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Pension Funds

Pennsylvania commission report finds state pension plans failed to report billions in fees

Ludovic Phalippou

At an informal hearing held last week to examine how to improve Pennsylvania's two statewide pension systems, University of Oxford professor Ludovic Phalippou said the plans have spent more than $12 billion on private equity fees over the course of their existences, much of which he said has gone unreported.

The Public Pension Management and Asset Investment Review Commission held the informal hearing to examine the need for improvements in transparency around investment expenses and returns of the $54.8 billion Pennsylvania Public School Employees' Retirement System and the $29.8 billion Pennsylvania State Employees' Retirement System, both in Harrisburg.

Mr. Phalippou, who conducted an internal analysis of the fees and performance of the private equity funds held by the two plans, added that the two state plans have reported $2.2 billion in fees over the past 10 years, but estimates that $6 billion was spent with $3.8 billion in what he described as "unreported fees."

Mr. Phalippou was hired by the state treasurer's office to conduct the analysis.

In response to Mr. Phalippou's testimony, PennSERS spokeswoman Pamela Hile said in an email that the pension system publishes "all manager investment fees and expenses by manager" each year, "including fees that are netted from distributions rather than billed directly."

And although PennSERS does not track and report carried interest, Ms. Hile noted that the board passed a motion earlier this year "directing staff to request that the general partners/investment managers of private equity funds and real estate funds adopt and complete the Institutional Limited Partners Association fee disclosure template."

Meanwhile, PennPSERS spokeswoman Evelyn Williams said the unreported fees the professor was referring to was carried interest, which "is not something that has been typically tracked/reported by public pension funds across the country," and added that "there is no industry consensus on reporting carried interest as a 'fee.' "

That said, Ms. Williams noted that PennPSERS has "begun to compile carried interest data and the first report will be available after our October board meeting."

Beyond that, PennPSERS "reports fees in our budget every year," said Ms. Williams. "You can find them on our website."

The commission was established in 2017 to review the investment management practices of PennSERS and PennPSERS. Its goals are to recommend improvements to the two plans' stress testing and fee reporting transparency; analyze the plans' assets, investment strategies, investment performance, fees, costs and procedures against established benchmarks; and develop a plan to identify $1.5 billion in cost savings over 30 years for each of the two systems.

In August, PennPSERS passed a resolution to reduce fees by $2.5 billion over the next 30 years.

This was the second hearing the commission held. The first was held in July, and the next is scheduled for Oct. 25.

The commission plans to complete its review, report its findings and make its recommendations to Gov. Tom Wolf and the state's General Assembly sometime in November, but does not yet have a presentation date, said Heidi Havens, spokeswoman for state Treasurer Joe Torsella, who heads the commission.