Governor Wolf, Treasurer Torsella Push Pension Funds to Reduce Wall Street Fees, Costs

Harrisburg, PA – Pennsylvania Governor Tom Wolf and Treasurer Joe Torsella today wrote the boards of the state’s two largest 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,” Governor 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 Governor Wolf has shown in urging the pension funds to embrace common sense savings and reforms.”

In the letters, Governor Wolf and Treasurer Torsella ask the boards of both the State Employees Retirement System and the Pennsylvania State 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.

The full text of the letter to SERS is below:

Dear ____[board member]__________:

We write to urge your consideration and active support for three initiatives that would both save money and increase retirement security for public employees.  Reducing investment costs, implementing administrative efficiencies, and increasing saving opportunities are critical steps that the State Employees’ Retirement System should take immediately in order to better position itself to face future financial challenges.

In particular, we formally request that the following matters be prioritized for consideration and action at the earliest opportunity by the SERS Board:

  1. Reduction of Investment Management Fees to National Average.

    The SERS Board does not have the ability to control market returns, salary growth or the inflation rate. However, the amount the System pays for investment management is well within the control of the Board.  According to its most recent annual report, the System paid approximately $167 million in investment expenses on $26.1 billion in assets under management and reports its fees as 62 basis points – a total that may understate the non-primary level fees paid in fund-of-funds investments. Though SERS has experienced some success in reducing investment costs over the past six years, according to a study of 33 comparable pension funds by the Maryland Public Policy Institute, SERS’ expense ratio remains well above both the average (48 bpts) and the median (39 bpts) of state-managed pension funds.[1]  Indeed, 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).

  2. 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.  Reducing these redundancies and beginning the process of establishing a consolidated operation that would assume the responsibility for executing the investment and operational functions of each of the pension systems would present substantial cost savings opportunities for the Commonwealth and beneficiaries of the two systems.

    In varying forms, other states such as Florida, New Jersey and Wisconsin have established consolidated functions to manage the assets of separate pension and investment boards. Instead of duplicating the Commonwealth’s pension investment operations among several systems, there are substantial efficiencies that could be realized by consolidating these operations (potentially also including PMERS). For example, periodically both SERS and PSERS have retained actuarial advisor and private equity consulting services from the same provider, yet under separate contracts. SERS, PSERS (and potentially PMERS) could share investment consultants, advisers and certain support services in an effort to reduce costs. A concerted effort should be made by both boards to identify common investment and support service needs, to cooperatively select providers, and to merge support operations, leveraging the capacity and purchasing power of the combined funds.

  3. Expansion of Deferred Compensation Program

    Originally enacted in 1987, the deferred compensation savings program administered by SERS is an effective and low cost defined contribution investment opportunity that allows state employees to supplement their retirement savings at no cost to taxpayers. Though an excellent program, the participation rate of eligible state employees is less than 30%. With a $25,000 average annual benefit paid to state employees, there is need for supplemental retirement savings.

    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.

    Unfortunately, a recent National Institute on Retirement Security study asserts that 45% of working age households have no retirement savings. For those households that do have savings, the study estimates that the median retirement savings account balance is $3,000. Expansion of the deferred compensation program would not solve this problem, but it would represent an important step in providing low-cost savings opportunities. The enabling legislation for the deferred compensation program envisioned making it available to local government employees. We therefore ask the Board to identify actions necessary to open the existing state deferred compensation program to the thousands of local public service employees through the Commonwealth. While legislative action may ultimately be required in certain cases, we ask the Board to take whatever steps it can to begin the expansion process now.

    By taking these three commonsense steps towards reducing fees, eliminating inefficiencies and expanding savings opportunities we can save billions of dollars and improve our pension systems. Achieving pension reform through legislation remains a priority this session. But it also important to look at our operations to see how we can achieve real reform with the authority we already possess. In our capacities as Governor and Treasurer, we are mutually committed to working together and with you and your colleagues on both pension boards to maximize returns while reducing costs.

The full text of the letter to PSERS is below:

Dear ____[PSERS board member]__________:

We write to urge your consideration and active support for three initiatives that would both save money and increase retirement security for public employees.  Reducing investment cost, implementing administrative efficiencies and increasing saving opportunities are critical steps that the Public School Employees’ Retirement System should take immediately in order to better position itself to face future financial challenges.

