Study questions costly state pension schemes

The practice of farming out billions of dollars in state worker and teacher pension money to high-priced private investment managers "is costly to both taxpayers and public sector employees," and funds would have done better to just put their money in cheap stock and bond index funds, according to a new study of state plan returns by John J. Walters of the conservative Maryland Tax Education Foundation and Jeff Hooke of the liberal Maryland Public Policy Institute. 

Pennsylvania's largest public-sector plans, the Pennsylvania Public School Employees' Retirement System and the Pennsylvnania State Employees' Retirement System, paid a collective 88 cents for every $100 invested in the last fiscal year each reported -- the third-highest expense ratio among the 46 states surveyed -- but only returned 1% a year in investment profits over the past five years -- 11th-lowest among the states surveyed.

ALSO: Maryland state pension spokesman Michael Golden challenged the study's accuracy. Read more in Pensions & Investments here. (The comparison was also complicated by the fact there are no national rules governing state pension fund reports or fiscal year limits.)

More broadly, "the top ten states, in terms of Wall Street fees, had a lower pension fund investment performance over the last five fiscal years" than the ten states paying the lowest fees, according to the report.

States including Alabama, Iowa and Tennessee which paid less than 25 cents of every $100 in annual management fees, reported higher returns than states like Pennsylvania and South Carolina that paid more than three times as much in proportional fees, including higher fees to managers of "alternative investments" like buyout and hedge funds, which have accounted for as much as 40% of SERS funds in recent years.

Indeed, the authors found that high-fee private-investment managers have provided "no scientific evidence" to show they outperform cheaper stock and bond index funds: "For the five years ended June 30, 2012, we were unable to find a correlation between high fees and high returns." Read the pension report here.