Philadelphia turns to index funds to bolster employee pensions

The Philadelphia Board of Pensions and Retirement is moving away from risky investments and putting nearly half of its portfolio in index funds.

The shift has resulted in a savings of nearly $13 million in fees and an improved return rate for the fund, Fran Bielli, executive director of the Board of Pensions, said Tuesday at a Philadelphia Intergovernmental Cooperation Authority (PICA) meeting.

"This is attributable to a return to basics," Bielli told the board.

The board has fired all but one of its hedge-fund managers and moved a bigger chunk of money into index funds. Of the pension fund's $4.3 billion portfolio, 47 percent is in index funds, Bielli said. That is up from about 30 percent in 2015.

In one year, the city went from paying $28.6 million in management fees to oversee $4.34 billion in assets, which resulted in a 0.3 percent return by the end of fiscal year 2015, to paying $15.8 million in fees for management of $4.3 billion in assets and a loss of 0.33 percent by the end of fiscal 2016, which ended June 30.

Although both of those years had abysmal returns - as happened with many of the other big-city pension funds throughout the country - Bielli said that in the first three months of fiscal 2017, the fund had seen a 3.6 percent return.

"We expect that trend to continue," Bielli said of the better-performing portfolio. "Reducing fees is free money."

The return rate, however, is still below the city's 7.75 percent assumed rate.

Bielli said it was still early in the fiscal year and year-end returns could be higher.

If the city doesn't meet its assumed rate, the fund's deficit could grow even bigger. The pension plan is only 45 percent funded, with a $6 billion budget hole.

Bielli hopes that moving nearly half of the city's portfolio to index funds will work to the fund's benefit.

"Fees are much less - that's one motivator," Bielli said after the PICA meeting, noting that fees are based on current assets. "The other is that active managers have not been able to outperform the index fund."

During Tuesday's PICA meeting, Bielli and city Finance Director Rob Dubow talked about the challenges facing the fund and how the city is addressing them.

For example, sales-tax revenue is projected to pump more money each year into the fund, with $52.8 million estimated to go into the fund in 2021. The city also negotiated for its blue-collar workers with salaries of more $45,000 to contribute more into the pension fund.

Dubow said he hopes to negotiate similar terms with the city's other unions.

cvargas@phillynews.com

215-854-5520@InqCVargas

Correction: The story has been corrected to reflect that the city is investing nearly half its pension money in index funds.