Pennsylvania Inches Closer to Forming a New $83 Billion State Investment Office

State lawmakers aim to narrow a pension funding gap by merging investment activities.

A package of legislation is gaining traction to reduce the funding shortfall of Pennsylvania’s state retirement systems by merging two of its plans. The proposal just passed the Pennsylvania House State Government Committee, and is now headed to the state’s full chamber.

The legislation would merge the investment offices of the State Employees’ Retirement System and the Public School Employees’ Retirement System (SERS), combining their respective $29.6 billion and $53.5 billion pools of capital into an $83 billion Commonwealth Pension Investment Office.

“The primary objective…is to establish a highly professional and expert investment office to serve in a fiduciary capacity the investment needs of SERS and PSERS,” the bill reads.

The bill’s sponsor, Rep. Mike Tobash, a Republican, said that the consolidation of the two systems significantly improves the rates of return to both retirement systems. The GOP controls both houses of the legislature, but not the governor’s chair. “Pennsylvania could certainly improve its performance within our two pension systems, and improved performance means less taxpayers dollars going in to fund the commitments we made to retirees,” he said.

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The leading investment executive for the combined office is yet to be decided. SERS Chief Investment Officer Bryan Lewis resigned from his post in August 2019, and a replacement is expected to be named by June 2020.

In addition to consolidating the two investment offices, legislators are weighing other means of improving their funded ratios. One measure under consideration would give any SERS employer the option to make a lump-sum payment against accrued liabilities. Critics of the bill voiced concerns that the money would have to come from the state’s institutions and employers, such as Penn State University, and would be too unpredictable for calculating budgets and expenses.

The state’s pension plan underwent a new reform earlier this year, creating two retirement options in order to cut taxpayer risk while helping to shore up funding for state pension plans. The plan puts newly hired state employees into a hybrid or a 401(k)-like account. The hybrid plan would keep half a retiree’s money in a traditional, taxpayer-backed defined benefit fund, and the other half into a private 401(k) plan tied to the stock market.

SERS reduced its long-term assumed rate of return earlier this year to 7.125% from 7.25%, in addition to trimming its allocations to hedge funds, citing a shift to what it called “realistic expectations” and shying away from relatively expensive hedge fund fee structures.

Related Stories:

Pennsylvania SERS to Cut Return Rates, Hedge Fund Allocations

Bryan Lewis, Pennsylvania SERS’s CIO, Is Leaving

Pennsylvania Pension Revamp Starts, Barring New Hires from Legacy Plan

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