Pennsylvania pension funds hid fee payouts, finance expert says

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Pennsylvania’s two largest public pension systems are paying much higher private equity fees than they report, a finance professor told a state oversight panel.

The State Employees’ Retirement System and the Public Schools’ Employees’ Retirement System paid an estimated $6 billion while actually reporting a $2.2 billion PE payout, Ludovic Phalippou of the University of Oxford’s Saïd Business School told the Public Pension Management and Asset Investment Review Commission at the state capitol in Harrisburg on Thursday.


The $3.8 billion differential “is a staggering number,” said Pennsylvania Treasurer and commission vice-chairman Joe Torsella.

Phalippou added that the systems would not release documents that would help him determine a more accurate amount. He said his preliminary results concluded that over the life of the two pension systems, more than $12 billion has been spent on fees.

“It is my belief and the conclusion that I draw from 15 years in this area, that we ought to care about how much in fees are paid and about how good or bad performance has really been,” said Phalippou. “There ought to be an honest and transparent conversation.”

Ashby Monk, executive director of the Stanford Global Projects Center, and representatives from the Center for Retirement Research at Boston College also appeared before the panel.

“Today, we heard some troubling findings from experts in the public pension field," Torsella said after the meeting. "Among these findings, we heard for the first time today an estimate that billions of dollars have been paid to Wall Street money managers, but have not been disclosed to the Pennsylvania beneficiaries."

Messages seeking comment were left with PSERS and SERS.

Last year’s pension overhaul law that Gov. Tom Wolf signed created the panel, which intends to develop a plan to identify $1.5 billion of cost savings over 30 years for each of the two systems.

The commission has six months to complete its review of PSERS and SERS, and to report findings and recommendations to Wolf and the General Assembly. Its chairman is state Rep. Mike Tobash, R-Pottsville. Torsella is a Democrat.

The panel plans to recommend improvements to SERS and PSERS on stress testing and fee reporting transparency; and analyze their assets, investment strategies, investment performance, fees, costs and procedures against established benchmarks.

It will discuss cost-savings opportunities for the pension funds at its October meeting.

Torsella two weeks ago announced new standards on fee transparency, saying Treasury will now disclose previously unreported “carried interest” and other fees. The announcement is part of an initiative to reduce Wall Street fees to improve investment returns.

PSERS and SERS list assets of $53.5 billion and $29.4 billion, respectively, in their 2017 comprehensive annual financial reports.

From 2000 to 2016, Pennsylvania’s pension systems went from a $16 billion surplus to a $69 billion deficit, Harvard Kennedy School reported in May. "We must bring down the debt in both of the commonwealth’s major pension systems," Tobash said.

The Kennedy report cited persistent underfunding, lower-than-expected investment returns and one of the largest unfunded benefit increases that any state has implemented.

“We estimate that current levels of high cost are likely to persist for decades in a scenario with significantly lower returns, because further increases in required state contributions may be unaffordable,” the Kennedy report said.

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.

Pennsylvania has enacted two rounds of changes since the financial crisis, dramatically ramping up employer contributions to stabilize pension financing and shifting new workers to a risk-managed hybrid plan.

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Public pensions Joe Torsella Commonwealth of Pennsylvania Pennsylvania
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