Pa. Pension Funds Need New Investment Approach

December 21, 2018

Pennsylvania needs a new investment office to replace underperforming offices that manage state, and public school pension plans, a commission tasked with recommending changes to the retirement systems with a combined deficit of $75 billion told lawmakers Thursday. A single office 2018 — in place of the current two investment office model — would help the State (SERS) and Public School (PSERS) Employees’ Retirement Systems have a more effective investment strategy, cut costs and help reduce the deficit, according to a new report from the commission. The bipartisan, five-man Pennsylvania Public Pension Management and Asset Investment Review Commission, headed by state Rep. Mike Tobash, R-125, Schuylkill Haven, also urged the state (aided by local school districts) to continue paying more than 30 cents into the pensions, for every dollar paid in wages, as the state’s “employer contribution” to help erase past deficits. Under Govs. Tom Ridge and Ed Rendell, the state had cut its pension payments even as legislators, teachers, state troopers and other public workers retired in larger numbers, with bigger pensions, and lived longer than projected. The commission also urged legislators to force SERS to follow PSERS in starting to publicly disclose how many billions of dollars have been collected by hedge fund managers and other private contractors who manage the state’s pension assets. And the commission urged SERS and PSERS to dump any remaining “actively-managed” stock or bond funds they own, in favor of indexed funds. The report also said SERS and PSERS investments have long performed poorly compared to dozens of other, similarly-sized pension plans, and blamed the shortfall in part on over-investment in expensive, underperforming private investments. But the report stopped short of recommending the state sell its private-equity, venture-capital, private real estate, hedge fund, commodities, junk bond, and other “alternative” investment portfolios, as Torsella and Wolf have sometimes recommended during their election campaigns. Gov. Tom Wolf and state treasurer Joe Torsella, the commission’s vice chairman, made grand claims for billions of dollars in potential savings through what Wolf called lower fees “to Wall Street,” which they said would follow adoption of these reforms. Cost saving is the commission’s stated goal. But chairman Tobash pointed out that any savings would not result in new money available to the state’s annual budget. Instead, effective reform will help keep the long-term pension deficits from growing larger, stabilizing state and school districts’ annual payments after a decade of rapid increases. In a brief interview after the report was released, SERS’ executive director, Terry Sanchez, said her system has been asking its hundreds of hired private money management firms for permission to tell Pennsylvanians how much of the profits private contractors make on state investments is kept by those managers as part of their compensation. But Sanchez couldn’t say whether SERS will begin disclosing that information in state budget hearings later this winter, or in its annual report next year, or anytime in particular. There is no timetable, she said. Tobash joined vice chair Torsella and Torsella’s fellow Democrat, Gov. Wolf, along with other commission members and state officials to unveil the recommendations. The pension review commission was set up by the General Assembly when it passed curbs on guaranteed pensions for future state hires and began steering them toward 401(k)-style pension plans, whose values rise and fall with those of the investment markets, leaving taxpayers off the hook for part of the shortfall when pensioners’ investments lose value. These revised pensions take effect for new state hires starting in January.

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