Wall Street Fees Paid by NYC’s Pension Funds Climb 28%

Photographer: Andrew H. Walker/Getty Images

“We need to limit costs, ensure payments are commensurate with performance and leverage our size and relationships with other pension funds to negotiate lower fees,” Stringer, a 53-year-old Democrat, said in a statement. Close

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Photographer: Andrew H. Walker/Getty Images

“We need to limit costs, ensure payments are commensurate with performance and leverage our size and relationships with other pension funds to negotiate lower fees,” Stringer, a 53-year-old Democrat, said in a statement.

Scott Stringer vowed during his successful campaign for New York comptroller to reduce the $370 million in fees the city’s five pension funds pay money managers and consultants annually. His job, which starts Jan. 1, just got harder.

The charges climbed to $472.5 million in the year ended June 30, enough to pay the salaries of 6,440 teachers, a city report shows. The 28 percent gain is more than double the return on the $137.4 billion retirement system’s assets in the same period. In the past seven years, investment expenses for the pensions, which are overseen by the comptroller’s office, surged by $280 million.

“I’m going to take a hard look at all of our fees,” Stringer, a 53-year-old Democrat, said in a statement. “We need to limit costs, ensure payments are commensurate with performance and leverage our size and relationships with other pension funds to negotiate lower fees.”

The growing cost underscores the challenge Stringer and municipal officials across the U.S. face in reducing pension-management fees and boosting returns as the gap between promises to retirees and the assets they have to pay for them has widened to $1 trillion, according to data compiled by Bloomberg. New York’s funding deficit alone totals $72 billion.

Riskier Investing

To help shore up their funding, retirement systems such as New York’s have turned to riskier and more expensive asset classes, such as private equity, hedge funds and real estate, to hit targeted annual returns of 7 percent to 8 percent. Money managers of those funds typically charge 2 percent of assets they oversee, plus 20 percent of profits, which is higher than traditional stock and bond funds.

New York City’s pensions had 11.6 percent of their assets in such alternatives at the end of fiscal 2013, compared with 4 percent in fiscal 2006, according to city comprehensive financial reports. Blackstone Group LP (BX), Apollo Global Management LLC (APO), and Pacific Investment Management Co. are among the city’s almost 250 money managers.

As the pension has moved into such alternative investments, its costs have increased to about $8 billion this year from $1.5 billion in 2002, when Mayor Michael Bloomberg took office.

“The long-term trend in asset allocation for most funds is a move to more private markets,” said Alan Torrance, a partner at Toronto-based CEM Benchmarking Inc., a consulting company. “Private markets are more expensive than public markets.”

Retiree Benefits

U.S. pension-fund costs increased by 0.26 percentage point on average from 2001 to 2010 as retirement systems shifted money to alternative assets that aren’t managed in-house, according to a 2012 report by CEM for New York City’s pensions. For a fund with a $1 billion in assets, the average increase is equivalent to $2.6 million.

Fees erode investment gains crucial to funding benefits for New York City’s more than 237,000 retirees, and future payments to 344,000 employees. The pensions have a 10-year average annual return of 7.5 percent, compared with a 7.2 percent gain for public pensions with more than $5 billion in assets, according to Santa Monica, California-based Wilshire Associates.

“We constantly work to reduce fees across all asset classes, including shedding poorly performing managers, moving public-market funds into indexes, and negotiating lower fees in alternatives,” Matthew Sweeney, a spokesman for outgoing Comptroller John Liu, said in an e-mailed statement.

“It’s misleading to cherry-pick one year and compare a rise in fees with the rate of return,” Sweeney said. “Many alternative investments, such as private equity and real estate, have front-loaded fees that don’t generate returns for several years.”

Since Liu took office in 2010, the funds have increased in value to $144 billion from $100 billion, Sweeney said. He said alternative investments have reduced risk.

Managing In-House

The pensions believe alternative investments will diversify their portfolio against events such as the stock market collapse in 2008 and provide attractive, risk-adjusted returns, he said.

Before departing last month to become president of investment adviser Angelo, Gordon & Co., the city’s chief investment officer, Larry Schloss, recommended that the pensions hire staff with Wall Street experience and pay them higher wages to manage money in-house. That would reduce fees and boost returns, he said.

New York City is the only one of the 11 biggest U.S. public-worker pensions that doesn’t manage any assets internally.

Ontario Model

Schloss pointed to Ontario’s C$130 billion ($126 billion) teachers’ pension fund, which manages most of its assets internally. The fund has returned an average 9.6 percent annually on its investments since 2003, 1.6 percentage points better than New York’s funds.

Trustees of the city pension funds, who include representatives of unions, were skeptical and didn’t adopt Schloss’s strategy.

They also balked at a plan proposed by Mayor Michael Bloomberg and Liu two years ago to overhaul management of the funds. The five boards, which have a combined 58 trustees, were to be pared down to a single 12-member panel that would set investment policy. The move would drive down costs, improve decision-making and boost returns, the mayor and comptroller said in October 2011.

In a July interview, Stringer, who is finishing his term as Manhattan borough president, said the city doesn’t need to pay a lot more to get talented money managers. The comptroller’s office could attract public-spirited employees, “the best and the brightest,” without paying Wall Street salaries and bonuses, he said.

“Any time we bring down consultant fees and streamline the bureaucracy, that’s more money for schools and cops on the other side,” he said.

Investments in alternatives to stocks and bonds, such as private equity and real estate, more than doubled to 24 percent of public-pension portfolios between 2006 and 2012, according to Cliffwater LLC, a Marina del Rey, California-based firm that advises institutional investors.

The mayor is the founder and majority owner of Bloomberg News parent Bloomberg LP.

To contact the reporter on this story: Martin Z. Braun in New York at mbraun6@bloomberg.net;

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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