Monday, April 30, 2012

A Response from Bob Lyons, TRS Trustee, Regarding Pension Fees

You may have seen the Better Government Association (BGA) story in the Chicago Sun-Times and on CBS local television regarding the TRS pension fund’s exorbitant fees and poor investment returns. While I do not generally believe that conspiracies are the hidden explanation for what goes on, I think that this expose was simply part of the ongoing attacks on public employee unions and their pensions. My reason for saying this is one paragraph that we sent to the BGA should have ended their story, but not only did it not stop them, they didn’t even include it as part of their story – for obvious reasons. Leaving out the math that justified the conclusion, here is the key paragraph:

TRS’s investment management fees are competitive, and often superior, to public pension plans of a similar size. In the 10-year period being studied by the BGA, TRS assets available for investment averaged $33.6 billion per year. A total of $1.3 billion in fees equates to an average annual fee of 39 basis points over the period. For comparison, the average public pension fund paid fees of 48.5 basis points in fiscal year 2010. Pension systems with more than $20 billion in assets had average investment manager fees of 55.2 basis points in fiscal year 2009. TRS paid fees to “hundreds of money management and brokerage firms” during the period because all assets are externally managed. A “basis point” is a standard measurement in investing - one-hundredth of 1 percent.

Certainly 1.3 billion in fees is a lot of money, but it is over ten years where TRS made over $10 billion dollars; it was paid to the companies that managed our money and the brokerages that bought and sold the investments. Our fees are low compared to other funds. If you go through the investment records, records that were available to the BGA, we report our returns for any period “gross of fees” (without the fees being subtracted) and then “net of fees” (after the fees are subtracted) and the difference will be around .04 of a percent.  Nevertheless, they ran the story probably just as it had been written before their investigative reporting.

People have asked me how we have done so far this year with our investing since the start of the new fiscal year. As you may recall, we made over 26% last year in what was an excellent year for the market. This year has been up and down and back up again. Here are the numbers we have for the fund through the end of March, though some assets classes, such as private equity and real estate, do not report for some weeks after a given date, even a month after the numbers are still not final. Keep in mind, that while the state was to make monthly payment of approximately $200 million to TRS, the state is running $280 million behind, though we have been told the payment will be made by the end of June.

Assets $37.0 billion - preliminary
Net of fee returns (preliminary) as of 3/31/12:

Quarter 8.05%
FYTD 2.67%
1 Year 5.00% - all these numbers are annual averages
3 Year 14.79%
5 Year 2.27%
10 Year 6.39%
20 Year 7.84%

The difference between total contributions for FY 2012 (not counting investment returns) and benefits to be paid out is a negative $1.1 billion for the year. The number is the same as last year’s and, at least for now, what the difference for next year is expected to be. TRS’ assets at the end of March were almost what we had when we started the year.

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