Private consultants rake in public pension fund fees
Apr. 4, 2012 — The woes of public pension funds have generally been placed squarely at the feet of public employees, who are often accused of having bloated pension packages that are neither realistic in today’s economy nor fiscally sustainable. But much of the damage to pension fund account balances occurred as a result of losses incurred during the collapse of the bubble in 2008 to 2009.
Who has been responsible for fund performance? A recent article in The New York Times shed some light on the huge amounts of money that public pension funds pay each year to Wall Street firms for the service of managing their assets.
But external management fees are only part of the expenses that pension funds pay to private companies. Most funds also retain “investment consultants” who advise them on how to allocate their assets. The fees paid to these consultants in many cases are equal to a sizable portion of the amount of money that pension funds pay to their own employees.
Consider the California Public Employees’ Retirement System, the largest public pension fund in the country. In fiscal year 2011, CALPERS had 2,366 employees and paid out a total of $155,965,000 in salaries and wages, according to its annual report. That same year, the fund paid a total of $48,707,000 to more than 100 investment consulting companies, equal to nearly a third of the amount that was spent on its own employees’ salaries.
The visualization below — a work in progress — presents data on a range of public pension funds for fiscal years 2009, 2010, and 2011 (in this visualization, you need to select the individual fund you wish to view; on the next page the data are presented in table form).
In addition to the total fees paid to all investment consultants, the visualizations also show the fees paid to the highest-paid individual consultants; the amount spent on employee salaries and wages; the rate of return on the fund’s investments over one-, three-, and five-year periods (measured from the year selected); and the total amount paid to external consultants expressed as a percentage of salaries and wages. This last measure ranges from the single digits to more than 90 percent in the case of the Indiana Teachers’ Retirement System.
The fees paid to consultants are often less than transparent. The data visualized below and on the next page were gathered from the annual reports of the individual funds, and in some cases from supporting documents and disclosures. Other funds not included in the visualizations did not disclose consultant fees in those reports. When contacted, representatives of such funds agreed that those fees were a matter of public record. However, very few were willing or able to produce them. In some cases — such as with the Teacher Retirement System of Texas, the Texas Employee Retirement System, and the Teachers’ Retirement System of the State of Illinois — we were told that the only way to obtain the disclosure of those fees was by submitting a state Freedom of Information law request.
For more information on methodology and sources, see the accompanying notes on the data.
Research assistance from Michelle Mayer.