Home ListingFebruary 23, 2014

Illinois Pension Plan Fights Back on Management Fees

The largest of Illinois’ five pension plans has allocated more assets to outside managers while pursuing a “recapture” program.

Reported by Featured Author

(February 24, 2014) — The Teachers’ Retirement System (TRS) of Illinois has initiated its latest plan to take back portions of management fees paid to outside managers.

According to its press release, the $43 billion plan is actively searching for brokers to negotiate the “recapture” program: “The TRS Board of Trustees approved the issuance of a formal ‘request for proposals’ with the goal of selecting one or more brokers to advise TRS and administer its program,” the System said.

This will be TRS’ latest active enterprise to fight back high fees since 2006, although the program had been in place since 1986. The board will consider the final recommendation of brokers in May or June.

Despite these efforts, the board agreed to raise allocations to external managers across various asset classes.

During its regularly scheduled February meeting, the board increased its $5.1 billion real estate portfolio by $350 million via Capri Capital Managers, Invesco Real Estate, and Heitman, LLC. TRS said these increases were made in the hopes of growing real estate allocations to 14% of the entire portfolio from the current 11.7%.

Vista Equity Partners was given an extra $300 million to the existing $127.8 million of TRS assets for private equity investments. The pension plan currently has a $4.6 billion private equity portfolio. TRS also committed $100 million of the private equity portfolio to Union Grove Venture Partners.

In addition, TRS allocated $500 million to Apollo Global Management on top of the existing $369 million, within the private equity and fixed income portfolios for credit investments. Oaktree Capital Management, which runs more than $520 million of the plan’s assets, received $100 million from TRS’ $7 billion global fixed income portfolio.

From its $2.26 absolute return portfolio, TRS allocated $100 million to Carlson Capital.

The TRS board also added PIMCO, which manages $2.39 billion of the plan’s assets, to its watch list. Currently, the watch list consists of PIMCO and Levin Capital Management, which administers $464 million in the domestic equity portfolio.

The Illinois pension system, including TRS, has been in the public eye for the last few years due to serious underfunding and high liabilities. Although the TRS gained 12.8% during fiscal year 2013, its funded ratio remained at 42.5%.

“Despite these strong returns, TRS cannot invest its way out of the funding hole we are in,” said TRS Executive Director Dick Ingram last year. “Without changes to the pension code to ensure sustained and adequate funding, TRS faces the very real possibility that in a few decades, the System will not have enough money to pay benefits to retirees.”

The latest development in Illinois’ controversial pension reform would save $145 billion in 30 years. TRS, the largest of the state’s five pension plans, is expected to be 102% funded.