Pennsylvania teachers' pension fund is still paying the Chicago consultant investigated by SEC

The Pennsylvania Public School Employees' Retirement System (PSERS) has scrapped an initial contract to renew an investment consultant’s appointment after reports that the Chicago firm is being investigated by the Securities and Exchange Commission.

However, Aon Hewitt — which got paid about $700,000 last year to help the retirement system pick from among the hundreds of funds that compete to manage billions in public investments — is still getting paid on a temporary basis.

In a closed-door executive session of the retirement system’s board, earlier this month, an Aon Hewitt representative apologized and acknowledged that the firm, which signed a preliminary consulting agreement in August, knew about the SEC investigation but failed to inform officials as required, a person present at the meeting said.

“Like all registered investment advisers, Aon is subject to regulatory oversight by the SEC, and we’re committed to continuing to cooperate with the SEC’s inquiry,” the company said in an emailed statement Wednesday about the investigation that started in 2017.

Aon is one of four similar investment consulting firms that PSERS works with. In all, the system paid out $3.6 million in 2017 to these consultants to help pick outside fund managers who collected more than $450 million from PSERS in fees and retained profits.

The retirement system that serves nearly 600,000 current and former public school employees has nearly $57 billion worth of assets under management. It has an unfunded liability — money needed to pay if all eligible employees choose to retire — of more than $44 billion.

After scrapping the initial agreement with Aon Hewitt, the retirement system plans to put the consulting contract up for rebid. Aon said it plans to submit a bid once the new request for proposal is out.

Although consulting fees are not nearly as high as the profit-sharing and direct fees collected by private-equity, real estate and other “alternative” investment managers, consulting profit margins can be large: Hamilton Lane, a publicly traded Bala Cynwyd-based investment adviser with many institutional clients, has told investors its fees are as much as double its expenses.

The three other consultants PSERS hired last year are specialists for different classes of private investments; Aon is the only firm with similar responsibilities for investments in general. Such firms can function as gatekeepers, whose observations can have the effect of steering big clients toward or away from private money managers based on their analysis of how well they fit their clients' needs.

“Aon was selected for contract negotiations through a [request for proposal] at the August board meeting,” confirmed PSERS spokeswoman Evelyn Williams. But, she added, “before a contract with Aon was executed, Aon notified PSERS that Aon is subject to an SEC inquiry.”

She said it was “unclear” whether an earlier disclosure would have affected the candidate scoring system used to choose between competing applicants. But once they knew the SEC was investigating Aon Hewitt’s approach, the retirement system’s trustees decided that “it is in the best interests of the commonwealth to cancel all bids and re-issue the RFP in order to protect the integrity of the process,” Williams added.

The SEC had not told PSERS of its probe. Though PSERS and other investors learned of it earlier, it became public knowledge on Dec. 10, when Pensions & Investments magazine wrote that the agency had escalated a routine review into “an enforcement investigation focused on its marketing materials and the custodial fees charged to several clients,” the magazine said, noting that Aon had confirmed the probe.

The investigation is “focused on the calculation of a single metric,” or measurement claim, that Aon Hewitt has used in its marketing, Aon confirmed, according to Pensions & Investments. The company wouldn’t say which metric was under review.

The SEC enforces the Investment Advisers Act of 1940, which includes a strict prohibition of “untrue” or “false or misleading” statements, the SEC reminded firms in a September 2017 risk alert, which also pointed to “advisers' use of accolades” praising firms' records, in their promotional materials. Violations have in the past resulted in million-dollar fines.

The magazine also reported that county investment funds in California and Virginia have reported Aon Hewitt had told them it was under investigation.