Kurt Summers, Chicago's city treasurer, wants to change the way Chicago-area pension funds pay investment managers and assess investment opportunities.
His proposals, part of a larger 90-day plan to improve Chicago's financial standing, include securing lower fees from investment managers and giving consideration to Chicago-centric investments and emerging managers, among others.
While Chicago pension conversations tend to focus on contribution levels or the structure of benefits, few address the $142 million in fees paid to investment managers annually.
That number, spread across the 10 Chicago-area benefit plans with more than $35 billion in assets combined, is “too large” to ignore, Mr. Summers said in an interview.
He pointed out about 59% of the assets across all funds are invested with the same managers and in some cases even the same strategy. However, these investments and their associated fees are not considered in aggregate, with one pension fund sometimes paying more than another and driving up the overall cost.
Mr. Summers recommends Chicago follow the lead of New York City and seek aggregated pricing.
“It's been proven that it can and should be done,” Mr. Summers said, also noting the Los Angeles Trustees Roundtable — a group of public pension fund and Taft-Hartley trustees — funds-of-funds managers and outsourced chief investment officers negotiate with managers to secure lower fees for their clients.
When asked how existing managers have responded to his proposal, Mr. Summers said it is “too early to communicate that in detail. (Chicago) has over 200 local managers.”
However, Mr. Summers said that some managers that have accounts with more than one city fund have been approached, and those discussions have been encouraging. Some managers have even reached out with ideas to “address the opportunity for aggregated pricing in their existing and prospective portfolios,” Mr. Summers said.
Discussions with pension board members and union groups also have been encouraging, he said.
In an e-mailed response, Vonda Brunsting, New York-based director of the Service Employees International Union's Capital Stewardship Program, said the SEIU supports Mr. Summers' fee proposal, which she believes “is more comprehensive than just aggregate pricing.”
“It begins with disclosure and understanding what fees are being paid,” Ms. Brunsting wrote. The SEIU represents Chicago city employees.
Aside from existing managers, new managers will be asked whether they are willing to provide aggregated pricing, Mr. Summers said.
Along with an aggregated fees matrix, Mr. Summers would like to see local investment opportunities included in the pension funds' efforts to find alpha.
Other jurisdictions like New York, Michigan and Florida have a precedent and process for looking at local investments; Chicago does not, he said.
As of June 30, the $158.7 billion New York City Retirement Systems had roughly $1.4 billion invested in its regionally targeted investment program.
“It's our fiduciary responsibility to find the very best investment opportunities that meet our risk/reward profile,” no matter where they might be, Mr. Summers said.
“We have to make sure that we are not excluding what could be great opportunities in Chicago.”
Once the data on current and prospective investments are gathered, the next step is to ensure “there's a process where each plan and (its) managers are evaluating local opportunities amongst others,” Mr. Summers said.
Another opportunity set he does not want to see ignored is emerging managers.
While funds like the $1.5 billion Chicago Laborers' Annuity & Benefit Fund, $1.9 billion Chicago Transit Authority Employees Retirement Plan and $1.3 billion Chicago Metropolitan Water Reclamation District Retirement Fund already have emerging managers in their lineups, Mr. Summers would like to see an increase in the number and size of opportunities for these managers.
Executives at the $1.1 billion Chicago Firemen's Annuity & Benefit Fund, $10.8 Chicago Public School Teachers' Pension & Retirement Fund; Chicago Laborers' Annuity & Benefit Fund, $5.4 billion Chicago Municipal Employees' Annuity & Benefit Fund; Chicago Transit Authority Employees Retirement Plan; $424.5 million Chicago Park Employees' Annuity & Benefit Fund; $8.9 billion Cook County Annuity & Benefit Fund; and $3.3 billion Chicago Policemen's Annuity & Benefit Fund did not return telephone calls seeking comment on the treasurer's proposals by press time.
