Pennsylvania pension systems explore central investment office

PSERS and SERS have engaged McKinsey on separate contracts to explore merger possibilities for their investment functions.

The $54.8 billion Pennsylvania Public School Employees’ Retirement System and the $26.8 billion Pennsylvania State Employees’ Retirement System have engaged McKinsey and Company to explore approaches for creating a central investment office that will merge the investment operations of both pension systems.

Both have separate contracts with McKinsey that reference one another, Steve Esack, press secretary for PSERS told Private Equity International.

The move comes almost three months after the December recommendation of the state’s Public Pension Management and Asset Investment Review Commission (PPMAIRC) to create a central investment office. The commission, tasked with identifying $1.5 billion in cost savings for each Pennsylvania pension system, presented the report after a seven month review.

“Such an office would increase collaboration and drive synergies for the two pension systems, which had the same investment horizons and strategies,” state treasurer Joe Torsella said at the time.

The commission invited several chief investment officers and consultants for its hearings, including Ash Williams, CIO of the $150 billion Florida State Board of Administration.

“The key thing is, number one, yes, you can effectively centralise investment operations,” Williams testified to the commission. “Number two, you can and should manage money internally. It will save you a lot of money doing so.”

The commission was critical of high investment fees and lack of transparency in disclosing details on private equity managers by the two pension systems. In addition, SERS’s large private equity portfolio was a cause for concern, according to testimonies at the commission’s hearings.

A central investment office, with oversight from a board with investment experience, would provide opportunities for greater efficiency, better management and lower costs through pooling resources, the PPMAIRC report said.

There is still work ahead for PSERS and SERS, which had $8.2 billion and $3.9 billion respectively in their private equity portfolios as of 31 December.

The Pennsylvania House and Senate would have final say on whether PSERS’s and SERS’s investment offices would be combined because both chambers would have to pass legislation approving a merger, Esack said.

The report mentioned Massachusetts Pension Reserves Investment Management Board, South Dakota State Investment Council, State of Wisconsin Investment Board and Florida’s State Board of Administration as successful investment management organisations that managed their respective state pension systems.