The pension brain drain

Public pensions in the US are under constant threat of a ‘brain drain’ among their investment staff – especially their private equity professionals.

These organisations have to compete with private sector investment firms that pay people multiples of what they can make in the public sector, while also offering less politicised work environments that are not so constrained by unwieldy governance structures. So it’s no surprise that turnover in the ranks of public pension investment professionals can be quite high.

However, two of the bigger pension systems appear to be making moves to try and reduce the likelihood of a brain drain.

In October, New York City mayor Michael Bloomberg and comptroller John Liu proposed changes to the structure of the five city pension systems to make the investment process smoother and faster, and also to bump up compensation levels for investment staff.

The plan involves the separate boards of the five pensions, which have a total of 58 trustees, being consolidated into one single board, supported by a staff led by a chief investment officer. This is intended to “insulate management of pension assets from any political office, further professionalise it and make it more consistent with industry best practices”, according to a statement.

The “Bureau of Asset Management”, which currently falls under the auspices of the comptroller’s office, will also be re-established as an independent investment entity that will determine consultant and asset manager pools and manage certain assets in-house, according to the comptroller’s statement. A CIO will run this newly independent investment entity and report to the newly configured board.

The Washington State Investment Board has also been considering changes that would make its investment division more like a management company, while reducing its ties to state politics.

This is the same kind of structure that many large university endowments have adopted over the past 20 years or so, including Harvard, Yale, Virginia and Texas. The advantage of this set-up is that the investment operations are no longer tied directly to the finance divisions of the universities; instead, they have some semblance of independence to manage their own assets and pay their people more competitive rates.

Investment heads at the university management companies are now some of the highest paid professionals among institutional money managers. According to survey of the highest paid CIOs of endowments, foundations, public pension funds, healthcare organisations and other tax exempt institutions by Charles Skorina & Company, a recruitment firm, Harvard’s Jane Mendillo was the highest-paid CIO, making total compensation of $4.7 million in 2010. David Swensen, CIO at Yale, is the next highest earner, collecting $3.7 million in total compensation. And third was Nirmal Narvekar, CIO at Columbia University Management Company, with $3.4 million in total compensation.

Compare that to the salary of the CIO at the New Jersey Division of Investment, Tim Walsh, who makes $185,000 a year – despite managing a portfolio of assets that totals about $66 billion.

Pay was probably a factor in the numerous examples of investment managers and private equity heads who have left their positions recently to move into the private sector. Florida, Pennsylvania, New York, Massachusetts, Oregon are among the states that have lost high-level investment professionals.

Wayne Smith, the long-time head of the Massachusetts Pension Reserves Investment Management Board, left in August to join Pathway Capital Management. Jim Treanor, head of private equity at the Florida State Board of Administration, left the pension system in July after 11 years to join institutional investment advisor Jeffrey Slocum & Associates, where he’ll focus on hedge fund strategies.

Losses of key personnel like this can leave a pension’s private equity programme depleted both in terms of relationships and institutional knowledge – particularly in places that are already under-staffed. In the case of MassPRIM, Smith’s departure was followed shortly after by that of Michael Langdon, senior investment officer for private equity, who had helped expand the system’s exposure to Asian private equity.

It’s this kind of brain drain that systems like New York City and Washington State are hoping to stem. But the difficult truth remains that the most effective way to stop it, ultimately, will be for pensions to recognise the immense value the really good investment professionals create for their institutions –and compensate them appropriately.