Public Pension Funds Recovering From Pandemic-Era Staffing Issues

The National Conference on Public Employee Retirement Systems, in collaboration with CBIZ Inc., released on Monday the results of its 2024 Public Pension Compensation Survey, highlighting compensation and recruiting trends across 158 public funds, which collectively manage more than $4.5 trillion in assets.

Survey participants represented 18,969 full-time positions and 22.56 million active and retired pension plan participants. The average respondent fund has $8.8 billion in assets under management and employs 33 full-time workers.

Approximately 49.3% of respondents said they had no issues with hiring or retaining talent, a figure that has risen from 38% in the 2022 survey. Many public pension funds, comprised of government employees, often cannot match the pay of other financial institutions, including their first-year analyst programs. Still, these funds reported having less of a hard time recruiting talent than in previous few years.

Approximately 12.3% of respondents said they expect the ability to attract and retain skilled staff will become a problem soon, while 26% say it is starting to become a problem, and 12.3% say it is a significant problem.

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

Many funds’ offices are located away from large financial hubs like New York, Chicago and San Francisco, and they therefore often have a hard time convincing high-quality candidates to move to smaller cities. Still, compensation is on the rise for public pension employees; funds that participated in the 2023 survey anticipated 3.6% salary growth in the next year. The actual figure for 2024 has been much larger, at 4.9%.

Total cash compensation for employees of public funds increased 8.3% from last year’s survey. Compensation growth roughly matched the increases in pay for all public sector employees.

“Notably, pension funds are beginning to see relief from ongoing recruitment and retention challenges as they embrace highly desirable benefits and begin to see the effects of the recent surge in public sector wage growth,” a spokesperson for NCPERS said. “The recent increases in public sector wages represent a much-needed correction after lagging behind private sector wage growth in the wake of the pandemic.”

NCPERS invited 608 pension funds to participate in the compensation survey, of which 158 provided valid responses. The survey was conducted between May and July. NCPERS will host a webinar on October 3 to discuss the findings of the survey.

Potential Strategies

For institutional investors looking to engage with this sector, several pathways exist:

Direct investment in digital tokens allows institutions to buy cryptocurrencies like Bitcoin and Ethereum directly on digital asset exchanges. Futures are also available for a select number of cryptocurrencies on exchanges, providing opportunities for risk hedging and income generation strategies without owning the assets outright.

Investments through exchange-traded funds represent a more “sanitized” method of investing in cryptocurrencies, predominantly available for Bitcoin and Ethereum. The recent growth in Bitcoin ETFs, capturing about 14% of its total market capitalization (according to CoinMarketCap), underscores the stability of the asset.

However, as with direct investment in digital tokens, ETFs face custody challenges. Typically, a digital asset exchange would use “cold wallets”—crypto wallets not connected to the internet—for enhanced security against hacking. This is not very efficient due to their susceptibility to human error. This scenario has prompted concerns about the risks associated with the concentration of custodial services. In the U.S., some members of Congress advocate for allowing traditional banks to offer custody services to mitigate these risks.

For asset allocators, investment through private funds that focus on cryptocurrencies may be more appealing. These funds largely operate like hedge funds, actively investing in so-called Layer-1 assets, focusing on what they consider attractive, regardless of the underlying “use case” of the digital asset.

Venture capital presents another avenue for investing in this asset class, directly or through funds. The range of venture investing is broad: One option is investing at the blockchain level (below Layer 1, or at Layer 0) for enhanced interoperability and communication, or in supporting other digital assets in Layer 2 and even Layer 3, the application layer where developers build actual applications using the underlying frameworks provided by Layers 1 and 2.

For more stories like this, sign up for the CIO Alert newsletter. 

Associated Risks

These strategies, while potentially rewarding, come with their own idiosyncratic risks.

Tokenization (the process of converting rights to an asset into a digital token on a blockchain) seeks to streamline processes and reduce costs and risks associated with intermediaries, holding great promise for both decentralized finance [DeFi] and traditional finance [TradFi]. For instance, the adoption of tokenization in DeFi showcases tokenization’s revolutionary approach to bypassing traditional financial systems, whereas in TradFi, it integrates with existing financial structures to enhance operational efficiency. While tokenization’s potential for efficiency and scalability could be rewarding to users and investors in both verticals, the lack of supportive policy and definitive regulatory guidelines poses a risk to the full realization of these benefits.

One of the least-discussed areas of digital asset investing is energy infrastructure for digital asset miners. Opportunities here are touted as pursuing global sustainability goals, yet conflict with the insatiable need for high-power computing capabilities, especially in the face of artificial intelligence power consumption. Global demand for mining infrastructure is growing, which makes owning and operating sustainable power sources crucial to leverage zero-carbon energy sources like nuclear power.

Finally, the debate about central bank digital currencies and the role of digital assets in national economies underscores the need for countries to future-proof their monetary systems. For institutional investors, these developments could dictate new norms in liquidity, risk and asset management.

‘Sensible Approach’

When considering asset allocation to the digital asset space, a sensible approach might be a “decile drawdown” allocation to cryptocurrencies. Taking 10% of your worst historical (pick how far back) 12-month return and using that as a maximum allocation to the asset class could be prudent. For instance, if your worst 12-month return has been 10%, then 1% could be your maximum allocation to crypto assets. Of course, this allocation, however small, must be weighed against the liquidity profile and risk appetite of the asset allocator.

In the end, discussions at the conference underscored that the intersection of traditional finance, digital assets, energy and blockchain technology is bustling with opportunities, yet fraught with unanswered regulatory questions. The push for clarity and innovation is strong, reflecting a dynamic, yet challenging, frontier for those navigating this space.

Abdiel Santiago is CEO and CIO of the Fondo de Ahorro de Panamá. The views and opinions expressed in this article are solely his own and do not necessarily reflect the official policy or position of the Fondo de Ahorro de Panama or the government. This content is provided for informational purposes only and should not be interpreted as investment advice or a recommendation on behalf of the Fondo de Ahorro de Panama.

This feature is published to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of ISS STOXX or its affiliates.

Tags: Abdiel Santiago, asset tokenization, Bitcoin, Blockchain, decentralized finance, Ethereum