With Pension Bonus Announcements, Smaller Funds Join Public in Outcry

News that investment managers at the Texas Teacher Retirement System received more than double what every other state agency's top employees have received combined since 2007 has raised concerns that top-performing executives may flee smaller funds with less robust compensation structures.

(April 25, 2011) — Like clockwork, after the end of every pension and endowment fiscal year, employee compensation is announced. In the public pension world, as it has for years, this time produces tension, both between the public and the people who manage their money and between large and small public pension funds.

The year’s public pension compensation controversy catalyst: the $100 billion Texas Teacher Retirement System (TRS) , which, according to The Dallas Morning News, is paying its managers $8.2 million for their 2010 performance.

The $8.2 million equals more than double what every other state agency’s top employees have received combined since 2007. According to the Dallas Morning News’ recent analysis, TRS’ bonuses went to 54 top TRS investment managers, with the biggest bonus totaling $521,512 and granted to the system’s Chief Investment Officer Britt Harris, who receives a base salary of $480,000. Meanwhile, TRS investment fund director Chi Chai saw $521,512 added to his salary of $300,000. Another 32 fund directors, portfolio managers and advisors received bonuses that equaled slightly more than $100,000 to over $300,000.

Invariably, smaller pension plans that must compete for talent find the ability of funds such as TRS to pay larger bonuses, if not harmful, then a nuisance.

One such smaller fund is the California Ventura County Employees’ Retirement Association (VCERA). “Politics are hindering our investment process, and it hindered our ability to retain someone like our former exec Tim Thonis,” VCERA Chairman Tracy Towner told aiCIO, referring to the departure of the pension board’s chief investment officer earlier this year. “Now, Tim’s at the Orange County retirement board making a lot more money than he made here.”

Towner added that VCERA’s pay is restricted by the county of Ventura, which sets and pays the salaries of board members, making it difficult for the fund to attract and retain top investment talent. “I still believe people want the best to work for government out of a duty to citizenship, but those days are diminishing,” he added. The risk: top-performing people may flee smaller funds, such as VCERA, to move into larger ones like TRS with a more robust compensation structure, or they will go into the private sector.

Funds such as TRS defend their compensation against both public outcry and smaller pension fund consternation. TRS officials maintain that the bonuses are justified as the fund’s portfolio was the best-performing large public pension in the US last year. In 2010, TRS had a record investment gain of 35% — or $25 billion — for the year ended March 31, breaking its previous record of 32% in 1998.

Furthermore, TRS argues that incentives are imperative to retain and attract top-tier talent. “You can have fund managers and people right now in this environment, pay them good salaries, be competitive with the private sector, and I do not think it’s a requirement in this environment to pay incentive for these fund managers,” R. David Kelly, chairman of the TRS board, told the newspaper.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742