N.J. pension fund heads to investigate investment fees and bonuses to private companies

The heads of New Jersey's largest pension funds, skeptical of the hundreds of millions of dollars in investment fees and bonuses paid to private companies, say they plan to launch a probe into how the state awards those fees.

The Public Employees Retirement System Board of Trustees on Wednesday voted to conduct a forensic audit of the fund's expenses, following a similar vote earlier this week by the trustees of the Police and Firemen's Retirement System.

Fees and bonuses for the pension fund's investments hit a high last year. The state spent roughly $265 million on management fees and expenses and $335 million on performance bonuses, which are referred to as "performance allocation" in a State Investment Council annual report.

"Why are we paying that kind of money?" said Wayne Hall, chairman of the PFRS Board of Trustees. "When I see the exorbitant fees the state has been paying for the last couple of years, I have to question that."

A spokesman for the Department of Treasury declined to comment.

While the state paid $265 million in fees to private credit fund managers and income advisers, the Division of Investment's own operations, which manage three quarters of the pension assets, cost $10.6 million.

In 2013, the state reported less than $400 million in fees and expenses and $25 million in commissions. Trustees said they were concerned with the rising costs and changes in the terms used for investments.

"We can't compare apples to apples unless we know we're looking at apples," PERS Chairman Tom Bruno said Wednesday. "And I think it might be deliberate."

The boards initiated audits for fees and bonuses paid since the 2012 fiscal year. Board members said they have a fiduciary responsibility to investigate those costs.

"I'm a layman. I'm not on Wall Street. I'm not an investor, and I have 33,000 people that I answer to and they're not investors either," Hall said. "I basically need it in English."

Five years ago, the state began increasing its stake in non-traditional, or alternative, investments such as private equities and real estate. The share of investments the state has in hedge funds has tripled to 12 percent in the past five years, and real estate and private equity have nearly doubled to 5.3 percent and 9.3 percent, respectively.

With 770,000 active and retired employees, the fund doles out $650 million to $700 million a month to pay for pensions and benefits. It is among the largest public pension funds in the U.S and one of the worst-funded.

State investment officials have said the shift out of fixed-income securities and into alternatives has paid off.

In the fiscal year that began July 1, 2013, and ended halfway through last year, the pension investments earned 16.9 percent.

Members of the State Investment Council that oversees the fund and state officials have defended the fees, which they say beat industry norms, and bonuses.

"I know there's some distrust of the fees we pay these people," Tom Byrne, chairman of the State Investment Council, has said. "But just by putting smart managers in some places you can add a lot of value... We have been producing returns well ahead of what was established, and the investment results have made the pension fund billions healthier."

Treasurer Andrew Sidamon-Eristoff told the Assembly Budget Committee in March that the investment division merely expanded its reporting to include those sweeteners, saying that should be recognized as "enhanced transparency and not an opportunity to distort facts."

Original article