New York state legislators have introduced bills that would allow large public pension funds to increase allocations to alternative investments such as private equity and hedge funds to 35% from 25%.
The legislation would affect the $176.2 billion New York State Common Retirement Fund, Albany; $150 billion New York City Retirement Systems; and $104.3 billion New York State Teachers' Retirement System, Albany.
Under state law, these public pension funds are governed by a “legal list,” containing a broad category of primarily fixed income and equity investments. The plans may allocate up to 25% of assets outside this list in a basket of investments such as private equity, hedge funds, commodities and international bonds.
The bills, introduced in the state Senate and state Assembly, would amend the so-called basket clause, allowing public pension funds to devote as much as 35% of allocations outside the “legal list” rather than the existing 25%.
“The current 25% limit on alternative investments prevents the (five) city pension funds from creating an optimal investment portfolio,” said Eric Sumberg, a spokesman for city Comptroller Scott Stringer, the fiduciary for the five pension funds.
“Increasing the basket will allow the (five) pension boards to achieve a superior risk-adjusted return by providing flexibility to use asset classes in many traditional public markets and alternatives that are restricted by the current basket law,” Mr. Sumberg added. “Expansion of the basket allocation this year is essential to maintain our ability to meet actuarial targets and navigate future market environments.”
The New York State Teachers' Retirement System declined to comment on the bills, spokesman John Cardillo said. Matthew Sweeney, a spokesman for state Comptroller Thomas DiNapoli, the sole trustee of the New York State Common Retirement Fund, didn't provide a comment by press time.
The basket clause has been amended several times since 1982 when the allocation to alternative investments was first set at 5%, according to one basket-clause bill introduced May 13 in the state Senate.
“With each increase, public pension plans have been in a better position to manage volatility,” the bill said. However, the 25% allocation limit “has become problematic, given current low expected market return.” Raising the limit to 35% “will result in increased flexibility” for the pension funds, the bill said.