In particular, we formally request that the following matters be prioritized for consideration and action at the earliest opportunity by the PSERS Board:

  1. Reduction of Investment Management Fees.

    The PSERS Board does not have the ability to control market returns, salary growth or inflation rate.  However, the amount the System pays for investment management is well within the control of the Board.  According to its most recent annual report, the System paid approximately $416 million in total investment expenses.  PSERS represents its “total investment expenses” ratio to be 65 basis points.[2] Though PSERS has had some success in reducing active management costs by moving investments in domestic public equities into indexing strategies, according to a study of 33 comparable pension funds by the Maryland Public Policy Institute, PSERS’ expense ratio remains well above both the average (48 bpts) and the median (39 bpts) of state-managed pension funds.[3]  Indeed, when both SERS and PSERS are considered together, the Pew Charitable Trusts ranks Pennsylvania 4th highest in the nation in terms of fees paid as a percent of assets under management. We should do better.

    To this end, we ask that the Board formally adopt 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 by 20 basis points for example, this step alone could save PSERS approximately $100 million annually and add approximately $10.2 billion to the System’s returns (compounded over 30 years).

  2. Consolidation of Pension Investment 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. Reducing these redundancies and beginning the process of establishing a consolidated operation that would assume the responsibility for executing the investment strategies of each of the pension systems would present substantial cost savings opportunities for the Commonwealth and beneficiaries of the two systems.

    In varying forms, other states such as Florida, New Jersey and Wisconsin have established central investment authorities to manage the assets of separate pension and investment boards. Instead of duplicating the Commonwealth’s pension investment operations among several systems, there are efficiencies that could be realized by consolidating these operations (potentially including PMERS). For example, periodically, both SERS and PSERS have retained actuarial advisor and private equity consulting services from the same provider, yet under separate contracts.

    SERS and PSERS could share investment consultants, advisors and certain support services in an effort to reduce costs. A concerted effort should be made by both boards to identify common investment and support service needs, to cooperatively select providers and to merge support operations, in order to leverage the capacity and purchasing power of the combined funds.

  3. Establishment of Deferred Compensation Program for PSERS members.

    Originally enacted in 1987, the deferred compensation savings program administered by SERS is an effective and low cost defined contribution investment opportunity that allows state employees to supplement their retirement savings.  Though an excellent program, a similar state administered program is not offered by PSERS to public school educators and employees.  With a $25,000 average annual benefit paid to retired public school employees, there is need for supplemental retirement savings.

    The System should develop a comprehensive plan and identify steps necessary to provide low-cost, supplemental retirement savings opportunities PSERS members.  Most public school districts are too small or otherwise unable to provide a similar low-cost defined contribution plan.  Creating a new deferred compensation program available to a public school teachers and school employees (PSERS members) is a tangible step toward ensuring more people have access to tools necessary for a secure retirement.

    Unfortunately, a recent National Institute on Retirement Security study asserts that 45% of working age households have no retirement savings.  For those households that do have savings, the study estimates that the median retirement savings account balance is $3,000.  Though the creation of a tax deferred supplemental retirement savings program will not solve this problem, it does represent an important step in providing low cost savings opportunities.  As such, we ask the Board to identify actions, legislative or executive, necessary to establish a state deferred compensation program to the thousands of local public school employees through the Commonwealth.

    By taking these three commonsense steps towards reducing fees, eliminating inefficiencies and expanding savings opportunities we can save billions of dollars and improve our pension systems.  Achieving pension reform through legislation remains a priority this session.  But it is also important to look at our operations to see how we can achieve real reform with the authority we already possess.  In our capacities as Governor and Treasurer, we are mutually committed to working together and with you and your colleagues on both pension boards to maximize returns while reducing costs.

[1] SERS investment returns under this fee structure have been 6.5% 1 year, 4.3% 10 year and 7.2% 20 year.

[2] It should be noted that according to PSERS, a majority of the expenses ($396 million) were paid to external managers at 85 basis points. A more complete representation of PSERS’ expense ratio would be 82 basis points on $50.4 billion in assets under management.

[3] PSERS investment returns under this fee structure have been, for fiscal year ending 2016, 1.29% 1 year, 6.01% 5 year, 4.94% 10 year.