'Serious Issues' in NYC Pension Investment Operations

New York City will completely overhaul the investment office responsible for its five pension funds, City Comptroller Scott Stringer announced Tuesday.

The planned changes are the recommendations of a 398-page report reviewing the management and operations of the Bureau of Asset Management, which oversees the investments of the city’s $160 billion pension funds. The assessment, conducted by Funtson Advisory Services, is the first independent analysis of the bureau’s operations since 2002.

“The evaluation is clear: we have to fundamentally rethink how the Bureau of Asset Management does business,” Stringer said. “For too long, too little attention has been paid to our investment operations and there was nothing that could be done to cut through an intractable bureaucracy. Today, that era has come to an end.”

According to Funtson, the bureau’s operations need to be brought “up to the standard of its peer pension systems.” The consultant made a total of 240 recommendations over 20 areas of operation, including investment management, risk and compliance, organization and administration, strategic plan and budget, staff development and training, and records management.

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“To continue to fulfill our fiduciary duties, we must re-engineer every process and procedure and bring our investment operations into the 21st century,” Stringer said. “In the coming months and years, I will be working with the trustees of all five pension systems to address these serious issues.”

The issues cited by the review include the lack of a strategic plan, overreliance on third-party consultants, and under-staffing caused by low compensation and ineffective recruitment. The investment program itself was also found to be too complex: From 2001-2015, while the value of assets managed doubled, the number of external managers increased five-fold.

nyc reform Source: New York City Office of the Comptroller

“Bringing this asset management operation up to leading practice will take all hands on deck over a period of many years,” said Scott Evans, Deputy Comptroller and CIO. “We have already begun to look anew at every process and procedure we have, but this review shows clearly why we need a fundamental re-architecting of the Bureau of Asset Management.”

Stringer and Evans will work with the pension system trustees to develop a roadmap for the bureau’s reorganization, which will be presented at their March investment meeting. Several initiatives already underway include expanding recruitment efforts, establishing internal investment and operational risk committees, and reviewing investment benchmarks.

“Our goal is to make the Bureau of Asset Management the gold standard of performance, risk, compliance, and ethics,” Stringer said. “This comprehensive review provides us a clear picture of what steps we need to take to address our most critical needs.”

Equities are a better option than index-linked bonds for pensions seeking to reduce shortfall risk and close existing deficits—despite present volatility—according to a study by Fathom Consulting and Pension Insurance Corporation.

Yields on index-linked UK government bonds are likely to remain low for a significant period, argued Fathom’s Andrew Brigden and Danny Gabay in a report. As a result, these reputed “safe havens” could pose major problems for pension fund investors.

“Underfunded schemes have been running hard, and yet they have been unable even to keep still.”UK private-sector funds have been increasing allocations to these assets for several years, despite yields turning negative four years ago. This approach has led to defined benefit (DB) pensions becoming “too defensive,” the authors argued.

“We find that the barriers to a full normalization of UK index-linked gilts are substantial,” Brigden and Gabay wrote. “It would require that policymakers in a number of countries, including China, take appropriate action. And that is not going to happen overnight. Indeed, we see a sizeable risk that it does not happen at all within a timeframe that is relevant to the UK defined benefit sector.”

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Inflation shocks pose a minor risk, the authors continued, due in part to the Bank of England’s reasonable success in maintaining its inflation target. With pensions in less need of hedging, equity risk is a more attractive proposition for pensions seeking to close deficits, they argued.

“Whether index-linked gilts return to their long-run average of around 2% or whether they stay low, a reallocation out of fixed income into equities would confer a number of benefits,” Brigden and Gabay said. “Understandably, the probability that any given scheme became fully funded would increase, but surprisingly, funding uncertainty would reduce beyond the very near term.”

The authors concluded that poorly-funded pensions and those with weak sponsors would particularly benefit, as it would reduce the need for large deficit-cutting capital infusions.

A survey published last summer by CREATE-Research found that pensions were increasingly incorporating equities into their liability-driven investment strategies due to the low yields on fixed-income assets.