Pennsylvania Auditor General Eugene DePasquale has criticized the $27.5 billion State Employees’ Retirement System (SERS) for not doing enough to cut the amount it spends on investment fees.
“Every dime going to Wall Street managers is not going into the pension funds that desperately need it, and adds additional stress to Pennsylvania’s budget situation,” said DePasquale in his performance audit of SERS.
The auditor said that while SERS hired investment consultants in accordance with its written procedures, it did not adequately pursue competitive offers and failed to document fee negotiations. He also said the state wasn’t getting its money’s worth, and pointed out that the system’s investment returns of 6.5% in 2016 was below its expected return of 7.25%, and well below the national median return of 12.4%.
He did say that “SERS is moving in the right direction by starting to address many of the issues I’ve been pushing for in the past four years, including reducing investment fees and using more passive investments, however, there is still room for improvement.”
According to DePasquale, SERS has reduced investment manager expenses from $345 million in 2007, to $167 million in 2016; and since October 2016, has moved $3.9 billion of assets into passive investment strategies, which reduced annual external investment management fees by approximately $17 million. As of April 26, SERS’ investments are 54% active and 46% passive.
“I commend SERS for achieving considerable cost savings so far,” DePasquale said. “Nonetheless, my audit found that SERS can still save more by taking every opportunity to negotiate lower fees and by competitively bidding every contract, every time.”
The 119-page audit report, which covers from the beginning of 2013 to March 31, 2017, includes 18 findings on six issues and makes 36 recommendations—23 directed at SERS, 13 directed at the General Assembly.
In the audit, DePasquale also said the Public Employee Pension Forfeiture Act needs to be broadened.
“The language of the Public Employee Pension Forfeiture Act is outrageously restrictive and creates loopholes where workers can be convicted of a sex crime and still keep their pensions,” he said.
According to DePasquale, SERS was overfunded by 32% in 2000, and remained over 100% through 2004. He said legislative changes in 2001 to increase benefits and to allow underfunding of employer contributions, combined with economic downturns, reduced the funding level to 58.7%, with a projected unfunded liability of $19.5 billion in 2017.