http://youtu.be/x5Tx-zcYYVQ
Here’s a video that dives into the topic of gender diversity on pension boards, and why it’s important to have both men and women as trustees.
The issue is discussed by Pennsylvania State Representative Pam DeLissio. She became interested in the issue after learning that there were no women on the 11-member board of the Pennsylvania State Employees’ Retirement System.
Pennsylvania’s top auditor has publicly wondered whether Pennsylvania’s State Employees Retirement System (SERS) should be investing in hedge funds.
SERS has released formal statements defending their investment strategy, which currently allocates 6.2 percent of assets toward hedge funds.
But today, we got the pension fund’s most in-depth defense yet of the asset class.
Glenn E. Becker, chairman of the SERS Board, wrote a letter to the editor of the Patriot News which was published today in the paper. The letter, in full, reads:
I feel it is important to correct the record and explain how our hedge fund exposure has been working for the state’s taxpayers.
Industry experts generally agree that while hedge funds are not for every pension system, the unique needs of each system must shape their individual asset allocation and strategic investment plans. Therefore, the actions taken by one system may not be appropriate for all systems. Investors need to consider many factors including their assets, liabilities, funding history, cash flow needs, and risk profile.
Our current plan was designed to structure a well-diversified portfolio to meet the needs of a system that is currently underfunded, steadily maturing (has more retirees than active members) and, in the near term, will receive employer contributions below the actuarially required rate.
Those unique characteristics mean we need liquidity, low cash flow volatility, and capital protection. We must plan to pay approximately $250 million in benefits every month for the next 80-plus years. We continuously monitor fund performance, the markets and cash flows for any needed plan adjustments. At this time, our plan uses hedge funds as an integral component of a well-diversified portfolio that is expected to provide risk-adjusted returns over all types of markets.
To date, the strategy has been working. As of June 30, 2014, our diversifying assets portfolio, or hedge funds, made up approximately 6.2 percent of the total $28 billion fund, or approximately $1.7 billion. In 2013, that portfolio earned 11.2 percent or $197 million, after deducting fees of $14.8 million, while dampening the volatility of the fund. That performance helped the total fund earn 13.6 percent net of fees in 2013, adding more than $1.6 billion to the fund.
Certainly, caution is warranted when examining one short period given SERS’ long-term liabilities. Over the long term, as of December 31, 2013, the total fund returned an annualized, net of fees return of 7.4 percent over 10 years, 8.4 percent over 20 years and 9.7 percent over 30 years.
Over the past 10 years, more than 75 percent of the funds’ assets have come from investments. In terms of making up for the past underfunding, that is money that doesn’t have to come from the taxpayers.
Last week Pennsylvania’s auditor general publicly wondered whether hedge funds were a sound investment for the state’s “already stressed” pension systems.
The crux of the auditor’s concern was the millions in fees paid by the system. In an editorial Monday, the Patriot News also questioned the fees incurred by hedge fund investments – including the fees that the public doesn’t know about. From the Patriot News:
The Pennsylvania State Employees’ Retirement System (PSERS) paid about $149 million in fees to hedge funds in fiscal year 2013, according to WITF, the public broadcasting station.
The Philadelphia Inquirer has noted that “It’s hard to know how much Pennsylvania SERS paid, since some SERS hedge fund fees aren’t included in the agency’s annual report.”
WITF also noted that it’s not clear what the pension fund got after paying all that money, which is the point raised by Auditor General DePasquale.
[…]
Pennsylvania has been one of the most aggressive states investing in “alternative” vehicles like hedge funds. In 2012, The New York Times reported that Pennsylvania’s state employees pension fund had “more than 46 percent of its assets in riskier alternatives, including nearly 400 private equity, venture capital and real estate funds.”
Those investments cost Pennsylvania $1.35 billion in management fees in the previous five years, according to the Times report.
The editorial wondered whether the state was really getting what it paid for performance-wise. From the Patriot News:
During that time, it appears Pennsylvania paid more and got less than other states did.
Over the five-year period, Pennsylvania’s annual returns were 3.6 percent. During that time, the New York Times report said the typical public pension fund earned 4.9 percent a year. And Georgia, which was barred by law from investing in high-fee alternative funds, earned 5.3 percent a year.
Georgia’s fees were a lot lower, too. For a pension fund about half the size of Pennsylvania’s, it paid just $54 million in fees over the five years. Pennsylvania paid 25 times as much for results that were significantly worse.
