Gov. Tom Wolf and Treasurer Joe Torsella Thursday wrote the boards of the state’s state employee and school employee pension funds to reduce investment costs by moving away from Wall Street money managers, implement administrative efficiencies, and increase savings opportunities.
“The evidence is clear that passive investment can yield similar or even better returns than Wall Street money managers and reducing these fees could save billions for the funds and taxpayers over the long-term,” Gov. Wolf said. “I applaud Treasurer Torsella for his cooperation and leadership on reducing money manager fees and our hope is that the pension funds can proactively do the same.”
"Every dollar that we save in Wall Street fees is a dollar we can keep in the pockets of Pennsylvanians. While Treasury has led the charge in being responsible stewards of taxpayer money by reducing investment fees, all of us have much more work to do," said Torsella. "I greatly appreciate the cooperation and effective leadership Gov. Wolf has shown in urging the pension funds to embrace common sense savings and reforms."
In the letters, Gov. Wolf and Treasurer Torsella ask the boards of both the State Employees Retirement System and the PA School Employees' Retirement System to work towards three goals:
-- Reduce Wall Street Fees to National Average: “When both SERS and PSERS are considered together, the Pew Charitable Trust ranks Pennsylvania 4th highest in the nation in terms of fees paid as a percent of assets under management. We can and should do much better.
“To this end, we ask that the Board formally adopt annual fee caps to substantially reduce manager fees to a level between the national average and median among state pension systems over the next three years. Assuming a reduction of the expense ratio to 45 bpts, this step could save SERS approximately $46 million annually and add approximately $4.5 billion to the System’s returns (compounded over 30 years).”
-- Reduce Administration Costs through Consolidation of Pension Investment and Support Operations: “Both SERS and PSERS maintain independent responsibility for overseeing and investing each system’s funds. Though each fund has unique investment liability profiles, there is substantial redundancy in investment and back office support operations -- including common professional consultants and investment managers.”
-- Expand Deferred Compensation Program: “The System should develop a comprehensive plan to increase the participation rate among active state workers and to identify steps necessary to open the program to local municipal, township and county employees throughout the Commonwealth.
Most political subdivisions are too small or otherwise unable to provide a similar low-cost defined contribution plan. Making the existing state deferred compensation program available to a new class of workers is a tangible step toward ensuring more people have access to tools necessary for a secure retirement.
By taking these three commonsense steps towards reducing fees, eliminating inefficiencies and expanding savings opportunities, the Governor and Treasurer believe Pennsylvania can save billions of dollars and improve our pension systems.
The two executive officers also said that achieving pension reform through legislation remains a priority this session but noted it is also important to look at operations to see how the Commonwealth can achieve real reform with the authority already available.
A copy of the letter is available online.
School Employees Fund Reaction
You may have seen a recent press release from Pennsylvania Treasurer Joe Torsella announcing the move of Treasury’s public equity assets to a passive investment strategy. PSERS supports the Treasurer’s move to passive investing, also known as indexing.
PSERS believes that the U.S. publicly-traded equity market is very efficient and has been passively investing all of its U.S. public equity investments for many years.
As a PSERS member you may be interested to know that PSERS also passively invests 100 percent of its public U.S. equity investments using its own internal investment staff to do so.
Currently we have $3.6 billion of U.S. publicly-traded equity investments under internal passive management, saving an estimated $700,000 per year in management fees versus hiring external passive manager and an estimated $10 million per year in management fees versus hiring external active managers.
PSERS also manages $2.9 billion (approximately 45 percent) of its non-U.S. publicly-traded equity exposure under internal passive management, saving an estimated $2.3 million per year versus hiring external passive managers and an estimated $12 million per year in management fees versus hiring external active managers.
PSERS has an “Index First” mentality and has long been a leader in equity indexing. In fact, in 1990 PSERS started one of first internally managed S&P 500 Index funds (large cap companies) among public pension funds and was one of the largest indexers for many years.
PSERS was also invited to be a founding member of the Standard & Poor’s Institutional Indexing Advisory Board and was a member of that Board for over 10 years. Standard & Poor’s is one of the world’s leading index providers.
PSERS also has been a leader in the nation in implementing other index tracking portfolios as follows:
-- Started second S&P 400 Index fund (mid cap companies) among all institutional investors in the nation in 1992
-- Started first S&P 600 Index fund (small cap companies) among all institutional investors in the nation in 1994
Among public pension funds, PSERS led the nation in implementing indexing as follows:
-- Started first internally-managed MSCI EAFE (Europe, Asia, Far East) Index fund in 1997 (MSCI is another leading index provider)
-- Started first internally-managed MSCI ACWI ex US (All-Country World Index excluding U.S.) Index fund in 2004
You should be proud to know that PSERS is a nationally recognized leader among public pension fund investors and has advised numerous other public pension plans on how to start and run index operations.
For more information on PSERS’ investments, go to PSERS Investment Program webpage.
