Public Employee Press

$2.5 billion eaten up by Wall Street
Union, comptroller blast excessive pension fees

Fees have not only wiped out any benefit to the funds but have in fact cost taxpayers billions of dollars in lost returns

Over the past decade, Wall Street management fees ate up $2.5 billion of the earnings of the city's pension system, according to a recent comptroller report.

"We need to demand more value from Wall Street when they invest the hardearned pension dollars of our workers, because right now money managers are being paid exorbitant fees even when they fail to meet baseline targets," said city Comptroller Scott Stringer. "When you do the math on what we pay Wall Street to actively manage our funds, it's shocking to realize that fees have not only wiped out any benefit to the funds but have in fact cost taxpayers billions of dollars in lost returns.

"The analysis, released in April, found that Wall Street managers of private asset classes, such as private equity, hedge funds and real estate, fell $2.6 billion short of their targeted benchmark, after fees.

During the same period, the managers of public asset class slightly exceeded the benchmark. Yet more than 95 percent of the value added - more than $2 billion - went to fund managers, and what they stuffed in their pockets virtually has wiped out the extra return to the city's five pension funds.

The poor performance of the private asset classes and the slightly better return on public assets cost the city nearly $2.5 billion in lost value during the past 10 years.

"It is absurd that hedge managers are being paid excessive fees when they are getting lousy returns on our investments," said DC 37 Executive Director Henry Garrido, adding that he was pleased Stringer is continuing the practice of his predecessor, Jon Liu, to put the investment practices of the pension system under the microscope. "I'd have to say that members who take a look at this wouldn't be wrong to conclude that the system is rigged against them. We need to take a closer look at the fee structure of the pension system.

"The city has five pension funds - the New York City Police Pension Fund, the New York City Fire Dept. Pension Fund, the Teachers Retirement System of the City of New York, the New York City Employees' Retirement System (NYCERS) and the Board of Education Retirement System (BERS). Most of DC 37's members are covered by BERS and NYCERS. The city's $160 billion pension system is the fourth largest in the country.

Whether public pension systems should invest in hedge funds is a matter of controversy.

Billionaire investor George Soros addressed the issue at the World Economic Forum in Davos, Switzerland, in January. He said it is imprudent for public pension systems to invest in hedge funds, because they charge high fees and are highly risky.

Berkshire Hathaway investor William Buffet is another major investor who says public pension systems shouldn't invest in hedge funds.

"Many institutions pay substantial sums to consultants who, in turn, recommend high-fee managers," Buffett wrote in a recent letter to Berkshire Hathaway shareholders. "And that is a fool's game."

Over the past 10 years, the typical hedge fund earned a return of 5.67 percent after fees. Companies included in the S&S 500 Index earned an annualized return of 7.65 percent.

In September, the California Public Employees Retirement System, the biggest in the country, announced it would get out of its hedge fund investments.

In February, the San Francisco Employees' Retirement voted to invest 5 percent of its $20 billion portfolio in hedge funds. That was far below what the staff of the pension system recommended - 15 percent, or $3 billion.

With certain asset classes, former Controller Liu recommended bringing investment management in-house to save money.

—Gregory N. Heires