Pennsylvania Pension Chairman Defends Hedge Funds; Says “Strategy Is Working”


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.

Pennsylvania Not Cutting Hedge Funds Despite State Auditor’s Skepticism

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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.


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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Urban Institute Rates Pennsylvania PERS Among Worst In Nation At Covering New Hires

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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.