Pennsylvania Pensions Could Save Nearly $10 Billion over 30 Years

A report commissioned by the state of Pennsylvania has identified potential cost savings of nearly $10 billion over the next 30 years for the state’s two largest retirement systems.

The Public Pension Management and Asset Investment Review Commission (PPMAIRC) was created in 2017 by state law to conduct a comprehensive review of the investment management of the Public School Employees’ Retirement System (PSERS) and State Employees’ Retirement System (SERS).. As part of its evaluation, the commission was tasked with finding $3 billion over a 30-year period—instead it found savings of close to $10 billion.

After a seven-month examination of Pennsylvania’s two retirement systems, the report found an estimated potential annual savings of $97.3 million to $116.8 million. Expressed as actuarial savings over 30 years at the 7.25% assumed rate of return, the report said estimated savings would be between $8.2 billion and $9.8 billion.

In compiling the report, the commission conducted three public hearings and received the testimony of academic experts, institutional investment professionals, state pension fund managers, and representatives from PSERS and SERS.

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The report found that both funds have underperformed relative to peers and have “consistently underperformed simple multi-asset portfolios” on a risk-adjusted basis. While costs have decreased by 50% over a 10-year period at SERS and are now approaching peer group averages, both funds have higher-than-average expenses.

The commission strongly recommended that the state maintain full payment of the annual actuarially determined contribution amount necessary to fund each pension plan “as doing so is fundamental and required to ensure the future financial viability of both retirement systems.”

It said that without full annual funding, none of the commissions other recommendations would be enough to ensure the availability of retirement benefits for future generations of public servants. The other recommendations include:

Establishing a consolidated central pension investment office that would be exclusively responsible for all investment functions on behalf of and as directed by each retirement system.
Enacting legislation mandating annual stress testing of each retirement system in a manner that is aligned with the recommendations of the Society of Actuaries Blue Ribbon Panel, and publicly reporting the findings of the tests.
Establishing policies at both system boards that favor and encourage open public reporting best practices, including, public reporting of an access to all investment costs and expenses at fund and manager level, full disclosure of all costs of private market investments, quarterly investment performance by asset class investment manager expense terms, and materials submitted to board trustees during open meetings.
Enacting legislation mandating, as well as the repeal of existing laws that “frustrate, increased public reporting” of all investment expenses, total fund, and asset class investment.
Moving to fully index all public market investments in both equities and fixed income at both retirement systems.

“The General Assembly has approved real and meaningful pension reform, but we need to do more,” State Rep. Michael Tobash, chair of PPMAIRC, said in a statement. “If these recommendations to the two public pensions systems are enacted, we will save taxpayers billions of dollars, reduce unnecessary risks and costs without compromising performance, and most importantly, keep our promise to existing retirees and system members.”

Tags: Pennsylvania Public School Employees Retirement System (PSERS), Pension, PSERS, Public Pension Management and Asset Investment Review Commission

The Texas Employees’ Retirement System (ERS) hired a new general investment consultant after having held an almost decade-long relationship with its current advisor, Aon Hewitt.

Aon Hewitt had provided general investment consultancy services to the ERS since 2009.

The system’s investment committee voted to hire NEPC after a competitive tender process launched on July 6.. The RFP provided that the selected consultant will hold several key responsibilities, including asset allocation and asset liability modeling, review and evaluation of the trust’s portfolio, policy review, and manager advisory services.

More than 30 unique firms requested access to partake in the solicitation, and six firms provided official submissions by the solicitation’s deadline, including Aon Hewitt, NEPC, Meketa Investment Group, Pension Consulting Alliance, RVK, and Verus Advisory.

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After grading the respondents based on qualifications, price, methodology, and other means, the retirement system shortlisted the list of respondents to three; Aon Hewitt, NEPC, and Verus Advisory.

“We felt the NEPC’s take on the way they are looking at asset allocation, and the combination of their resources with this firm, the team that they were providing, as well as the opportunity to have new insight,” led to the decision to hire NEPC, Deputy Chief Investment Officer Sharmila Kassan said. “I think any of the finalist were just fine—we were talking very tight evaluations scores.”

NEPC will begin with the ERS on January 1.

The ERS also hired a new infrastructure private equity consultant, CBRE Caledon, replacing Pavilion Alternatives Group in the process.

Pavilion had served as the ERS’ private equity consultant since August 2007, but its contract was amended in August 2013 to implement infrastructure-related services as part of Pavilion’s scope of work.

CBRE Caledon will be responsible for assisting in the analysis and assessment of funds, co-investments and infrastructure investments, monitoring portfolio performance against the designated benchmark, and assisting in periodic review for ERS’ existing policies and benchmarks for the infrastructure program.

Albourne America, Pension Consulting Alliance, StepStone Group Real Assets, Hamilton Lane Advisors, Townsend Holdings, Meketa Investment Group, and Pavilion Alternatives Group bid for the contract.

Tags: Aon Hewitt, NEPC, Pension, Texas Employees Retirement System (ERS)