Key Takeaways
- • CalPERS, the nation's largest public retirement plan, began publicly disclosing carried interest and other performance fees in November 2015, revealing that external investment partners realized $700 million from profit-sharing agreements in fiscal 2015.
- • Pew Charitable Trusts analyzed asset allocation, performance, and fee data from the 73 largest state-sponsored pension funds, which hold approximately $2.9 trillion, or more than 95 percent of state pension investments according to the U.S. Census Bureau.
- • State pension funds paid more than $10 billion in 2014 in fees and investment expenses, their largest expenditure, and costs rose more than 30 percent over the past decade alongside greater use of alternative investments.
- • Fees can reduce returns on alternative investments by as much as 10 to 20 percent, and CEM Benchmarking estimates undisclosed private equity fees can equal 1.5 percent or more of assets annually.
- • Pew recommends standardized fee reporting, online availability of investment policy statements, and disclosure of returns both net and gross of fees, noting that 27 of 73 plans (37 percent) reported 10-year returns gross of fees only.
Summary
The California Public Employees' Retirement System (CalPERS), the nation's largest public retirement plan, has raised the bar on investment fee transparency by disclosing the full amount it pays for private equity investments. CalPERS, like most public retirement systems, pays performance-based fees, known as carried interest, to external managers, but it only began publicly disclosing these costs in November 2015. The new reporting showed that external investment partners realized $700 million from profit-sharing agreements in fiscal 2015, according to Pew Charitable Trusts.
Pew's analysis, published in an issue brief dated February 18, 2016, examined transparency practices across the 50 states using data on asset allocation, performance, and fees from the 73 largest state-sponsored pension funds. Collectively these funds hold approximately $2.9 trillion, more than 95 percent of state pension fund investments, according to the U.S. Census Bureau's Census of Governments 2014 report. The report found wide variation in investment strategies, disclosure policies, and cost reporting, and it said states interpret Governmental Accounting Standards Board and Government Finance Officers Association guidance differently.
The brief links rising costs to the growing use of alternative investments, which include private equity, hedge funds, real estate, and some commodities. State retirement systems have roughly three-quarters of their more than $3 trillion in assets in stocks and alternatives, an allocation that has more than doubled in recent years. State funds paid more than $10 billion in fees and investment expenses in 2014, and those costs have risen more than 30 percent over the past decade. Pew says fees can reduce alternative investment returns by as much as 10 to 20 percent. CEM Benchmarking Inc. estimates that undisclosed private equity fees, including carried interest and monitoring costs, can equal 1.5 percent or more of assets annually, roughly half of total private equity management costs.
Pew recommends adopting comprehensive fee-reporting standards, such as the Institutional Limited Partners Association's Fee Transparency Initiative, whose final reporting template was released in January 2016. Thirteen state and municipal treasurers and comptrollers also urged the Securities and Exchange Commission to set industrywide private equity fee disclosure standards. South Carolina's retirement system, which reports fees netted from returns, and the Missouri State Employees' Retirement System, which reports 1.73 percent in total fees, were cited as examples of more thorough disclosure. Pew also urges public availability of investment policy statements, noting that 59 of the 73 plans provided them online, and disclosure of returns net of fees, since more than one-third of plans do not report net-of-fee results.
Pew's analysis, published in an issue brief dated February 18, 2016, examined transparency practices across the 50 states using data on asset allocation, performance, and fees from the 73 largest state-sponsored pension funds. Collectively these funds hold approximately $2.9 trillion, more than 95 percent of state pension fund investments, according to the U.S. Census Bureau's Census of Governments 2014 report. The report found wide variation in investment strategies, disclosure policies, and cost reporting, and it said states interpret Governmental Accounting Standards Board and Government Finance Officers Association guidance differently.
The brief links rising costs to the growing use of alternative investments, which include private equity, hedge funds, real estate, and some commodities. State retirement systems have roughly three-quarters of their more than $3 trillion in assets in stocks and alternatives, an allocation that has more than doubled in recent years. State funds paid more than $10 billion in fees and investment expenses in 2014, and those costs have risen more than 30 percent over the past decade. Pew says fees can reduce alternative investment returns by as much as 10 to 20 percent. CEM Benchmarking Inc. estimates that undisclosed private equity fees, including carried interest and monitoring costs, can equal 1.5 percent or more of assets annually, roughly half of total private equity management costs.
Pew recommends adopting comprehensive fee-reporting standards, such as the Institutional Limited Partners Association's Fee Transparency Initiative, whose final reporting template was released in January 2016. Thirteen state and municipal treasurers and comptrollers also urged the Securities and Exchange Commission to set industrywide private equity fee disclosure standards. South Carolina's retirement system, which reports fees netted from returns, and the Missouri State Employees' Retirement System, which reports 1.73 percent in total fees, were cited as examples of more thorough disclosure. Pew also urges public availability of investment policy statements, noting that 59 of the 73 plans provided them online, and disclosure of returns net of fees, since more than one-third of plans do not report net-of-fee results.
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