Pennsylvania Pensions Could Save Nearly $10 Billion over 30 Years

Report says annual fees were greater than all employee contributions.

A report commissioned by the state of Pennsylvania has identified potential cost savings of nearly $10 billion over the next 30 years for the state’s two largest retirement systems.

The Public Pension Management and Asset Investment Review Commission (PPMAIRC) was created in 2017 by state law to conduct a comprehensive review of the investment management of the Public School Employees’ Retirement System (PSERS) and State Employees’ Retirement System (SERS).. As part of its evaluation, the commission was tasked with finding $3 billion over a 30-year period—instead it found savings of close to $10 billion.

After a seven-month examination of Pennsylvania’s two retirement systems, the report found an estimated potential annual savings of $97.3 million to $116.8 million. Expressed as actuarial savings over 30 years at the 7.25% assumed rate of return, the report said estimated savings would be between $8.2 billion and $9.8 billion.

In compiling the report, the commission conducted three public hearings and received the testimony of academic experts, institutional investment professionals, state pension fund managers, and representatives from PSERS and SERS.

The report found that both funds have underperformed relative to peers and have “consistently underperformed simple multi-asset portfolios” on a risk-adjusted basis.  While costs have decreased by 50% over a 10-year period at SERS and are now approaching peer group averages, both funds have higher-than-average expenses.

The commission strongly recommended that the state maintain full payment of the annual actuarially determined contribution amount necessary to fund each pension plan “as doing so is fundamental and required to ensure the future financial viability of both retirement systems.”

It said that without full annual funding, none of the commissions other recommendations would be enough to ensure the availability of retirement benefits for future generations of public servants. The other recommendations include:

  • Establishing a consolidated central pension investment office that would be exclusively responsible for all investment functions on behalf of and as directed by each retirement system.
  • Enacting legislation mandating annual stress testing of each retirement system in a manner that is aligned with the recommendations of the Society of Actuaries Blue Ribbon Panel, and publicly reporting the findings of the tests.
  • Establishing policies at both system boards that favor and encourage open public reporting best practices, including, public reporting of an access to all investment costs and expenses at fund and manager level, full disclosure of all costs of private market investments, quarterly investment performance by asset class investment manager expense terms, and materials submitted to board trustees during open meetings.
  • Enacting legislation mandating, as well as the repeal of existing laws that “frustrate, increased public reporting” of all investment expenses, total fund, and asset class investment.
  • Moving to fully index all public market investments in both equities and fixed income at both retirement systems.

“The General Assembly has approved real and meaningful pension reform, but we need to do more,” State Rep. Michael Tobash, chair of PPMAIRC, said in a statement. “If these recommendations to the two public pensions systems are enacted, we will save taxpayers billions of dollars, reduce unnecessary risks and costs without compromising performance, and most importantly, keep our promise to existing retirees and system members.”

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