Pennsylvania’s two big pension funds are tens of billions of dollars short of being able to pay all the money they’ll owe to retirees.
One has to wonder whether one reason is that the funds are spending too much money on supposedly sophisticated investments that aren’t worth the cost.
It’s a question the Legislature needs to answer.
SERS allocates 7 percent of its assets, or $1.9 billion, towards hedge funds. PSERS, meanwhile, allocates 12.5 percent of its assets, or $5.7 billion, towards hedge funds.
CalPERS’ decision to pull out of hedge funds is having a ripple effect across the country.
On Wednesday, Pennsylvania Auditor General Eugene DePasquale released this skeptical statement on the state pension system’s hedge fund investments:
“Hedge fund investments may be an appropriate strategy for certain investors and I trust that SERS and PSERS weigh investment options carefully,” DePasquale said in a statement. “But, SERS and PSERS are dealing with public pension funds that are already stressed and high fees cost state taxpayers more each year. I support full disclosure of hedge fund fees paid by our public pension funds and we owe it to taxpayers to ensure that those fees do not outweigh the returns.”
Spokespeople for both the State Employees Retirement System (SERS) and the Public School Employee Retirement System (PSERS) have now responded. The consensus: the pension funds will not be cutting their hedge fund allocations.
From Philly.com:
SERS has no plans to cut hedge funds further. “Hedge funds play a role in our current board-approved strategic investment plan, which was designed to structure a well-diversified portfolio,” SERS spokeswoman Pamela Hile told me. With many more workers set to retire, hedge funds (or “diversifying assets,” as SERS prefers to call them) combine relatively steady returns with low volatility “over varying capital market environments.” By SERS’s count “difersifying assets” are now down to $1.7 billion, or 6% of the $28 billion fund and returning 10.7% after fees for the year ending June 30, up from a 10-year average of 7.4%.
Says PSERS spokeswoman Evelyn Williams: “We agree with the Auditor General that hedge funds are appropriate for certain investors. Not all investors can or should invest in hedge funds. Clearly CALPERS reviewed their hedge fund allocation and acted in their own fund’s best interests.
“PSERS also sets our asset allocation based on our own unique goals and issues. We do not have any immediate plans to change our hedge fund asset allocation at this time… PSERS’ hedge fund allocation provides diversification for our asset allocation and is specifically structured so it does not correlate with traditional equity markets…PSERS hedge fund allocation has performed as expected and provided positive investment returns over the past fiscal year, one, three, and five years.”
SERS allocates 7 percent of its assets, or $1.9 billion, towards hedge funds. PSERS, meanwhile, allocates 12.5 percent of its assets, or $5.7 billion, towards hedge funds.
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A months-long probe into the ex-CIO of the Pennsylvania State Employees Retirement System (PSERS) has wrapped up this week, and the results are in: the investigation found no evidence that the former CIO, Anthony Clark, lied to the pension board about the poor performance of an investment.
But, investigators say, the lack of evidence wasn’t so overwhelming as to dispel suspicion entirely. One investigator said that whether Clark lied to the pension board is still “open to question”.
Other allegations against Clark included not consistently working a full workweek and conducting personal investment business on the job. An anonymous employee at the fund had originally tipped off investigators, but the subsequent investigation uncovered no wrongdoing by Clark in those areas.
Reported by the Pittsburgh Post-Gazette:
A law firm hired by the Pennsylvania State Employees’ Retirement System to investigate allegations against a former chief investment officer has found no evidence of broken laws or state rules.
But after an eight-month probe into an investment decision and the personal trading and work hours of Anthony Clark, attorneys with the firm Obermayer Rebmann Maxwell & Hippel refrained from concluding whether the investment chief had deceived the SERS board over an investment with hedge fund Tiger Asset Management. The agency announced the conclusion in a letter released Wednesday.
“Obermayer found no evidence of illegality in what turned into an under-performing investment mainly due to its gold component,” wrote Walter Cohen, a past acting attorney general of Pennsylvania.
“Whether Clark intentionally misled the Board by seeking to conceal Tiger’s poor performance is open to question but the Board remained vigilant in monitoring the Tiger investment until its dissolution.”
