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Pension Funds

PennPSERS approves plan to reduce fees by $2.5 billion over 30 years

Pennsylvania Public School Employees' Retirement System, Harrisburg, passed a resolution to reduce the fees it pays to external money managers, documents from the $54.8 billion pension system show.

The long-term plan created by PennPSERS' investment staff and its investment consultants — Aon Hewitt Investment Consulting, Aksia and Hamilton Lane — aims at reducing fees by $2.5 billion over the next 30 years. The staff has estimated that the system can reduce the amount of base management fees it pays annually by $38.7 million within three years — a 10.4% reduction from the previous fiscal year.

The main aspects of the plan, the details of which are available on PennPSERS' website, includes renegotiating fees with existing managers and expanding its internal management, which in turn means adding to the investment staff.

The investment staff believes that, to achieve its targeted savings, it will need to hire up to nine additional investment professionals, including three to help oversee private equity, one or two to commodities, one to non-U.S. developed markets fixed income, one for Treasury inflated-protected securities, one to real estate, and one to risk parity, which should cost an estimated $3.15 million annually. In addition to the investment staff, PennPSERS estimates this should result in net annual savings of $35.6 million after fiscal year 2021 and should continue for the next 27 years. However, if the pension fund does not receive approval to add staff, the projected savings over the next 30 years are expected to drop to $1.55 billion due to losing the ability to manage more real estate and private equity co-investments.

The plan also calls for terminating one U.S. core fixed-income manager and managing those assets in-house, transferring all of the non-U.S. developed markets fixed-income allocation to be managed internally, transfer its leveraged U.S. TIPS portfolio in-house, bringing in half of its commodities assets to be managed internally, and transferring $250 million of its risk-parity assets to in-house management. The pension fund is looking to boosts it internally managed assets to 43% of the portfolio from the current 38% within three years of hiring additional staff.

The board agreed on the resolution at its Aug. 10 meeting and has authorized investment staff to begin making recommendations for where to reduce investment management fees paid to external managers over a period of three years. The staff will continue to monitor and report its progress on this matter to the board.