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Published on January 23rd, 2013 | by Len Lazarick

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State pension system pays too much to advisors, think tanks assert; retirement officials disagree

Pension system logoBy Len Lazarick
Len@MarylandReporter.com

Two of Maryland’s free-market think tanks are again attacking the Maryland pension system for spending too much money on investment advisors who are not producing enough returns. But the State Retirement Agency says the advisors have helped it reach its benchmark investment goals.

The Maryland Public Policy Institute and the Maryland Tax Education Foundation issued a report Tuesday saying the retirement system spent $229 million on “Wall Street money managers” for the fiscal year that ended in June 2012.

The fees exceeded the fund’s investment income by more than $100 million, the think tanks said.  For fiscal 2012, the $37 billion fund’s investment return was 0.36%, substantially lower than the 50-state median of 1.15% reported by consulting firm Wilshire Associates.

Maryland underperforms, think tank claims

“Maryland’s pension fund continues to underperform its peers at the expense of taxpayers and the system’s 350,000 members,” said Jeff Hooke, the MTEF chairman and longtime investment banker.  “Despite the trustees’ best efforts, the fund’s sizable commitment to hedge funds and private equity hasn’t worked out.  As we have noted in previous studies, Maryland’s pension system could save enormous amounts of money on fees without harming investment returns by simply embracing low-cost, passively managed index fund investments.”

But Robert Burd, the agency’s deputy chief investment officer, said the plan’s total earnings as of Dec. 31 were 12.94%, a point and half more than its benchmark of 11.51%, according to a report from State Street Investment Analytics. The plan’s investment portfolio now totals $39.3 billion, the report said.

“Active management has made us money,” Burd said. “We have added value over our benchmarks.”

Done well on private equity

“We cannot passively invest in all asset classes,” Burd said, in particular private equities — stock in companies not sold on public exchanges. “We’ve done very well on private equity,” earning 13% last year and 11% over the past 10 years.

“For someone to say that active management has not worked for us is totally wrong,” said Burd.

“The fees we pay our asset classes are below average,” Burd said, as shown by 2011 report by Greenwich Associates.

Due to time lag in reporting by various states, only fiscal 2011 figures are comparable across the country.

“The investment earnings lost to overpaid money managers could have helped solidify the pension fund’s financial condition,” said Christopher Summers, president of the Maryland Public Policy Institute. “Instead, the state is subsidizing Park Avenue penthouses and Palm Beach getaways. Maryland’s retired state employees and taxpayers deserve a simpler, more effective investment strategy for their retirement savings.”

Retirement agency spokesman Michael Golden noted that only a small portion of the pensions system’s investment advisors are based in New York, despite Summers’ overblown rhetoric.

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  • Angie Boyter

    This sounds outrageous, BUT can someone explain the difference in definition between “investment income” and “total earnings”?

  • Karl

    Who cares if in the last half year our pension system earned 12.94%, a point and half more than its 11.51% benchmark? Last year the pension earned only 31% of the average earnings in the other 49 states. For the past five years, 2007-2012, (the same time Dean Kenderdine began as pension system CEO) Maryland’s unfunded pension debt has increased to $78 billion. During that period workers “contributed” more than $2.3 billion to pensions, and those running the system blew 98 percent of it or $2.25 billion. And at the same time they doled out $869 million in “Other Payments”.

    The pension system has acknowledged that their obligations increased more than $7 billion. But worst of all, while “Active” PAYING workers have DECREASED about half a percent, the number of beneficiaries RECEIVING payments INCREASED almost 12 percent! These calculations are based on the pension systems’ own assumptions and performance.

    When you look at reality the debt is probably worse. Officially Maryland’s pension debt is estimated based on investments earning 7.75 percent a year forever. In reality that have only earned 4.74 percent over the past 10 years.

    Mr. Kenderdine attempts to refute these figures. However, they are universally accepted by economists because they eliminate the politically influenced assumptions and deceptions that let legislators and governors use pension funds as hidden loans, which will not come due until long after they are out of office and gone.

  • hungrypirana

    Angie Boyter: I think the “investment return” relates to the latest year’s performance and “total earnings” relate to performance since the time the pension money was first put in the hands of the hedge fund or private equity firm.

    “The fees exceeded the fund’s investment income by more than $100 million” Seems to me the state bears a significant risk in terminating any PE firm or hedge fund for poor performance due to the likelihood of realized losses when unwinding positions. Therefore, I would expect the state should be able to negotiate equitable terms such that risks are shared via fee reductions in bad times. Maybe some of that is happening, hard to tell what pull the state may have and what are the putative practices.

    I don’t think its prudent for the state to “save” money by investing strictly in index funds> Yes index funds have delivered great returns over the last 14 months, but that trend can change quickly.

  • http://twitter.com/whcampbell67 William H. Campbell

    Maryland pension officials and others continue to deny the unsustainability of the pension and retiree healthcare funds. The financial condition of both funds continues to deteriorate, putting State retirees and employees, and tax payers at risk. Governor O’Malley’s 2011 “pension reform” did not improve things. It siphoned $250 million away from the pension fund, and capped the cost avoidance improvements that could go to improving the fund’s finances. How anyone can dispute the cold, hard financial facts is beyond my comprehension. The math doesn’t lie, but perhaps our officials do. The hole is to deep to be filled by outstanding market performance. Exhorbitant investment fees for inferior returns is outrageous. My retirement investments averaged 17.33% last year. The last decade’s performance of Maryland pension investments has been inferior! My suggestion: End Corridor Funding and pay the Actuarial Recommended Contribution; Significantly reduce the number of managed investments, and move to broad index funds; and Avoid highly speculative investments!

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