Illinois Pension Calls Investigation on Fees Unfair, Misleading

(April 19, 2012) — An investigation has shown that the $37 billion Teachers Retirement System (TRS) of Illinois paid $1.3 billion in fees to hundreds of financial managers over the last decade, alleging its returns were measly in comparison — but the public pension fund asserts the claims are unfair and misleading.

“The issue is not the facts that are in the investigation, it’s the facts that are not in the investigation,” TRS spokesman Dave Urbanek told aiCIO. “It’s unfortunate because this is simply scaring people to think our investments are in trouble when they’re not.”

The investigation, completed by the Better Government Association (BGA), alleges that the scheme’s average rate of return on investments between 2001 and 2010 was just 3.7% excluding the cost of fees, far below its 8.5% annual target return. Including fees, the scheme’s return during the period was 3.3% — a figure slightly under the median of 3.4% for public pensions during the time frame.

The fund posted on its website: “This is like comparing apples and oranges and does not provide a true picture of TRS investments. It’s the dollars that matter. Investment revenues between 2001 and 2010 totaled $10.937 billion. Fees totaled $1.3 billion.”

In response to the findings, TRS asserts that the BGA chose an arbitrary period of time that included unprecedented worldwide financial downturn between 2008 and 2009, which caused all large investors to lose money. According to the public scheme, other measures of time produce the following investment results for TRS against the system’s target of 8.5%:

-Between 1981 and 2011, including the 10 years studied by the BGA, investment returns averaged 9.3%.

-Between April 2009 and March 2012, investment returns averaged 14.8%.

-Between 2003 and 2007, investment returns averaged 12.6%.

Meanwhile, “in fiscal year 2011, which ended last June, TRS recorded a 23.6% rate of return after all fees had been subtracted and generated $7.2 billion in investment income,” TRS wrote. “At the end of March, 2012 total TRS assets stood at $37 billion.”

Despite the defense by Illinois’ public pension in response to the critical investigation, the scheme also acknowledges that “TRS can no longer be confident that the Illinois General Assembly will appropriate all of the money to TRS that is required by law. The State of Illinois’ growing budget deficit and the System’s $43 billion unfunded liability is together causing this ‘new reality’ at TRS. “

The system could become insolvent as soon as 2030, the pension says.

Yet while BGA claims the public pension is largely to blame for its insolvency, Urbanek — who was in communication with the BGA during the entirety of the roughly five-month investigation — said the allegations reflected a narrow-minded view, as every retirement account in the country suffered during the economic downturn. “We told the BGA that those projections on insolvency are relating to the state of Illinois not paying us — they’ve never paid TRS in any given year what the actuary says should be paid.”

According to Urbanek, if adequate contributions are made by the state Legislature, issues over insolvency will be resolved.

Read TRS’ response to the BGA investigation here.