[…]
Mr. Clark also had been accused of conducting personal investment activities at work and failing to spend a full work week on his SERS responsibilities. In his letter summarizing the firm’s findings, Mr. Cohen wrote none of his associates interviewed could substantiate the allegation of “day trading.“
Clark resigned from his position with PSERS in 2013, soon after the allegations surfaced. He hasn’t worked since.
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The Urban Institute released a report Thursday studying the pension benefits paid by Pennsylvania’s State Employees Retirement System.
The authors rated the System as the third worst in the country in terms of covering new state employees. From the report:
Pennsylvania’s pension plan for state employees receives a failing grade in the Urban Institute’s state and local pension plan report card, and ranks as the third-worst plan in the nation covering newly hired general state employees. The plan scores poorly because it is inadequately funded, it penalizes work at older ages by reducing lifetime benefits for older employees, and it provides few retirement benefits to short-term employees. Age-25 hires must work 32 years before they accumulate rights to future pension benefits worth more than their required plan contributions. Various pension reforms could distribute benefits more equitably across the workforce.
More details on the report’s findings, as reported by TribLive:
The study, published Thursday, said SERs, the state employee retirement system fund that serves about 120,000 retirees and 105,000 state workers, has an $18 billion shortfall and deficits that result in dramatic inequities in pension benefits.
The plan ties benefits to years of service. Researchers found 76 percent of all state-financed pension benefits go to the 25 percent of employees with the largest pensions, and the top 5 percent of recipients receive 22 percent of all benefits.
Those who leave after five years, the minimum time to vest in the system, fared poorly.
Only Massachusetts and New Jersey scored worse than Pennsylvania in terms of covering new state employees, said economist Richard W. Johnson, a senior fellow with the Washington-based Urban Institute and lead author of the study.
Read the full report here.
A Philadelphia-area private equity firm has become the first ever to be charged by the SEC for violating a pay-to-play rule set up in 2010 designed to prevent conflicts of interest when pension funds hire investment firms.
The firm, TL Ventures Inc, was charged with violating the rule after an employee at the firm made political contributions to Pennsylvania’s governor and Philadelphia’s mayor while the firm was doing work for the Philadelphia Board of Pensions and the Pennsylvania State Employees’ Retirement System.
The employee, an investment advisor, made a $2,500 campaign contribution to a candidate for Mayor of Philadelphia and a $2,000 contribution to a candidate for Governor of Pennsylvania.
The SEC says that presented a conflict of interest because the Mayor and Governor appoint a total of nine members to the two pension boards for which TL Ventures was providing investment services for at the time of the donations.
Those boards are tasked with hiring investment firms to do advisory work for the pension funds.
Bracewell & Giuliani explains the specifics of the rule:
Rule 206 (4)-5, which was adopted in 2010, prohibits investment advisers from providing compensatory advisory services to a government client for a period of two years following a campaign contribution from the firm, or from defined investment advisers, to any government officials, or political candidates in a position to influence the selection or retention of advisers to manage public pension funds or other government client assets. Some de minimus contributions are permitted, topping out at $350 if the contributor is eligible to vote for the candidate, and the contribution is from the person’s personal funds.
TL Ventures has agreed to give up the $257,000 worth of fees it earned from the state, as well as pay a $35,000 fine.
Republicans are now suing the SEC in an attempt to block the rule, saying that preventing investment advisors from making political donations is, in effect, a restriction on free speech. From Reuters:
Republican politicians sued the U.S. Securities and Exchange Commission, seeking to throw out a rule that limits political donations by investment advisers.
The Republican state committees from New York and Tennessee said the federal securities regulator had flouted due procedure when adopting its Political Contribution Rule, which they said also violated the constitutional right to freedom of speech.
“The (rule) directly harms Plaintiffs, as potential donors have informed each Plaintiff that they will not make political contributions because of the SEC’s rule,” said the complaint before a federal court in the District of Columbia, which was filed late on Thursday.
The SEC in 2010 approved the rule, which prohibits investment advisers from making campaign contributions in the hope of being awarded lucrative contracts to manage public pension funds, a practice known as “pay to play”.
The plaintiffs want the court to decide that the rule violates the law and to stop the SEC from enforcing the rule with respect to federal campaign contributions.
Specifically, Republicans are arguing that the SEC violated the Administrative Procedures Act when drafting the law. The Act requires specific procedures to be followed when drafting rules.
The Administrative Procedures Rules has been used successfully to strike down previous SEC rules.