NY CIO: Fix Public Fund Compensation—Or We May Fail

Dramatically underpaying staff relative to market threatens funds’ long-term solvency, according to top CIOs.

Milken Asset Owners1Two of America’s most powerful public fund CIOs laid bare the potential consequences of a “broken” staff compensation system at the Milken Institute Global Conference

“If it doesn’t get fixed, no, you won’t meet the target rates of return. You won’t have the talent,” said Vicki Fuller, CIO of the $185 billion New York State Common Retirement Fund. 

On a $1 billion private equity mandate, for example, New York’s fund might spend $30 million to $50 million in fees per year. The employee responsible for that mandate? “$150,000,” Fuller pointed out. “It doesn’t make sense.” 

The net investment of increasing staff wages to effectively manage assets in-house would be paid off many times over, according to panelist Chris Ailman, CIO of California’s $187 billion teachers’ retirement system. He knows from experience. 

“In the public markets, it costs us about one-tenth the cost to run money in-house as it does to hire an external manager,” Ailman said. “If we could run money in private markets and do direct deals, it would probably be 25 times cheaper.” 

Ailman and Fuller lauded Canadian pension funds for solving the issue through arm’s-length governance structures and market-competitive wages. 

Ron Mock, CEO of Ontario Teachers’ Pension Plan, earned C$4.3 million (US$3.4 million) in 2015, for example. His predecessor took home double that in 2013. At $133 billion, the fund has among the best long-term track records of any pension investor worldwide, net of expenses. 

Chris Ailman’s compensation totaled $675,000 in 2014, according to public records. New York State paid Fuller approximately half that to oversee the equivalent of New Zealand’s GDP. 

Neither Ailman nor Fuller mentioned their own pay during the discussion. Rather, they raised alarm on behalf of their teams and members. 

“I actually believe in calling this out, being transparent, and letting our pensioners know what the implication is,” Fuller said. “In order for all of us—for the welfare of the millions of people we serve—to be able to provide that secure pension in a defined benefit form in perpetuity, we’re going to have to fix this.” 

Related: ‘Serious Issues’ in NYC Pension Investment Operations & New Jersey Pension Looks to Upgrade Pay Structure