Retirement system improves returns on short-term cash

Missouri State Employees' pension fund introduces 'for the benefit of' account structure

The challenge

Missouri State Employees' Retirement System (MOSERS), a statewide public pension fund providing retirement, life insurance, and long-term disability benefits for approximately 100,000 Missouri state employees, retirees and beneficiaries, manages an investment portfolio of more than $7 billion.

As the market interest rates dipped to historical lows during the recent economic downturn, MOSERS was challenged to find attractive yields on secure and liquid short-term investments. As a public pension fund manager, MOSERS must uphold its fiduciary duty to taxpayers — and the exclusive interests of its members — and ensure the security of the employee benefits that it manages, while also maximizing returns within prudent risk parameters.

With yields on MOSERS' traditional short-term investment instruments, which include government securities such as Treasury bills, repos and commercial paper, hitting all-time lows, the fund was looking for alternative investments with more attractive returns that also offer safety of principal and daily liquidity.

The solution

Citi presented MOSERS with a creative solution that involved depositing funds in a "for the benefit of" (FBO) Negotiable Order of Withdrawal (NOW) account, an interest-bearing checking account in the U.S. that is available to individuals, government entities, non-profit organizations and pension funds. These accounts carry standard FDIC insurance of up to $250,000 per legal entity per bank and also offered MOSERS greater returns than various short-term government securities.

The FBO account solution leverages the concept of pass-through FDIC insurance and is a way for entities such as MOSERS that hold funds on behalf of multiple entities or individuals to realize increased FDIC insurance. In an FBO account structure, each individual in an aggregated account is eligible for standard insurance, ultimately making the total deposit fully FDIC insured.

The result

With the FBO NOW account, MOSERS gained a fully backed investment option with a superior rate of return for its short-term cash. Since the solution provides full FDIC insurance, MOSERS eliminated the need for collateralization and collateral monitoring of bank deposits in excess of standard FDIC coverage, which is a requirement of most state and local entities using standard demand deposit or NOW accounts. What's more, MOSERS has ready access to its funds when it needs them.