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The Wolf administration has dispatched a series of letters to board members at the state’s twin pension funds, urging officials to suspend any additional involvement with investment funds linked to billions in “wasted” Wall Street management fees.
The letters were sent out less than a month after a report from City & State PA revealed that the board members at one fund, the $29 billion State Employees Retirement System, had approved a new plan with limited reductions of so-called “alternative” or “actively managed” investments.
These plans pay high-priced financial consultants to effectively game the stock market. But a July article in the Financial Times cited state Treasurer Joe Torsella blaming the investment strategy for costing the funds some $5.5 billion in fees with little positive impact on performance.
In the Aug. 9 letter, Gov. Wolf urged members of both SERS and the $50 billion Public School Employees Retirement System to refrain “from taking action on any change that involves sizeable management fees” until the bipartisan Public Pension Management and Asset Investment Review Commission releases findings on reforming the state’s beleaguered retirement funds.
“There should be no major revisions to the systems’ fiduciary obligation…or related governance and investment policy guidelines prior to the publication of the Commission’s recommendations,” Wolf wrote.
Pension experts, like University of Pennsylvania professor Donald Keim, broadly agree that similar fees tend to result in more waste than results when compared to passively invested portfolios that are pegged to stock indices.
“There’s simply too much evidence that actively managed funds don’t provide sufficient additional return over and above the return on a passive fund with the same risk to offset the additional fees they charge,” Keim said.
The governor and other officials have publicly supported a shift to a passively indexed portfolio for the state retirement plans. But many on the SERS board, including some of Wolf’s own appointees, voted in April to approve a portfolio that kept 40 percent of investments in actively managed schemes.
PSERS spokesperson Evelyn Williams said the board had not interpreted the letters as an admonishment for that decision – a Wolf spokesperson offered no additional comment, except to say the letters “speak for themselves” – noting that in April, the pension board voted to commit to some reduction in actively managed plans.
This stance may explain why the PSERS board outlined a plan to meet performance targets by spending millions on in-house money managers less than a week after Wolf’s letter was dispatched.
Torsella condemned the move as doing nothing more than shifting costly management fees to an in-house model rather than eliminating the practice altogether.
“There has been no correlation between high fees and high performance,” wrote Torsella in another letter to board members following the recent meeting. “Such a claim is premised on the concept that excess returns can be bought. They cannot.”
PSERS replied that the board is simply taking actions to reduce expenses.
“The plan is fluid and will adapt to changes and market conditions as necessary. The plan specifically acknowledged the work of the Commission,” Williams wrote.
Some estimates put the state’s unfunded pension liability in the $70 billion range. Despite paying financial managers, SERS, for example, has sometimes missed its projected returns of 7.5 percent per annum, at times by a wide margin. In 2015, the fund earned just 0.5 percent.
A spokesperson for SERS said only that board members had not met to discuss Wolf’s letters.