Aon agrees to pay PSERS $7 million to settle performance error suit; pension approves new investments

Aon Investments USA has agreed to pay $7 million to settle the Pennsylvania teachers’ pension system (PSERS) complaint blaming Aon, the system’s former adviser, for errors that led the $73 billion system to exaggerate its profits for 2011-2020, the agency’s lawyers told trustees in a meeting Friday.

PSERS trustees also approved new investments worth around $720 million after discussions over whether past investments in private education by funds tied to investor and casino owner Ira Lubert made his current funds appropriate for public school pensioners. PSERS has over the past 25 years invested $2.5 billion with funds Lubert founded or co-owns. In the end the board approved $125 million for his group’s new LLR Equity Partners VII fund.

PSERS chair Richard Vague hailed the Aon settlement. “I am pleased to see the matter resolved amicably,” Vague, a banker turned investor and former state banking secretary, said in a statement. “We take our stewardship of the assets and resources entrusted to PSERS seriously.”

Correcting the bad performance report had the effect of obliging public school employees hired since 2011 to pay a total of more than $80 million extra into PSERS from 2021 to 2024. The correction also set off a string of federal and internal investigations and divided the board. Four top PSERS officers interviewed by investigators left or retired.

The probes ended without charges. The board separately agreed to sell hedge funds and real estate accumulated under the departing managers. PSERS spent more than $8.8 million on lawyers and consultants hired as a result of the investigation. PSERS expects “minimal” additional costs from firms still representing it in related litigation, said spokesperson L. Paul Vezzetti. PSERS hopes to recover some of its expenses from the $1.5 million Aon paid the SEC to settle that agency’s complaint over Aon’s error.

In court filings, PSERS had blamed Aon for errors that had the effect of artificially boosting reported returns.

Pension accountants who reviewed PSERS reports at The Inquirer’s request expressed surprise that the agency relied on new, unaudited data used in Aon’s calculations, instead of its own audited periodic reports, adding that such data substitution left performance calculations prone to error. PSERS officials later replied that while its annual reports had indeed been audited, the financial data in them was not audited. The agency has since hired more auditors and tightened financial reporting procedures.

In its own court filings, Aon denied wrongdoing and said it had followed accepted industry practices. But in January the SEC fined Aon $1.5 million, settling its own complaint against the firm. The SEC said Aon “failed to adequately investigate” the difference between the data it used in the 2011-2020 reports and PSERS’ audited reports. When confronted by PSERS, Aon staff was “negligent” in offering various, contrasting, false possible explanations instead of finding and correcting the errors sooner. But under that settlement, Aon did not admit wrongdoing.

Aon spokesperson Robert Elfinger said the company would not comment on the $7 million payment to PSERS or whether it now admits it did anything wrong.

PSERS’ new investments are mostly going to new funds organized by managers who have long handled some of the agency’s private investments.

Besides the $125 million investment in LLR Equity Partners VII, PSERS on Friday agreed to invest $100 million in private-equity fund Summit Partners Growth Equity Fund XII-A; $175 million in private-credit fund ACORE Opportunistic Credit Fund II; and the rest in two infrastructure investment funds, a growing category for PSERS: 200 million Euros in Blackstone Infrastructure Partners Europe (CLM) and $100 million with Peppertree Capital Fund X. Additional investments could follow for some of the funds in final contract arrangements.

Most of the proposals passed unanimously, with State Sen. Katie Muth (D., Chester and Montgomery) abstaining or casting a lone opposing vote. Muth in 2021 sued PSERS, demanding that the agency make public private-equity and real estate investment contracts, whose financial details have been kept secret.

Lawyers for Muth and the PSERS board are expected to meet for mediation sessions to try to resolve the dispute later this summer, board members said.