$858 Million: ‘Outrageous' Management Fees Paid By Pennsylvania's Pension Fund in the Last 5 Years

Management costs for the $26 billion state pension system are fourth highest in the country, the governor and state treasurer claimed earlier this year.

Officials who oversee Pennsylvania's $26 billion pension fund for state workers have begun studying ways to reduce management costs, which Gov. Wolf and Treasurer Joe Torsella cited in April as the fourth-highest in the country.

The governing board for the State Employees Retirement System (SERS) last week voted to begin working to reduce those management costs that go to financial firms, which Torsella described Tuesday as "outrageous."

More than 220 fund managers split $162 million in management fees in 2016, according to the most recent audit of SERS. Since 2012, management fees have totaled $858 million.

The size of the fund, meanwhile, is $1 billion less than it was three years ago. Its value was $26.3 billion at the end of 2016. 

Pension officials in Pennsylvania are grappling with similar problems facing other states and cities when it comes to public retirement plans. Increases in retirees collecting pensions have outpaced annual contributions to the fund, and annual investment growth has not lived up to expectations.

For example:

  • More than 20,000 retirees collected pensions in 2016 than five years earlier. 
  • And even after the SERS board reduced its expected annual return from 8 percent to 7.5 percent in 2012, investments have sagged below that figure the last three years: 6.4 percent in 2014, 0.5 percent in 2015, and 6.5 percent last year.

The pension plan is now funded at 58 percent of its total liabilities.

A spokeswoman for SERS said management fees have been reduced already.

"Since 2010, we reduced fees by about $73 million annually," spokeswoman Pamela Hile said in an email this week. "Our goal has always been and will continue to be driving the best value in the investment decision-making to maximize results at the lowest cost over the long term and multiple market cycles."

The "points" paid on its investments to those financial firms dropped to 62 last year from a recent high of 75 in 2012. Points are financial jargon for the percentage of fees collected on an investment. One percent equals 100 points.

In a letter to the SERS board in April, Wolf and Torsella asked that the fees be lowered even further to 45 points, which they described as in line with the national average and median for public funds.

"This step could save SERS approximately $46 million annually and add approximately $4.5 billion to the System’s returns (compounded over 30 years),” they wrote.

This week, Torsella commended the board for its vote to begin studying ways to reduce the fees. But he recommended they go as far as possible — and soon.

“I commend the SERS Board for supporting action that will save Pennsylvania taxpayer money and improve returns to the pension fund by reducing the amount of Wall Street fees paid by SERS,” Torsella said in a statement Tuesday. “SERS has recently taken initial action to reduce fees. We need to go further, and reduce fees by 30% over the next three years. Adopting this resolution serves as a tremendous step forward in making SERS a national leader in fighting against outrageous fees.”

Here is the size of the fund and its rate of return on investments annually for the last 30 years.

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