By: Russ Kamp, Managing Director, Ryan ALM, Inc.

As we’ve stated many times, the primary objective in managing a pension plan is to SECURE the promised benefits at a reasonable COST and with prudent RISK. For most of Pension America, the primary objective has morphed into a return objective and the asset allocation has migrated toward a much more aggressive risk profile. One in which alternative investments (real estate, private equity, and private debt) have been emphasized. One can argue about the value add that has been achieved, but you would be hard-pressed to argue that the cost structures of these plans hasn’t risen dramatically.

I saw this little blurb in a Bloomberg email this morning and it immediately grabbed my attention. “New York City’s pensions paid Wall Street money managers about $1.7 billion in fees last year, a roughly $150 million increase from the prior year. Fees paid by the city’s five pensions rose 10%, faster than the growth rate of assets, according to the city’s annual comprehensive financial report.” The combined assets of the City’s pension systems are $253 billion and the $1.7 billion in fees is equal to 67 bps annually. Wow!

It was reported in the CAFR > 70% of the 321 investment managers were alternative managers. That is fine if plans are actually being rewarded for the lack of liquidity, but that doesn’t seem to be the case. Sure, the nearly 8% fiscal year return eclipsed the annual return objective of 7%, but it fell nearly 4% below a 65% equity/35% fixed income benchmark, as reported by the City. Worse, and I repeat, fees grew by $150 million in the last fiscal year or about 10% more than in fiscal year 2022 despite assets not growing by a similar level.

Given NYC’s combined funded ratio of about 83%, they would be wise to take risk off the table by bifurcating the assets into liquidity and growth buckets. They would quickly realize a substantial savings in fees, as a cash flow matching strategy can accomplish the objective of securing benefits at both a reasonable cost (<15bps) and also at a prudent level of risk. They might also find that the present value cost of the future value benefits will provide substantial savings and a likely surplus. What a deal!