Penn­syl­va­nia Pen­sion Re­view Panel Hits Home Stretch

The Bond Buyer - - Regions - BY PAUL BUR­TON

Penn­syl­va­nia’s pen­sion com­mis­sion, af­ter three pub­lic hear­ings, will com­plete its re­view of the state’s two ma­jor funds and re­port its find­ings to Gov. Tom Wolf and the Gen­eral Assem­bly.

“The tes­ti­mony re­ceived has pro­vided the com­mis­sion with a full view of the scope of the pen­sion is­sue,” said state Trea­surer Joe Torsella, who gave no timetable.

Law­mak­ers es­tab­lished the Pub­lic Pen­sion Man­age­ment and As­set In­vest­ment Re­view Com­mis­sion in 2017 -- un­der the broader pen­sion changes of state law Act 5 -- to re­view the Pub­lic School Em­ploy­ees’ Re­tire­ment Sys­tem and the State Em­ploy­ees’ Re­tire­ment Sys­tem.

PSERS and SERS list as­sets of $53.5 bil­lion and $29.4 bil­lion, re­spec­tively, in their 2017 com­pre­hen­sive an­nual fi­nan­cial re­ports. The fund­ing ra­tios for SERS and PSERS were 58.1% and 57.3% re­spec­tively, as of Dec. 31, 2016 and June 30, 2016, re­spec­tively, based on com­pre­hen­sive an­nual fi­nan­cial re­ports and state bud­get doc­u­ments.

Bond rat­ing agen­cies have down­graded the com­mon­wealth over the past three years, cit­ing un­funded pen­sion li­a­bil­ity along with bud­get im­bal­ance.

Moody’s In­vestors Ser­vice rates Penn­syl­va­nia’s gen­eral obli­ga­tion bonds Aa3 with a sta­ble out­look. S&P Global Rat­ings and Fitch Rat­ings as­sign A-plus and AA-mi­nus rat­ings, re­spec­tively. Their re­spec­tive out­looks are sta­ble and neg­a­tive.

Fri­day’s hear­ing fo­cused on cost sav­ings op­por­tu­ni­ties for the pen­sion boards. Mar­cel Staub, found­ing part­ner and chief ex­ec­u­tive of No­varca Group, pre­sented best-prac­tice rec­om­men­da­tions for re­duc­ing costs while keep­ing the ex­ist­ing risk-re­turn ex­po­sure.

The panel ex­pects to rec­om­mend im­prove­ments to SERS and PSERS for stress test­ing and fee re­port­ing trans­parency; an­a­lyze their as­sets, in­vest­ment strate­gies, in­vest­ment per­for­mance, fees, costs and pro­ce­dures against es­tab­lished bench­marks; and de­velop a plan to iden­tify at least $1.5 bil­lion in cost sav­ings over 30 years for both sys­tems.

Of­fi­cials from both funds ob­jected to tes­ti­mony in Septem­ber by a Univer­sity of Ox­ford fi­nance pro­fes­sor, who said SERS and PSERS paid much more in pri­vate eq­uity fees than they re­ported. Ac­cord­ing to Lu­dovic Phalip­pou of Ox­ford’s Saïd Busi­ness School, the funds paid an es­ti­mated $6 bil­lion in fees while ac­tu­ally re­port­ing a $2.2 bil­lion pri­vate eq­uity pay­out.

“PSERS re­ports fees in our bud­get re­port ev­ery year,” said the fund’s press sec­re­tary, Eve­lyn Wil­liams. “PSERS re­sponded to ev­ery com­mis­sion and trea­surer re­quest for in­for­ma­tion that was part of the com­mis­sion hear­ings. Con­trary to [Phalip­pou’s] com­ments, in fact we have co­op­er­ated with the com­mis­sion and trea­surer re­quests for in­for­ma­tion.”

SERS press sec­re­tary Pamela Hile said her or­ga­ni­za­tion pub­lishes an­nu­ally all man­ager in­vest­ment fees and ex­penses by man­ager, in­clud­ing fees that are net­ted from dis­tri­bu­tions rather than billed di­rectly, in its sup­ple­men­tal bud­get books.

Both funds say they have taken steps to fol­low the In­sti­tu­tional Lim­ited Part­ners As­so­ci­a­tion re­port­ing tem­plate.

“It is im­por­tant to rec­og­nize that while our re­port­ing process fol­lows in­dus­try stan­dards and is more trans­par­ent than many other state pub­lic pen­sion plans, we con­tinue to work to­ward im­proved trans­parency and view man­ager adop­tion of the ILPA tem­plate as a big step to­ward that goal,” Hile said. ◽

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