The Pennsylvania Public School Employees’ Retirement System (PSERS) moved to reallocate $5 billion in assets, moving $2 billion from risky investments made through Bridgewater and BlackRock to more secure stocks, bonds, commodities, and infrastructure investments. This move impacts 8% of the entire funds holdings and will take effect October 1st.
Pennsylvania State Treasurer Joe Torsella praised the decision and criticized the investment firms. “It’s time that more pension funds wake up to the fact that Wall Street has, in many cases, sold them something close to modern-day snake oil. What so many active Wall Street managers have sold our nation’s pension funds on is the idea that—for a hefty set of fees—they can help pensions experience almost all of the gains and none of the losses. We need to recognize that for the fantasy it is,” he said in a statement.
“In so many cases, what ends up happening is that the Wall Street managers do worse than fail to deliver value, they end up delivering an expensive failure,” Torsella said. “This move by PSERS is worthy of substantial praise, and shows that Pennsylvania doesn’t have to be at the mercy of expensive and under-performing Wall Street managers.”
This move comes on the heels of the COVID-19 economic downturn that saw PSERS lose 8.17%, or 4.7 billion, in total assets. This loss outperformed comparative pension funds significantly. On the flip side, the overall rate of return on the risk parity investments only surpassed 4% over the last few years while losing 9% in just the first quarter of 2020. Pennsylvania, along with California, Texas, New Jersey, and Illinois, represent over half of the U.S.’s entire pension fund liability at a moment when pension liabilities are at an all time high, highlighting how important this move is to PSERS overall finances.
“We got as wet as everyone else,” Torsella said, referring to the pandemic and ensuing economic downturn. “And we missed a lot of years that would have had returns. This absolutely, categorically should make us mad,” he concluded.
Although this case is only one example, this move represents a smart shift that will help support and make pensions more sturdy for years and decades to come. As public pensions often are incentivized to make riskier investments to close the gap between their assets and liabilities and make investments look good on paper, PSERS move is a smart decision that will help secure public school teachers retirement funds. Pension funds should not be making riskier decisions for short term bookkeeping over the long term responsibility and fiduciary duty to retirees.