Radical overhaul for $120bn New York pension funds

New York will radically overhaul its pension system, consolidating the investment strategies for its five pension funds and reforming the governance structures of the funds.

The move has the backing of powerful unions; the New York Mayor, Michael Bloomberg; and the city’s Comptroller, John Liu (pictured), with the changes expected to produce savings of more than $1 billion a year.

Under the plan, the five boards – the Police, Fire, Teachers’ Retirement System of the City of New York (TRS), New York City Employees’ Retirement System (NYCERS) and Board of Education Retirement System of the City of New York (BERS) – would delegate investment advisory authority for more than $120 billion in assets to a pension investment board.

An independent investment management company (IMC) would also be established to manage the investment strategies of the five funds, which cover more than 237,000 retirees and 300,000 municipal employees.

IMC would be a government body, with its own CIO appointed by the pension investment board.

This board would set the strategic direction, policy and investment goals for the five funds, in consultation with their five existing boards.

Assets will not be co-mingled and the performance of each fund will continue to be tracked independently.

The move to establish a new asset management body will also mean taking more investments in-house and consolidating the more than 360 different asset managers and 15 consultants who currently provide services to the funds.

The pension investment board will also include the Mayor and Comptroller, as well as representatives from municipal employees.

The reform package was drawn up with input from pension experts, including Keith Ambachtsheer, the director of the Rotman International Centre for Pension Management at the University of Toronto.

Ambachtsheer says that improved governance at a fund could add between 1 and 2 per cent in returns annually.

This could mean up to $2 billion more a year in investment returns, easing some of the budgetary pressures on the city to increase contributions to meet spiralling pension liabilities.

“Hopefully, the New York City initiative will inspire other pension fiduciaries around the world to consider similar initiatives,” he says.

Columbia Business School Professor Andrew Ang supports the push to improve governance at the funds.

Ang, who is the Ann F Kaplan Professor of Business and the research director for financial studies at Columbia Business School, says the changes should cut costs and boost returns.

“The reforms should allow the investment management company to significantly impact returns – by actions as simple as bringing in-house and managing cheaply what had been previously outsourced at much higher costs,” Ang says.

Streamlining the investment decision-making process should also allow the IMC to take advantage of funds’ long-term investment horizons and scale to boost returns, Ang says.

If the reforms are optimally implemented, Ang says the board should also have the capability to monitor and manage both sides of the funds’ balance sheets.

“The new board should not only understand the risks – both investment risks taken by the Investment Management Company and actuarial risks on the projected contributions and benefits side – but also the opportunities in building a robust professional investment organisation, well-founded in meeting the goals of the NYC pension system,” Ang says.

“In doing so, the new board can create processes that can improve fund performance, mitigate risk, and improve the pension system as a whole for all stakeholders.”

In a recent joint press conference at City Hall, Mayor Bloomberg and Liu said the reforms would make the investment process less political and better able to react to fast-changing market conditions.

Bloomberg said the city hoped to attract a star investment manager the helm of the IMC, to oversee $128 billion – representing the combined assets of the five funds.

“Depoliticising, professionalising, and streamlining the management of our pension funds will enhance investment returns and reduce pension costs,” Liu said.

“Our labour leaders and trustees have delivered a huge win for taxpayers and city workers alike with this game-changer.”

The Comptroller will remain a custodian of the five funds and also select investment staff for IMC.

Liu says the reforms will overhaul governance processes that have remained unchanged at the funds for between 70 and 154 years.

As part of the reforms the new board will institute what Liu describes as “tough new standards and accountability measures, and adopt best-in-class ethics, training and code of conduct policies and procedures”.

The Pension Procurement Board will no longer be operative in advising the new board, with new procurement policies also set to be established.

IMC will select investment managers.

Last year the New York City’s retirement system’s five funds had combined returns for fiscal year 2011 of 23 per cent. But the funds lost 9.62 per cent in the September quarter.