Key Takeaways
- • Pennsylvania's PSERS invested 62.6% of its assets in alternatives such as real estate and private equity over the last decade, versus roughly 20% for the average pension plan, according to Reason Foundation's Pension Integrity Project.
- • PSERS paid $4.3 billion in private equity management fees over the past four years, more than the $4.2 billion members contributed over the same period.
- • PSERS outperformed Vanguard's 60/40 portfolio (VBIAX), net of retail investor fees, only once in the last five fiscal years, per Pension Integrity Project analysis.
- • Ohio's State Teachers Retirement System (STRS), with over 18% in alternatives, paid about $303 million, or 0.40% of 2018 assets, in fees tied to private equity and hedge fund investments.
- • Reason's Marc Joffe found all five Ohio state pension plans tracked by the Retirement Study Council earned domestic public equity returns substantially above their private equity returns.
Summary
A Reason Foundation commentary published October 12, 2021, argues that private equity and other alternative investments are creating fee, performance and transparency problems for public pension plans in Pennsylvania and Ohio. The piece notes that pension systems have been slow to lower investment return assumptions in a low-yield environment, pushing plans toward private equity, which carries higher volatility, higher fees and limited transparency.
The Pennsylvania Public School Employees' Retirement System (PSERS), which serves the state's teachers and school workers, has allocated 62.6% of its assets to alternatives such as real estate and private equity over the last decade, far above the roughly 20% average for pension plans. According to the Pension Integrity Project's analysis of PSERS performance, the asset class has underperformed a hypothetical passive index fund. The authors state that PSERS beat Vanguard's 60/40 stock-bond portfolio (VBIAX), net of retail investor fees, only once in the last five fiscal years.
The commentary highlights fee burdens as a central concern. PSERS paid $4.3 billion in private equity management fees over four years, exceeding the $4.2 billion in member contributions over the same period. The plan has announced that member contributions will rise because of long-term investment results below its benchmark. By comparison, the New York State Teachers' Retirement System, which has roughly twice PSERS's assets, reported 36% less in total investment fees and expenses.
Ohio's State Teachers Retirement System (STRS), which holds over 18% in alternatives, paid about $303 million, or 0.40% of plan assets in 2018, in fees associated with active private equity and hedge fund investments. Following the 2017 elimination of an annual cost-of-living increase, legislators, retirees and members have scrutinized the fund's transparency and fees. Reason senior policy analyst Marc Joffe found that all five Ohio state pension plans tracked by the state's Retirement Study Council reported domestic public equity returns substantially exceeding their private equity returns.
The authors conclude that alternatives should not be relied upon to single-handedly rescue underfunded plans, and that the pursuit of higher returns, combined with high fees, poses risks to plan funding and member retirement security. They also flag limited transparency: private equity limited partnerships report only annually, private company valuations are estimates, and asset holdings are not disclosed under SEC rules, although data is available on Bloomberg Professional Terminal.
The Pennsylvania Public School Employees' Retirement System (PSERS), which serves the state's teachers and school workers, has allocated 62.6% of its assets to alternatives such as real estate and private equity over the last decade, far above the roughly 20% average for pension plans. According to the Pension Integrity Project's analysis of PSERS performance, the asset class has underperformed a hypothetical passive index fund. The authors state that PSERS beat Vanguard's 60/40 stock-bond portfolio (VBIAX), net of retail investor fees, only once in the last five fiscal years.
The commentary highlights fee burdens as a central concern. PSERS paid $4.3 billion in private equity management fees over four years, exceeding the $4.2 billion in member contributions over the same period. The plan has announced that member contributions will rise because of long-term investment results below its benchmark. By comparison, the New York State Teachers' Retirement System, which has roughly twice PSERS's assets, reported 36% less in total investment fees and expenses.
Ohio's State Teachers Retirement System (STRS), which holds over 18% in alternatives, paid about $303 million, or 0.40% of plan assets in 2018, in fees associated with active private equity and hedge fund investments. Following the 2017 elimination of an annual cost-of-living increase, legislators, retirees and members have scrutinized the fund's transparency and fees. Reason senior policy analyst Marc Joffe found that all five Ohio state pension plans tracked by the state's Retirement Study Council reported domestic public equity returns substantially exceeding their private equity returns.
The authors conclude that alternatives should not be relied upon to single-handedly rescue underfunded plans, and that the pursuit of higher returns, combined with high fees, poses risks to plan funding and member retirement security. They also flag limited transparency: private equity limited partnerships report only annually, private company valuations are estimates, and asset holdings are not disclosed under SEC rules, although data is available on Bloomberg Professional Terminal.
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