Pennsylvania Pension Panel Explores Debt-Cutting Plans

The state’s SERS and PSERS retirement organizations say they are looking for ways to cut management fees and improve transparency.

A study committee of Pennsylvania officials is trying to find ways to help plug the $70 billion in total debt between the Public School Employees Retirement System (PSERS) and the State Employees Retirement System (SERS).

Focusing on fee reductions and other steps, the Public Pension Management and Asset Investment Review Commission held its final hearing last week in Harrisburg, the state capital, to figure out how to get out of this dilemma, with the help of experts.

The pension funds could save up to $6.5 billion if they  cut back on manager fees, which would clear the $1.5 billion minimum the committee requires for each, Marcel Staub, CEO of Novarca Group, an independent cost specialist manager for institutional investors, told the panel.

Plus, innovation can help, said Ashby Monk, research director of the Stanford Global Projects Center. The pension plans could utilize new technology to help bolster returns, he contended.

The goal of the study commission, said Joe Torsella, the state’s treasurer and the commission’s vice chair, is to find out how to “do better for our beneficiaries, for our taxpayers, and for the Commonwealth as a whole.”

The public school fund’s executive director, Terry Sanchez, said it is continuing to provide “as much transparency as possible,” and publicly reports all investment and related expenses, including fees.

Its chief investment officer, Brian Lewis, said the organization is looking into and implementing several cost-reduction tactics. It is also examining its public and private assets internally.

The state employee plan’s executive director, Glen Grell,  said it does not “waste system assets,” nor does it hide fees. Grossman also noted a savings plan involving renegotiating fees with managers—fees would get cut in exchange for profit-sharing on returns above an agreed benchmark. The strategy is aimed at saving $2.4 billion over 30 years.

“We are open to considering any fee savings recommendations,” said CIO, James Grossman Jr. “The investment professionals at PSERS are always looking to negotiate the fairest fee deal possible.” Grossman added that all fee negotiations are now formally documented.

The state employees’ pension took offense at the commission’s speculations that it was hiding fees, said Grell. He labeled it a “false allegation” that “creates sensational headlines, it is incorrect and irresponsible.”

Last month, in a previous hearing, the coalition discussed a report by Ludovic Phalippou, an Oxford finance professor, which found that the two pension funds had been underreporting one-third of fees paid to private equity firms over the past decade. Phalippou found about $3.8 billion in unaccounted fee money between the plans.

The study was conducted to show the risk factors in the plans’ private equity investments. The committee’s mission is to improve the funded statuses, which are 56.3% for the public school retirement plan and 59.4% for the state employees system.

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