Troubled PSERS must change to support hardworking educators | Opinion

The Inquirer Editorial Board correctly stated on July 29 that it’s time for change at PSERS, the long-troubled Pennsylvania Public School Employees’ Retirement System. Public interest reporting by this paper and other news outlets has drawn fresh scrutiny to this opaque billion-dollar fund. Now is the time to implement reforms necessary to ensure PSERS is truly operating in service to Pennsylvania educators and taxpayers.

Last year, PSERS failed to meet performance benchmarks, and its private equity portfolio is likely to blame. The high cost of fees charged for private equity investments diminishes fund assets: every dollar paid in fees is a dollar that could remain in the fund, compounding. A 2017 American Federation of Teachers (AFT) report found that by just cutting fees in half for private equity and other alternative investments, PSERS would save $300 million in the first year alone, with those savings compounding to $7.5 billion over 10 years, equivalent to over 10% of current assets and a number that could easily lower class sizes or modernize school buildings.

As AFT Pennsylvania testified earlier this month in Harrisburg, PSERS is out of step with similar funds in other states. This and other financial irregularities that are being investigated by the FBI and IRS pose a threat to the present and future financial security of our commonwealth’s most dedicated public servants and their communities. We have called for most members of the board of trustees to resign, and for staff to be replaced.

» READ MORE: Why PSERS investment strategy has failed to pay off for Pa. taxpayers and school employees

Although our union represents the commonwealth’s two largest school districts and, therefore, PSERS’s two largest participant groups, AFT Pennsylvania has no representation on the PSERS board. The following are our suggestions for PSERS to improve fiduciary performance, become more transparent, and ensure its board of trustees reflects its participants.

PSERS has $6.2 billion invested in private equity, representing 10.7% of its total portfolio, which is nearly 40% more than the average pension fund. For the past two years, the private equity investments selected by PSERS performed worse than the average private equity investment and worse than U.S. public equities, where investment fees are a fraction of private equity fees.

While PSERS has just recently reduced private equity’s share of total fund assets invested, replacing private equity with lower-fee, equivalent-risk alternatives, the fund must go further in the long term. Remaining private equity investments must be evaluated against a low-fee, equivalent-risk alternative. Most importantly, PSERS must demand clawbacks from the lowest-performing private equity funds as well as lower fee structures going forward.

Private equity is among the most expensive asset classes, with managers typically charging a 2% annual management fee regardless of profitability, a performance fee equal to 20% of any profits generated, plus additional fees that often remain hidden. According to PSERS’s own data, the fund paid $427 million in private equity fees in 2020, and a 2018 report found that PSERS’s total investment fees in FY 2017 exceeded all employee contributions to the fund. It is past time for PSERS to consider moving its entire investment into passively managed funds, like the recent move by Montgomery County’s pension fund.

PSERS does not publicly disclose complete private equity fee data in its annual report, leaving participants and stakeholders in the dark as to the true cost of these investments. All private equity fees — including management fees and carried interest — should be disclosed in its annual report, which should be released to the public. The fund must also immediately cap fees for new private equity investments at a 1% management fee and 10% performance fee, effectively cutting fees in half. Finally, PSERS must ensure that investment fees paid out never exceed regular, required employee contributions.

» READ MORE: Amid PSERS troubles, Pa. lawmakers may be ready for pension reform

The structure of the PSERS board must also conform with other retirement funds across the nation. Active and retired educators currently make up just one-third of PSERS’s board of trustees, while the average educator representation across the public pension plan industry is more than half. We must increase stakeholder representation on the PSERS board and ensure diversity of representation among beneficiary groups, as well as demographic and professional diversity.

Pennsylvania’s educators are among the most undervalued in the country, as evidenced by our dubious distinction as the most inequitable system of public education in the nation. Educators and staff do not go into this field to become wealthy; they do so because they love helping our kids reach their potential to grow and thrive. To value their work, educators and staff receive relatively modest compensation along with the promise of a secure retirement. We must ensure that promise is kept by reforming PSERS.

Arthur Steinberg is president of AFT Pennsylvania, a union comprising 36,000 educators, paraprofessionals, school secretaries, and state workers across 64 locals.