The debate over whether county and municipal pension plans should join their state systems is heating up.
Officials in Massachusetts and Rhode Island are trying to persuade smaller public plans to let the state manage their entire investment portfolios or make it easier to do, arguing the advantages of scale and the availability of greater resources.
In Wisconsin and Nebraska, some municipal pension plans are looking to be folded into their state systems as a means of solving funding problems.
Still, representatives from some local plans argue they'd rather not go all-in with the state, pointing to better returns, greater autonomy and nimbleness by managing all or part of their own money themselves.
“This trend is coming from public plans looking at what their competitive advantage is,” said Kristen Doyle, a partner and head of public funds at Aon Hewitt Investment Consulting, Chicago. “They must take a critical step back and go: What are we good at, what are not so good at?”
Most industry experts interviewed for this story noted the primary benefits of a municipal plan to join a state plan are size and skill.
The more assets a state plan has, the better the deals it can negotiate, added Jay V. Kloepfer, executive vice president and director of capital markets and alternatives research at Callan Associates Inc., San Francisco. Mr. Kloepfer said Callan works with many state plans “that encourage municipalities to cast their lot” with the larger pension fund.
The chairman of one county retirement system in Massachusetts, who asked not to be named, said the state's public pension regulatory agency, the Public Employee Retirement Administration Commission, has been subtly putting pressure on smaller pension plans to go “all-in” with the state plan, the $62 billion Boston-based Massachusetts Pension Reserves Investment Management Board. “PERAC thinks PRIM has the resources to better manage investments,” the chairman said. “And PERAC doesn't think local funds can manage their assets that can compete with the PRIM fund.”
The chairman, however, argued local governments want local control; at PRIM, asset allocation is dependent on the funded status of the pension plan. So, plans within PRIM must accept its asset allocation along with its risk factors.
Thomas J. O'Donnell, compliance officer at PERAC, Boston, denied the organization has been pushing local plans to move their assets to the state trust, but acknowledged there are significant advantages to being part of the state plan. “They (local plans) do enjoy larger economies of scale as one of the benefits” of joining PRIM, Mr. O'Donnell said. “PRIM has a large dedicated staff.”
PERAC's compliance officer added alternative investments, which often require minimum commitments of at least $100 million, are an area in which smaller plans can truly benefit from PRIM's scale.
Aon Hewitt's Ms. Doyle echoed that sentiment. “Scale becomes an advantage; (as part of a larger plan) you gain access to a broader set of alternative investments,” she said.
In Massachusetts, locally administered pension plans don't have to join PRIM unless they are deemed to be underperforming.
After several plans were ruled to be underfunded and underperforming in 2007, Massachusetts passed legislation mandating that plans that are underfunded by 65% and underperformed the PRIM fund on a 10-year annualized basis by more than 200 basis points must join PRIM.
In Rhode Island, General Treasurer Seth Magaziner proposed a bill in March designed to make it easier for cities and towns with locally administered pension systems to join the state's $1.4 billion Municipal Employees' Retirement System.