Will NYC Pay Millions To In-House Managers?

Pension Fund: New York City Bureau of Asset Management

Size: $120 Billion (Among Five Pension Funds)

Private Equity: $7.5 Billion in Invested Capital (July 31, 2011)

Chief Investment Manager: Lawrence Schloss

New York City’s public pension system could start paying investment managers millions of dollars a year if a new tentative agreement to consolidate oversight of the city’s five municipal pensions is ultimately approved.

Such high salaries could become a political lightening rod for the plan’s sponsors, Mayor Michael Bloomberg and Comptroller John Liu, if the city winds up paying in-house investment managers multiple times what a typical city worker earns.

Central to the proposal is the aim to “enhance investment returns and reduce pension costs” by “professionalizing and depoliticizing” investment decisions, said Liu and Bloomberg at a presentation at City Hall. What that means in practice is that the city’s investment staff should be made up of “experienced industry professionals” who would be paid compensation consistent with what top investment managers make in the private sector.

While million dollar salaries could be become a political liability if the performance of the pension was to lag, salaries of investment managers would likely be closely tied to performance, said Liu, with a small base salary and a larger bonus. Thus, poor performing managers would receive less than those who perform better. Furthermore, salary decisions would be made by an independent Pension Investment Board, further insulating public officials from the fallout that could accompany million-dollar public paychecks.

Yet offering competitive compensation is a central tenet of bringing the pension’s investment decisions in-house. In 2010, the five pensions paid $427 million in expenses to outside investment firms and consultants, according to the city’s annual report. By bringing investment decisions in-house, the city aims to reduce those expenses sharply.

Similarly, the comptroller presented research showing that comprehensive pension reform could potentially add 1 to 2 percent a year to overall investment returns, essentially a “good governance” premium. If the pension were to earn such a premium, it would mean an additional $1 billion to $2 billion a year or more for the system.

The city’s five pensions, the New York City Employees’ Retirement System, the Teachers’ Retirement System of New York, the New York City Police Pension Fund, the New York City Fire Department Pension Fund, and the New York City Board of Education Retirement System, collectively manage $120 billion in assets for the city’s 500,000 employees and retirees. While each pension is currently overseen by its own board, investment decisions are suggested by Lawrence Schloss, the city’s chief investment officer, whose Bureau of Asset Management reports to Comptroller Liu.

Under the new proposal, the CIO role would be independent of elected officials and serve for a fixed term. The CIO would run a new Investment Management Company which would report to a single Pension Investment Board. The main aim of the independent and streamlined structure would be to depoliticize investment decisions and protect against corruption and fraud.

Although Liu and Bloomberg both said that the city was lucky to have Schloss as its pension overseer, the new proposal puts his future as CIO in some doubt, since Schloss owes his current position to Liu, who is an elected official. And even though the mayor and comptroller have tentatively signed off on the reforms, the proposal still must be approved by the city council, the governor and the state legislature.