Peter Vaughn, chief executive of Maryland's troubled state employee pension system, resigned under pressure yesterday -- taking medical retirement at the age of 46.

Vaughn, executive director of the State Retirement Agency since 1993, submitted his resignation at the monthly meeting of the state pension board.

The trustees released a statement saying they accepted the State Medical Board's recommendation of a disability retirement "with reluctance and deep regret." They noted that Vaughn suffers from a chronic back condition and has undergone two major operations in recent years.

While there is no doubt that Vaughn's medical condition is serious -- for months he has worn a stiff body cast over his clothing -- it was also clear that he had lost the confidence of lawmakers and top leaders of the pension system.

In recent weeks, Comptroller William Donald Schaefer, chairman of the pension board, repeatedly expressed his unhappiness with the management of the agency.

At a Joint Pension Committee hearing last month, Schaefer criticized Vaughn for failing to keep trustees informed on crucial issues. "That's the job of the executive director -- to tell me and tell the board there's trouble brewing somewhere," Schaefer said.

Trustees said the change in leadership is a positive move for the system, which has been shaken in the past two years by heavy losses and an embarrassing financial fraud.

"I think we're going to start with a clean slate," said trustee George R. Tydings.

No successor was named yesterday. System spokesman Joseph M. Coale said an interim replacement may be appointed in about two weeks.

Vaughn announced his decision in a closed-door session with trustees. He declined to answer questions after the meeting.

Trustees expressed sympathy for Vaughn's medical condition, which has curtailed his working hours for more than a year. Vaughn told board members the pain from his back was "unbearable" and that he may have to undergo a third round of surgery, trustees said.

"It was clear to Pete and the board and the staff members here that he couldn't devote full time to his job," said state Treasurer Nancy K. Kopp, the board's vice chairwoman. "It was a very difficult decision for a relatively young man."

Schaefer declined to comment after the meeting.

Vaughn earned $119,657 a year managing a state pension system with more than 250,000 participants. The fund provides benefits for 86,000 retired state employees, police officers and schoolteachers.

After reaching a record $33 billion in assets in 2000, the system has staggered through more than two years of heavy losses on its investments. The system was ranked last in a Wilshire Associates survey of large public pension plans' investment performance last year, and at the end of last month its assets stood at $25.3 billion.

Vaughn's resignation comes almost a year after the board fired money manager Nathan A. Chapman Jr. for allowing one of the sub-managers he hired to invest about $5 million in Chapman's companies -- a deal described by business ethics experts as a blatant conflict of interest.

The system lost an estimated $4.5 million on that investment, which was not brought to the board's attention until three months after at least one member of the retirement agency's staff knew about the conflict.

Vaughn generally took a hands-off approach to the investment side of the agency. But in October last year, his intervention in an investment issue played a critical role in keeping the board in the dark about Chapman's conflict of interest for months.

An internal audit showed that Vaughn directed Chief Investment Officer Carol Boykin to halt her inquiries into Chapman's dealings with convicted stock swindler Alan B. Bond, the sub-manager who bought Chapman stock.

Vaughn would later explain that he wanted to avoid conflicts between federal investigations and Boykin's inquiries.

In a recent Sun article examining the system's relationship with Bond and Chapman, trustees expressed frustration with the agency's staff, who had failed to adequately inform them about a federal indictment of Bond in 1999. At the time, Bond was managing about $30 million in state pension money under Chapman's supervision.

Vaughn, a protege of former Comptroller Louis L. Goldstein, was hired as executive director in 1993. After Goldstein's death in 1996, Vaughn became known for his unswerving loyalty to then-Treasurer Richard N. Dixon, who succeeded Goldstein as system chairman.

Lawmakers said Vaughn had a difficult relationship with General Assembly leaders -- a problem that predated his health problems. Sen. Edward J. Kasemeyer, co-chairman of the Joint Pension Committee, said Vaughn's tenure was "probably a good thing to end."

Still to be decided is the future of Boykin, who has been criticized by some trustees, including Schaefer, for her handling of the Bond-Chapman matter.