Hidden pension management fees – hundreds of millions of Pennsylvania dollars – could become public

By Anthony Hennen

(The Center Square) – Public pensions in Pennsylvania have a transparency problem. Though the public retirement systems pay performance-based fees to investment managers, these fees aren’t reported or publicly available. 

Their costs, however, can be quite high. Pennsylvania’s public pensions have some of the lowest funding ratios in the country; the more fees the state pays out, the harder it is to ensure worker retirements are fully funded.

A proposed bill would change that state of affairs, requiring pension fund fees to be reported to the General Assembly, allowing the public to know how much investment managers earn from public pensions.

HB1671, sponsored by Rep. Brett Miller, R-Lancaster, echoes the recommendations from a 2018 Public Pension Management and Asset Investment Review Commission report on the commonwealth’s pension issues.

“It was fascinating to me that, for alternative investments in particular in Pennsylvania, a member of the General Assembly could not get the fees,” Miller said. “A member, a beneficiary, a recipient of pension funds could not know what the fees were. No member of the public could get these fees. It seemed to me to be counterintuitive in what we believe in about transparency.”

Those fees are not a trifling matter.

“These hidden fees can amount to hundreds of millions, even billions of dollars, which ultimately take away from pension fund balances needed to pay pension obligations,” Miller wrote in a legislative memo.

Those pension obligations are not fully funded. Though the retirement systems have improved in recent years, the Public School Employees’ Retirement System  was only 59.2% funded in 2021, while the State Employee Retirement System was 59.4% funded in 2020. That means PSERS has an unfunded accrued liability of $44 billion and SERS has a liability of $22.4 billion. 

The Tax Foundation ranked Pennsylvania 41st in the nation for its funding of state pension systems. The national average is closer to a funding ratio of 72%.

The bill would require the Public School Employees’ Retirement Board and the State Employees’ Retirement Board to livestream their meetings and post a written record of their meetings online. Other records relating to the boards’ investments would be deemed public, with some exceptions for sensitive information. 

Alternative investment vehicles, which are investments that aren’t stocks or bonds, such as real estate transactions, would be subject to more disclosure requirements, such as rates of return on those investments. Most importantly, management fees, costs, and expenses paid for those investments would become publicly available.

SERS and PSERS would also be required to post the fees performance of all investments and an itemized list of fees and expenses paid to investment managers, along with travel or other expenses for system staff paid by an external investment manager, fund, or consultant.

Better awareness of the fees could mean better management of public pensions. The ability of the tax base to fund public pensions is “a huge, huge issue,” Miller said.

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