PA SERS approves PE commitments despite governor’s request

  • Assets under management: $28.8 bln
  • PE target: 16 pct
  • Actual PE commitment: $3.9 bln, or 13.7 pct
  • Key personnel: Bryan Lewis, CIO; David Felix, director Alternative Investments
  • Why this is important:  The move by PA SERS appears to go against a request by the governor to halt high-management-fee investments while a committee studies the costs of the system’s investment programs.

Pennsylvania State Employees’ Retirement System appeared to defy the governor’s wishes for the state’s two public pension funds to halt high-management-fee investments while a committee studies the costs of the system’s investment programs.

Earlier this month, the board of the state’s public-workers pension approved $175 million in commitments across three funds: $75 million to Vista Equity PartnersFund VII; $75 million to NGP Natural Resources XII; and $25 million to NGP Keystone.

Governor’s letters

The board approved the commitments around a month after Pennsylvania Gov. Tom Wolf sent letters to the pension boards, asking for a pause to high-risk, high-management-fee activities.

The board approved the commitments because they support the 2018-2019 investment plan established in April, said Pamela Hile, spokeswoman for the state workers’ pension.

“None of the investments substantially change the liquidity profile or add additional risk to the portfolios,” Hile said.

The investment plan set an annual investment pace for private equity at $650 million. The plan calls for prioritizing commitments of $75 million or more in best-in-class funds, Buyouts previously reported.

Like many public pensions, PA SERS is trying to build long-term strategic partnerships, reduce the number of GP relationships and improve its ability to negotiate lower fees, according to the plan.

The commitment approvals come amid strong pushback on PE investments from the state government.

One of the pension fund’s board members, state Treasurer Joe Torsella, voted against the commitments. Torsella has “concerns … about the process of screening and accepting these high-fee, no-bid contracts. … These murky, often high-fee and illiquid investments deserve close scrutiny when they come before the board,” said Mike Connolly, spokesman for Torsella.

Torsella earlier this year accused the two pension systems of wasting $5.5 billion in fees paid to investment managers who haven’t performed well.

“SERS already had one of the highest levels of investments in alternatives and just a few months ago decided they needed to invest in those funds further,” Connolly told local publication City & State PA in July.

“These funds are often less transparent with much higher fees than what could be found on the open market.”

Gov. Wolf’s letter, while vaguely worded, asked the retirement systems to “[refrain] from taking action on any change that involves sizable management fees.”

The governor asked the systems to make no major revisions in their investment-policy statements, asset-allocation plans and/or related governance and investment-policy guidelines.

Finally, the systems should “cease other commitments, terminations, or changes in investment strategy that do not address an immediate portfolio de-risking or increase short-term liquidity,” the letter said.

Panel reviewing

These restrictions should be in effect until the Public Pension Management and Asset Investment Review Commission, created last year, issues its recommendations on long-term fee reduction, the letter said.

The commission’s study could result in significant changes to pension oversight and investment operations “that modify practices related to investment strategy, actuarial assumptions, fund structure, and/or fee transparency,” the letter said.

The state workers’ pension, which manages about $29 billion in assets, has exposure of about 13.7 percent of the total fund in private equity. It has a target allocation of 16 percent.

It’s unclear whether the state teachers’ pension system will move forward with PE commitments. The next teachers board meeting is scheduled for Oct. 11-12.

Action Item: Check out the 2018-2019 investment plan here: