Commission urges PA pensions to reduce illiquids, create central investment office

  • Why this is important: The two pension systems have faced scrutiny on high management fees and transparency

A central investment office would create synergies for assets managed by Pennsylvania Public School Employees’ Retirement System and Pennsylvania State Employees’ Retirement System. And the agencies should revisit and reduce their allocations to illiquids because the asset class could cause problems during volatile periods.

These recommendations were announced Dec. 20 by Rep. Mike Tobash (R-Pennsylvania), state Treasurer Joe Torsella and Gov. Tom Wolf.

The proposals resulted from a seven-month review by the Public Pension Management and Asset Investment Review Commission, tasked with identifying $1.5 billion in cost savings for each Pennsylvania pension system.

The commission’s recommendations would lead to almost $10 billion in savings in the next three decades, Wolf said.

The central investment office, creation of which would require legislative approval, would be separate from the pension systems, Torsella said. Such an office would increase collaboration and drive synergies for the two pension systems, which had the same investment horizons and strategies, he said.

Several states have similar offices that direct pension investments, he said.

In addition, the commission recommended the pension systems adopt the Institutional Limited Partners Association templates to measure themselves against their peers and provide more transparency in their investments, Tobash said. (Both pension systems adopted the ILPA fee-disclosure template.)

PA PSERS deserved commendation for increasing transparency by releasing the carried-interest report, as well as posting board resolutions and documents on its website, he said.

PA SERS has been working toward responding to issues raised at an earlier hearing, Torsella said. He declined comment about whether SERS would release a carried-interest report.

The commission’s recommendations were focused on modernization, driving innovation and cutting costs paid to managers on Wall Street, Torsella said.

The seven-month review included presentations by various professionals including Ashby Monk, executive director of Stanford University Global Projects Center and co-founder of Novarca North America; Marcel Straub, co-founder of Novarca, and Ludovic Phalippou, professor of finance at Oxford University.

On several occasions, the two pension systems pushed back against issues raised during the hearings.

PA SERS also appeared in September to defy the governor’s wishes for the state’s two public-pension funds to halt high-management-fee investments while the committee studied the costs of the system’s investment programs, Buyouts reported.

But the board approved the commitments because they support the 2018-2019 investment plan established in April, Pamela Hile, spokeswoman for PA SERS, told Buyouts at the time.

PA SERS’s large PE portfolio caused concern, Straub told the commission at the third and final hearing on Oct 25, Buyouts reported.

But “seeking relief from investment fees is a way of life at SERS,” Terri Sanchez, executive director of the pension system, told the commission in her testimony.

Action Item: Read more on the commission and testimonies here