Independent Operational Review of the Arizona State Retirement System’s Investment Strategies, Alternative Asset Investment Procedures, and Fees Paid to External Investment Managers

As part of its sunset review, the Office of the Auditor General retained Gallagher Fiduciary Advisors, LLC (Gallagher), a subsidiary of Arthur J. Gallagher & Co., to conduct an independent review of the Arizona State Retirement System’s (ASRS) investment strategies, alternative asset investment procedures, and fees paid to external investment managers from fiscal years 2005 through 2014. Over the cumulative 10 fiscal years analyzed, Gallagher determined that the ASRS defined benefit plan’s investment performance ranked in the 16th percentile of public pension plans and met its 8 percent actuarial assumed rate of return in every year except for 2008, 2009, and 2012, largely because of poor market conditions in those time periods. In addition, Gallagher determined that the ASRS has adequate policies and procedures that are comparable to industry standards and/or best practices in place for monitoring investment strategies and objectives, evaluating and selecting alternative investment managers, and setting external investment manager fees. Gallagher recommended that the ASRS continue these practices, but that it adopt additional practices, including an annual review of its assumed rate of return, an annual review of its Strategic Investment Policy, and documenting additional due-diligence information for the partnerships it considers.