Pennsylvania panel in home stretch on pension overhaul study

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Pennsylvania’s pension commission, after three public hearings, will complete its review of the state’s two major funds and report its findings to Gov. Tom Wolf and the General Assembly.

“The testimony received has provided the commission with a full view of the scope of the pension issue,” said state Treasurer Joe Torsella, who gave no timetable.

Lawmakers established the Public Pension Management and Asset Investment Review Commission in 2017 -- under the broader pension changes of state law Act 5 -- to review the Public School Employees’ Retirement System and the State Employees’ Retirement System.

PSERS and SERS list assets of $53.5 billion and $29.4 billion, respectively, in their 2017 comprehensive annual financial reports. The funding ratios for SERS and PSERS were 58.1% and 57.3% respectively, as of Dec. 31, 2016 and June 30, 2016, respectively, based on comprehensive annual financial reports and state budget documents.

Bond rating agencies have downgraded the commonwealth over the past three years, citing unfunded pension liability along with budget imbalance.

Moody’s Investors Service rates Pennsylvania’s general obligation bonds Aa3 with a stable outlook. S&P Global Ratings and Fitch Ratings assign A-plus and AA-minus ratings, respectively. Their respective outlooks are stable and negative.

Friday’s hearing focused on cost savings opportunities for the pension boards. Marcel Staub, founding partner and chief executive of Novarca Group, presented best-practice recommendations for reducing costs while keeping the existing risk-return exposure.

The panel expects to recommend improvements to SERS and PSERS for stress testing and fee reporting transparency; analyze their assets, investment strategies, investment performance, fees, costs and procedures against established benchmarks; and develop a plan to identify at least $1.5 billion in cost savings over 30 years for both systems.

Officials from both funds objected to testimony in September by a University of Oxford finance professor, who said SERS and PSERS paid much more in private equity fees than they reported. According to Ludovic Phalippou of Oxford’s Saïd Business School, the funds paid an estimated $6 billion in fees while actually reporting a $2.2 billion private equity payout.

“PSERS reports fees in our budget report every year,” said the fund’s press secretary, Evelyn Williams. “PSERS responded to every commission and treasurer request for information that was part of the commission hearings. Contrary to [Phalippou’s] comments, in fact we have cooperated with the commission and treasurer requests for information.”

SERS press secretary Pamela Hile said her organization publishes annually all manager investment fees and expenses by manager, including fees that are netted from distributions rather than billed directly, in its supplemental budget books.

Both funds say they have taken steps to follow the Institutional Limited Partners Association reporting template.

“It is important to recognize that while our reporting process follows industry standards and is more transparent than many other state public pension plans, we continue to work toward improved transparency and view manager adoption of the ILPA template as a big step toward that goal,” Hile said.

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Public pensions Budgets Joe Torsella Commonwealth of Pennsylvania Pennsylvania