Searching for higher returns to bridge looming shortfalls, public workers’ pension funds across the country are increasingly turning to riskier investments in private equity, real estate and hedge funds.
But while their fees have soared, their returns have not. In fact, a number of retirement systems that have stuck with more traditional investments in stocks and bonds have performed better in recent years, for a fraction of the fees.
Consider the contrast between the state retirement fund for Pennsylvania and the one for Georgia.
The $26.3 billion Pennsylvania State Employees’ Retirement System has more than 46 percent of its assets in riskier alternatives, including nearly 400 private equity, venture capital and real estate funds.
The system paid about $1.35 billion in management fees in the last five years and reported a five-year annualized return of 3.6 percent.
That is below the 8 percent target needed to meet its financing requirements, and it also lags behind a 4.9 percent median return among public pension systems.
In Georgia, the $14.4 billion retirement system, which is prohibited by state law from investing in alternative investments, has earned 5.3 percent annually over the same time frame and paid about $54 million total in fees.
The two funds represent the extremes, with Pennsylvania in a group of pension systems with some of the highest percentages of investments in alternatives and Georgia in a group of 10 with some of the lowest, according to groupings of funds identified by the London-based research firm Preqin.
An analysis of the sampling presents an unflattering portrait of the riskier bets: the funds with a third to more than half of their money in private equity, hedge funds and real estate had returns that were more than a percentage point lower than returns of the funds that largely avoided those assets. They also paid nearly four times as much in fees.
While managers for the retirement systems say that a five-year period is not long enough to judge their success, those fees nevertheless add up to hundreds of millions of dollars each year for some of the country’s largest pension funds.
The $51.4 billion Pennsylvania public schools pension system, for instance, which has 46 percent of its assets in riskier investments, pays more than $500 million a year in fees. It has earned 3.9 percent annually since 2007.
Whether the higher fees charged by private equity firms and hedge funds are worth it has been hotly debated within the investment community for years.
Do these investment entities, over an extended period of time, either offset the wild swings in assets during rough patches of the market or provide significantly higher gains than could be found in less-expensive bond and stock investments?
“We can’t put it in Treasury notes and bonds; that’s just not making any money,” said Sam Jordan, the chief executive of the Austin Police Retirement System in Texas.
James Wilbanks, executive director of the Oklahoma Teachers Retirement System, which has largely stayed with stocks and bonds, said that pension funds were obligated to take a cautious approach.
“We all heard the stories about institutional funds that had more than half of their assets in private equity in 2008” and then had to sell, he said.
While both sides of the debate can point to various studies, the topic is taking on a sharper focus as more funds embrace the riskier strategy.
By September 2011, retirement systems with more than $1 billion in assets had increased their stakes in real estate, private equity and hedge funds to 19 percent, from 10.7 percent in 2007, according to the Wilshire Trust Universe Comparison Service.
Public retirement systems are struggling to earn sufficient returns with interest rates near record lows and more and more workers qualifying for retirement. Their pension costs are growing fast, but state and local government returns are not keeping up.
A new study by the Government Accountability Office raised questions about how some of the riskier investments performed for public and private pension funds during the financial crisis. Meanwhile, some public retirement systems that increased their stakes in those investments are trying to curb those costs.
nytimes.com
But while their fees have soared, their returns have not. In fact, a number of retirement systems that have stuck with more traditional investments in stocks and bonds have performed better in recent years, for a fraction of the fees.
Consider the contrast between the state retirement fund for Pennsylvania and the one for Georgia.
The $26.3 billion Pennsylvania State Employees’ Retirement System has more than 46 percent of its assets in riskier alternatives, including nearly 400 private equity, venture capital and real estate funds.
The system paid about $1.35 billion in management fees in the last five years and reported a five-year annualized return of 3.6 percent.
That is below the 8 percent target needed to meet its financing requirements, and it also lags behind a 4.9 percent median return among public pension systems.
In Georgia, the $14.4 billion retirement system, which is prohibited by state law from investing in alternative investments, has earned 5.3 percent annually over the same time frame and paid about $54 million total in fees.
The two funds represent the extremes, with Pennsylvania in a group of pension systems with some of the highest percentages of investments in alternatives and Georgia in a group of 10 with some of the lowest, according to groupings of funds identified by the London-based research firm Preqin.
An analysis of the sampling presents an unflattering portrait of the riskier bets: the funds with a third to more than half of their money in private equity, hedge funds and real estate had returns that were more than a percentage point lower than returns of the funds that largely avoided those assets. They also paid nearly four times as much in fees.
While managers for the retirement systems say that a five-year period is not long enough to judge their success, those fees nevertheless add up to hundreds of millions of dollars each year for some of the country’s largest pension funds.
The $51.4 billion Pennsylvania public schools pension system, for instance, which has 46 percent of its assets in riskier investments, pays more than $500 million a year in fees. It has earned 3.9 percent annually since 2007.
Whether the higher fees charged by private equity firms and hedge funds are worth it has been hotly debated within the investment community for years.
Do these investment entities, over an extended period of time, either offset the wild swings in assets during rough patches of the market or provide significantly higher gains than could be found in less-expensive bond and stock investments?
“We can’t put it in Treasury notes and bonds; that’s just not making any money,” said Sam Jordan, the chief executive of the Austin Police Retirement System in Texas.
James Wilbanks, executive director of the Oklahoma Teachers Retirement System, which has largely stayed with stocks and bonds, said that pension funds were obligated to take a cautious approach.
“We all heard the stories about institutional funds that had more than half of their assets in private equity in 2008” and then had to sell, he said.
While both sides of the debate can point to various studies, the topic is taking on a sharper focus as more funds embrace the riskier strategy.
By September 2011, retirement systems with more than $1 billion in assets had increased their stakes in real estate, private equity and hedge funds to 19 percent, from 10.7 percent in 2007, according to the Wilshire Trust Universe Comparison Service.
Public retirement systems are struggling to earn sufficient returns with interest rates near record lows and more and more workers qualifying for retirement. Their pension costs are growing fast, but state and local government returns are not keeping up.
A new study by the Government Accountability Office raised questions about how some of the riskier investments performed for public and private pension funds during the financial crisis. Meanwhile, some public retirement systems that increased their stakes in those investments are trying to curb those costs.
nytimes.com
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