Fees paid to Wall Street firms charged with managing the State Pension Fund surged a staggering 163 percent during the last five years — even as pension fund investments sputtered, according to a report today released by the Independent Democratic Conference.
These increases cost nearly $758 million – even though the pension fund has had a net negative investment return during that time frame.
“ It’s clear New York is not getting the best bang for its buck with this arrangement,” said Senator Jeffrey D. Klein, (D-Bronx/ Westchester). “While I believe those entrusted with managing our pension money deserve to be fairly compensated for good performance, it seems that instead of making money for us, some Wall Street institutions are simply allowed to just make money off us.”
This disconnect was especially pronounced in 2009, when pension fund investments plummeted 29 percent, while management and performance fees increased more than 27 percent, from $162 million to $272.5 million.
While the names and amounts paid to these institutions are publicly disclosed in annual reports put out by the State Comptroller’s Office, their individual performance records, and the terms of their fee structures, are not.
The Independent Democratic Conference found that these “investment manager fees” to outside money managing firms increased 162.7 percent from $161.8 million in 2007 to $425 million in 2011.
During that time, the state pension fund experienced an average annualized rate of return of 2.62 percent, and an overall investment return of -4.84 percent.
If these fees had stayed at 2007 levels, the pension fund would have saved $757,831,721.
The IDC is seeking to bring more clarity and disclosure to this process.
Specifically:
• The IDC will be drafting legislation requiring public, online disclosure of all management and performance fee agreements between the Pension System and outside investment managers.
• The IDC calls on the Department of Financial Services to conduct a review of the pension system’s investment management practices.
• Senator Klein, as Co-Chair of the bi-partisan Senate Task Force on Government Efficiency, will be calling on the Task Force to hold hearings on the terms of all current and future fee agreements. As part of hearings, Senator Klein will be seeking testimony from independent experts, beneficiary representatives, and members of the Comptroller’s office.
• The IDC calls for the Comptroller’s office to ensure that all future management and performance agreements align the long-term interests of pension beneficiaries with the strategies of outside investment managers.
“The hardworking men and women who pay into this system are entitled to know not only who is managing their money, but also how the managers are performing, and what they are doing to earn their fees,” said Senator Diane J. Savino, (D-Staten Island/ Brooklyn). “Let’s bring in all the stakeholders and create a system where reality is the first hurdle that pension fund managers have to clear before collecting a larger fee.”
“This report clearly indicates the need to reform the way we compensate financial firms so that merit pay and performance remain paramount in these tough economic times,” said Senator David Carlucci, (D-Rockland/ Orange). “Particularly when middle class families who pay into the system are struggling to make ends meet, they should have full confidence that their hard earned life savings are being invested wisely. I look forward to working with my colleagues to bring more transparency to this issue as we seek greater fairness and disclosure with the retirement security for New Yorkers.”
“All of us in state government need to focus on being efficient and effective, especially in this challenging fiscal environment, said Senator David J. Valesky, (D-Oneida). “When we see areas that have room for improvement, it is incumbent upon us think creatively to find alternative ways to ensure our resources are managed the best way possible.”
Robert Hiltonsmith, Policy Analyst at Demos, said: “After reviewing what data is available on the investment management fees the state pension fund is paying, the fee levels, as a percentage of either assets or returns, seem higher than is warranted given the assets’ performance. Any discussions about pension system reform should also include achieving cost savings by lowering these fees.”
Dean Baker, economist and co-founder of the Center for Economic Policy and Research, said: “It’s great the Independent Democratic Conference is seeking to require greater disclosure of the fee arrangements for managing the state’s pension funds. Around the country there have been many abuses of these arrangements over the years, with fund managers often getting rich at the taxpayers’ expense. This money belongs to the state’s workers and taxpayers. There is no excuse not to have all the information about management expenses readily available in an accessible form so that any interested person can easily find out exactly who is collecting how much money for managing a portion of the state’s pension assets.”
RELATED: IDC Pension Report