New York City Comptroller Scott M. Stringer said Thursday that a restructuring of the city’s $163.4 billion public pension system is necessary because high fees and disappointing performance have cost the pension system an estimated $2.5 billion in lost value during the 10 years ended Dec. 31, 2014.
Mr. Stringer, the fiduciary of the five pension funds that make up the New York City Retirement Systems, said the revamping would include improving selection of outside investment managers and better linking management fees to investment manager performance.
Mr. Stringer said in a news release that the overhaul, which did not include specific details, was based on a review of 10 years of city pension fund data undertaken by Chief Investment Officer Scott Evans and the city’s bureau of asset management. The bureau makes investment recommendations and analysis for the five pension funds, each of which has a separate board of trustees.
The analysis of 10 years of city pension fund data said outside managers of private asset classes such as private equity, hedge funds and real estate “fell $2.6 billion short of target benchmarks after fees.”
Managers of public asset classes “exceeded the benchmark slightly” after fees, but those managers “gobbled up more than 95% of the value added — over $2 billion — leaving almost no extra return” for the five city pension funds. The net asset value added over 10 years for these investments was $40 million.
The combined public and private asset results meant the city pension funds suffered “nearly $2.5 billion in lost value over the past 10 years.”
The pension funds returned an annualized 7.6% over the 10 years ended June 30, 2014.
The biggest detractors of value during the 10-year period were the pension system’s investments in private equity ($1.73 billion in lost value) and private real estate ($934 million in lost value), the report said.
Among other alternative asset classes, opportunistic fixed income and hedge funds added a combined $112 million while infrastructure investments broke even. An investment official in the comptroller’s office, speaking on condition of anonymity, said the latter three investments are relatively new and small compared to private equity and private real estate.
“Right now, money managers are being paid exorbitant fees even when they fail to meet baseline targets,” Mr. Stringer said in the news release. “When you do the math on what we pay Wall Street to actively manage our funds, it’s shocking to realize that fees have not only wiped out any benefit to the funds, but have in fact cost taxpayers billions of dollars in lost returns. It’s clear that the status quo needs to change.”
The pension funds manage about $5 billion — in fixed income assets — of the aggregate assets internally.
