Gov. Tom Wolf and Treasurer Joe Torsella fleshed out on Monday their proposals to cut fees paid by the state’s pension funds, billing their suggestions as first, easy-to-accomplish steps in addressing the funds’ roughly $74 billion shortfall.
The proposals focus on reducing the fees the Pennsylvania State Employees’ Retirement System and Public School Employees’ Retirement System pay to money managers and on administrative costs.
They also call for expanding the ranks of employees eligible for the state’s deferred compensation program.
Wolf and Torsella first floated their ideas in letters to PSERS and SERS earlier this month. Wolf estimated that adopting these suggestions, which would need to be approved by the funds’ boards, could address 10 percent of Pennsylvania’s unfunded pension liability.
“It’s not trivial,” Wolf said of the potential savings, later adding the proposal is nonetheless “not a substitute for meaningful pension reform.”
Pennsylvania politicians have debated for years how best to address the $74 billion gap between the amount of money the state owes retirees and the pool of money it has available to pay them. Wolf himself campaigned on the issue.
Accomplishing meaningful change, however, has been slow-going. Although fund officials expressed optimism for good investment returns this year, factors like benefits changes and a history of underfunding have proven difficult to overcome under the system’s current structure.
Wolf and Torsella described their plan as steps SERS’ and PSERS’ boards could take up in the next few months, without any legislative changes.
Their proposal includes
- Adopting a fee cap for money manager fees: SERS and PSERS collectively rank fourth-highest in the country in terms of fees paid as a percent of assets under management, the letter states, citing a Pew study. Wolf and Torsella propose capping fees at a level between the national average and median over the next three years. (Pam Hile, a spokeswoman for SERS, noted she had never heard of the Pew study before seeing it referenced in the letter.)
- Consolidating investment and support operations for the two funds: States like New Jersey, Wisconsin and Florida have consolidated some management of their pensions funds. PSERS and SERS could do the same for certain redundant tasks, the letter states.
- Expanding SERS’s deferred compensation program: State employees can take part in a program in which the state delays a portion of their wages and invests it on their behalf. Only about 30 percent of state employees eligible for the benefit participate. The letter suggests increasing participation rates and expanding eligibility.
Wolf, asked why these ideas weren’t pitched earlier in his term, acknowledged nothing legislatively prevented the changes, but said no one had taken the time to spell them out in clear, actionable language.
Spokespeople for SERS and PSERS defended measures they have taken to cut costs in recent years but said they remain open to hearing out Torsella, who sits on both boards, at their next meetings.
SERS has already cut fees by $73 million since 2010, said Hile, the fund’s spokeswoman.
Additionally, about 70 percent of the fund’s public equity portfolio – or 40 percent of the total fund – is passively invested. That means the stocks are in funds that replicate market indices, as opposed to funds run by paid money managers who try to beat the markets.
The letters from Wolf and Torsella fall short of proposing a fully passive strategy, something that California has done with its pensions and the state Treasury recently initiated for its public equity investments.
Money managers are still valuable for some holdings, Torsella said, but a move toward passive strategies where appropriate could play a role in meeting fee reduction goals.
PSERS, meanwhile, has slashed its investment expenses by $142 million – or 25 percent – since 2012-2013, said PSERS spokeswoman Evelyn Williams.
It also has looked to cut costs by bumping up its portion of internally managed assets from 30 percent to 35 percent in the current year.
“When assets are assigned to PSERS’ staff, the total costs (e.g., staff salary and benefits, computers and office supplies) are much lower than the largest ‘very low fee’ index mutual fund companies, giving PSERS a significant advantage,” Williams said.
Rep. Stephen Bloom (R-Cumberland) also supported cutting costs. Bloom sits on the PSERS board but spoke only on behalf of himself.
“In-house and passive investment management strategies already play an important role in reducing costs, and we should continue to evaluate more such opportunities where appropriate,” he said.
Like Wolf and Torsella, Bloom acknowledged that reducing fees can solve only a small portion of Pennsylvania’s pension problems. He personally would like to see a system overhaul in which state employees adopt 401(k)-style defined contribution plans.