Thought Leadership Thursday
A Prudent and Responsible Approach to Public Pensions & Investments
Thought Leadership Thursday Article
As the new chair of NAST’s Pension & Trust Investment Committee, I’m excited to build on the great work and advocacy our organization is known for. One of my goals is to encourage a broad exchange of experiences so that we can learn from each other. I want to have open conversations so we can share ideas, innovations, and strategies to improve public retirement systems across our great nation.
The Pennsylvania Treasury Department has a history of actively participating in pension reform discussions at NAST, and we helped develop and pass resolutions supporting stress testing for pension funds and increased transparency in the private equity marketplace. NAST was also instrumental in the development of the proposed SEC rule that would update the Investment and Advisers Act of 1940 to increase transparency in the private equity industry.
It’s hard to ignore the difficult economic times we’re in – and likely will remain in for months or (hopefully not) years to come. The tumultuous markets in 2022 hit public pension systems hard. American families continue to struggle to make ends meet as inflation eats away at their budgets. But as markets rebound, earnings will build again and inflation will calm down. History has taught us that there will be an upswing.
The solvency of our public pensions is of utmost importance, both to fund beneficiaries and taxpayers. Although we can’t control the markets or see the future, we can make smart decisions now to be sure pension plans are ready to weather financial storms and take advantage of the eventual recovery.
As Treasurer of Pennsylvania, I serve on the boards of our state’s three largest pension systems, including the Public School Employees’ Retirement System (PSERS) and the State Employee Retirement System (SERS). One way we’ve made huge improvements at PSERS and SERS is by reevaluating investment management fees.
Are high fees for managed investments worth it? Not usually. We’ve moved to simpler, more passive index-style investments that come with less fees for comparable returns – because it makes good financial sense. For example, at PSERS, we’ve done away with the majority of our hedge fund investments by starting to exit $6 billion worth of these pricey investments in 2021. Making the swap to reallocate these funds to lower-risk, lower-cost investments is estimated to save the fund $3 billion over 30 years.
On top of tackling investment fees, PSERS and SERS have reigned in travel costs for system staff in the best interest of taxpayers who were footing outrageous travel bills. Our pension systems are meant to prudently serve the interests of our hardworking public servants and educators. PSERS and SERS have revamped their rules to no longer permit investment managers to book extravagant travel arrangements like flights and hotel accommodations. Travel is now booked in-house by both systems. That removes incentives for lavish spending that only benefited Wall Street – not plan beneficiaries or taxpayers.
PSERS and SERS have made a number of positive changes in recent years, and both were notably praised by The Pew Charitable Trusts last month for the actions taken to get the plans back on a positive trajectory. Reforms include the changes in investment strategy – as well as the state General Assembly’s track record of consistently meeting the annual required contribution amount in full since 2018.
Both systems implemented a new hybrid benefit plan following legislative action in 2017. Employees hired starting January 1, 2019, are offered a combination of a defined benefit plan (traditional pension) and a separate defined contribution account similar to a 401(k). This change alone is estimated to save taxpayers $8 billion to $20 billion over three decades.
The funds also now publish annual stress tests, tremendously increasing plan transparency. This helps everyone involved better understand investment risk and climate, and to make the best decisions possible moving forward.
I’m excited to lead the Pension & Trust Investment Committee, to learn about successful strategies other states are implementing, and to use our collective knowledge to advance sound, practical policy. Managing these funds well ensures financial security for the hardworking people who depend on them to enjoy their retirement after years of dedicated public service – and creates savings for taxpayers.
Pennsylvania State Treasurer
Chair, NAST Pension & Trust Investment Committee