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Study: Despite Improvements, Pension Fund Governance Cause for “Concern”

A new paper by Keith Ambachtsheer and John McLaughlin dives into pension fund governance and concludes that, although governance has improved, there are still causes for “concern”.

From ai-cio.com:

Pension funds and other major investors are failing to act sufficiently to promote good governance and long-term investing, according to a new study.

[…]

They found there had been some improvement in governance of pension funds and other major investment institutions, but many “major concerns” still remain.

Ambachtsheer and McLaughlin updated previous governance surveys to add force to the initiative, quizzing 81 major pension funds with total assets in excess of $5 trillion.

“Despite evidence that board effectiveness is marginally improving, our survey-based study conducted in 2014 finds that much work still needs to be done,” the authors wrote.

Among their governance concerns, Ambachtsheer and McLaughlin listed “flawed” board selection processes, unclear board oversight functions, and uncompetitive pay packages hampering recruitment and retention of talent.

“It will require a concerted, ongoing joint effort by pension plan stakeholders, pension organization boards, regulators, and legislators to change the current situation,” the pair said.

The paper, which also covers long-term investing efforts, can be read here.

Recruiting Private Equity Talent Getting More Expensive For Pension Funds

As more pension funds participate in direct investing or co-investing ventures, they find the need for private equity experts on their staff.

But the cost of getting that talent is growing: a recent survey found that almost 50 percent of pension funds are having to shovel out higher salaries to recruit and retain private equity employees.

From the Financial Times:

Private equity employees are commanding higher wages as increasing amounts of money are pushed into the asset class.

Almost half of North American limited partnerships (pension funds and funds of funds) are having to increase their pay scales to recruit staff, according to a survey of 114 investors and private equity funds by Coller Capital, which invests in the secondary private equity market. The European market lags behind somewhat, with 30 per cent of LPs increasing salaries.

“The industry has done very well over the past couple of years, with very strong distribution,” said Michael Schad, a partner at Coller Capital. “As there is more demand from employers, wages can go up.”

As well as the industry expanding, investors are entering more directly into the asset class, either co-investing with general partners or building their own private equity investment capabilities. “This requires different skill sets,” said Mr Schad.

The survey also asked where funds were looking to recruit PE employees:

While more than half expect to recruit employees from other LPs, almost as many (46 per cent) will look for talent at alternative asset managers that are not private equity firms. A third will take on former investment bankers, but just a quarter hope to attract workers from general partners (private equity firms).

Increasing remuneration may be good news for the LPs, according to remarks made by Klaus Ruhne, partner at ATP Private Equity Partners, during a round-table held by private equity consultant Triago in November.

“What is more important than the size of teams, or the value of assets under management, is the frequent lack of generous long-term incentive plans for limited partners,” he said. “Without a restructuring of LP compensation, we will continue to witness an inordinate amount of inconsistency and even foolishness when it comes to how capital is deployed and how limited partners are organised.”

The survey was conducted by Coller Capital.

Photo by 401kcalculator.org

Documents Shed New Light on Alleged Conflicts of Interest In New Jersey Pension System

Gov. Chris Christie has shielded his state’s pension system in recent weeks from allegations of conflicts of interest by asserting one thing: the State Investment Board doesn’t have input in pension investment decisions, it only loosely oversees them.

But new documents obtained by the International Business Times suggest that the Council does have an active hand in guiding pension money.

David Sirota writes:

The minutes of the State Investment Council (which Christie appoints, and whose official mission is to “formulate policies governing the investment of [state] funds”), show his appointees not only oversee the state’s due diligence reviews of specific managers but also offer guidance to New Jersey Treasury Department officials about managers. Christie appointees at times cast votes on specific investments and have spearheaded the recruitment and subsequent appointment of the official who runs the state’s Division of Investment.

According to minutes of the State Investment Council, most of New Jersey’s investments in private equity, hedge funds, venture capital and other so-called alternative investments are reviewed by Christie appointees on the Investment Policy Committee (a subcommittee of the State Investment Council). Typically, the minutes show State Investment Council Chairman Robert Grady reports the committee “discussed the investment and was satisfied that the due diligence that was performed was adequate and appropriate.”

Grady was appointed to the council by Christie. He also serves as the Chairman of the Governor’s Council of Economic Advisers, and state documents show he was in regular contact with Christie administration and campaign officials. The governor has described him as a longtime friend.

The State Investment Council debates the merits of specific investments in open session, offering advice to Department of Treasury staffers about the specific money manager being given a New Jersey pension contract. Because the council has influence over the selection of specific managers, Grady and another Christie appointee, real estate investor Jeffrey Oram, have recused themselves from deliberations that involve managers to whom they might have a financial connection.

The documents also reveal a few examples of members explicitly voting to approve (or disapprove) big investments with money managers. From the report:

– On Dec. 8, 2011, Grady spearheaded a proposal to invest as much as $1.8 billion of New Jersey money in the Blackstone Group. State records show “a motion was made by Chair Grady to approve the Blackstone investments,” the motion “was seconded by Council Member Oram,” and the investment in Blackstone was subsequently approved on a 7-2 vote. As IBTimes previously reported, Grady’s private firm was investing in one of the same Blackstone funds though Grady did not disclose that at the time of the vote.

– On July 21, 2011, the council voted on a quarter-billion-dollar investment in Blackstone Resources Select Fund. After a debate, the council voted against a motion to halt the investment.

– On June 11, 2011, the council voted to approve a financial maneuver to facilitate a specific transaction with a firm called RLJ Lodging Trust.

In addition to overseeing and voting on specific investments, Christie appointees oversee the appointment of the state official who runs the state’s Division of Investment.

Christie yesterday offered his first extensive defense against conflict of interest allegations.

Photo by Truthout.org via Flickr CC License