Auditor General Eugene DePasquale Thursday urged leaders of the state’s two public pension systems to negotiate lower fees for fund management, limit exposure to risk, and improve overall transparency regarding investment costs, including those associated with hedge funds.
“Pennsylvania’s two largest public pension plans, Public School Employees' Retirement System (PSERS) and the Pennsylvania State Employees' Retirement System (SERS), collectively have investments totaling $77 billion,” DePasquale said at a news conference with Montgomery Commission Chairman Josh Shapiro. “With that immense buying power, the retirement systems should be able to obtain reductions in the fees they pay to fund managers.”
DePasquale acknowledged that the 2001 state pension hike and years of underfunding from the state and school districts exacerbated the pension challenges and may have prompted the pension systems to look at potentially higher-risk investments such as hedge funds. However, he urged them to limit their risk exposure from such funds.
Based on the most recent audited financial statements, SERS has about 7 percent of its investments in hedge funds; PSERS has about 12 percent of its investments in hedge funds.
“Because of the risk often associated with hedge fund investments, it would be wise for PSERS, especially, to review the amount they have invested in such funds,” he said.
DePasquale urged the retirement systems to be more up front with the public on investment costs.
“For example, hedge fund managers typically earn 2 percent per year, plus an incentive fee of 20 percent of the profits,” DePasquale said. “The problem with PSERS and SERS is it is not clear what hedge fund fees they are paying or to whom.
“While PSERS and SERS may publish information on the management fees, the information is incredibly difficult to locate and comprehend unless you are trained in the business of investments. These are public pension systems and the general public has a right to know where the money is going.”
Based on the most recent audited financial statements, Pennsylvania’s two largest public pension plans, PSERS and SERS collectively have investments totaling $77 billion. Of that total, PSERS has $5.7 billion invested in hedge funds; SERS has $1.9 billion invested in hedge funds.Hedge funds are an investment alternative often only available to institutions and individuals with significant investment assets. Depending on the amount of assets in the hedge funds, investment managers may not be required to register or to file reports with the U.S. Securities and Exchange Commission. Additionally, these investment managers may charge high fees.