U.S. state pension plans have increased their allocations to alternatives in recent years in an effort to reach their assumed rates of returns, but the move to more complex investment vehicles has come with a dramatic increase in fees, according to a report from Pew Charitable Trusts.
For fiscal year 2014, the average public pension plan allocation to alternatives was 25%, more than double the 11% allocation in fiscal year 2006, the report said. That hike in alternatives has increased external management fees for public pension funds considerably, rising as a percentage of total assets to 0.34% in fiscal year 2014, compared with 0.26% in fiscal year 2006.
Of the 73 plans, the report said the $9 billion Arizona Public Safety Personnel Retirement System, Phoenix, had the highest allocation to alternatives in fiscal year 2014, at 56%, and the highest external management fees, at 2% of total assets.
“Although the increase may seem small, it equates to over $2 billion (more) in total annual investment fees for the 73 plans examined,” the report said.
During the same time period, the average allocation to equities dropped to 51% from 61% and the allocation to fixed income dropped to 24% from 28%.
Of the 73 state plans analyzed by Pew, 21 plans had at least 30% of their portfolios in alternatives, and five plans had more than 40% in alternatives.
The 73 plans represent assets totaling $2.8 trillion.