t seen the returns on the System’s investments improve as dramatically as I would have liked, there have been many positive changes to the System’s investment program since I joined the Board. That is a credit to the entire Board and something that is very good for the State, the participants in the System, and for Maryland counties.

Some of the changes include a new investment consultant to the Board of Trustees and a new Chief Investment Officer. With these two changes the Board has revised the asset allocation and investment structure of the System. 

Tell us more about the System’s asset allocations and investments.

In 2008 and 2009 the Board approved a significant reduction in the exposure of the System to equities. I was not a member of the Board at this time, however, my understanding was that the decision related to the financial crisis and the need to ensure that assets were not subject to a high level of risk. The Board moved the money that would have been invested in equities to hedge funds and other lower returning assets that were deemed to be less risky and to do well in times of market dislocations. 

In comparison, in 2007 Montgomery County also approved changes to their asset allocation to diversify the portfolio away from equity risk by introducing allocations to long duration bonds, global inflation linked bonds, commodities, and private natural resources. This diversification effort was not necessarily driven by a goal to maximize returns, rather to manage risk. Diversifying across various asset classes at a meaningful risk level is important because different assets tend to outperform in different economic environments. For example, equities and credit outperform other asset classes during economic expansions; global inflation linked bonds, commodities and real assets protect during inflationary periods and long duration bonds do best during periods when the economy contracts and inflation expectations fall. 

In addition to diversifying the portfolio across broad asset classes, the Montgomery County has also achieved significant diversification within each asset class by pursuing unique strategies and focusing on alpha opportunities. It is important for the State Board to continue to look for ways to manage risk and increase the return of the portfolio so that the System can “weather” any type of financial market scenario.

The Washington Post recently published an editorial about the State Pension System’s funding and how it could be improved. The editorial focuses on policy and funding decisions that are largely in the hands of the General Assembly and the Governor, not the Pension Board. However, are there changes to investment policy that you think could help the System’s funding?

There are many variables at play with regard to the State pension system’s funding that are not in the hands of the Board. What we are required to do as Board members is to help the funded status by seeking to improve investment performance. The Maryland system has consistently underperformed its peers over the last ten + years. 

“The general consultant to the board, and the Chief Investment Officer, have stated repeatedly that the underperformance compared to peers is due to the Board’s decision to reduce equities after the financial crisis in an effort to reduce risk. That decision has resulted in millions of dollars in lost revenue and increased employer/taxpayer contributions.”  – Linda Herman, County Representative to the State Pension Board

The main point I have tried to push as your Board member is the expansion of the Board’s knowledge on the use of risk versus the avoidance of risk. If risk, and return, are reduced in one part of the pension system’s portfolio, the system still needs to meet its return hurdle to maintain the funded status. If the return hurdle is not met, employer or employee contributions must be increased to maintain the funded status. I continue to stress that the Board review other avenues, as Montgomery County and the State’s peers have, to manage the risk of the system’s assets while meeting the return hurdle without increasing contributions. 

Thank you for joining us at Conduit Street, Linda. We look forward to staying in touch and hope you will have more good news to share as you continue your work as a Trustee on behalf of county governments.




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