Jay Cooper reports on how conversations are stirring in the US about whether or not the government business model is the best fit for public schemes
State pension funds in the US are grumbling about working under an inefficient government business model they claim hampers performance and lessens their ability to compete with sovereign wealth funds and other public investors across the globe that have more independence in their investment decisions.
Every state pension fund works under its own state laws. However, most state pension funds operate like any other office within the state government. That can mean longer, slower, more detailed procurement processes for hiring money managers, slower approval processes to make other investment decisions and sometimes, constraints on salaries that make it difficult for state pensions to hire and retain top investment staff members.
The need for a new business model was brought up in the California State Teachers Retirement System’s (CalSTRS) annual business plan presented to its investment committee in July. In that document, CalSTRS chief investment officer Christopher Ailman recommended the investment committee discuss better business models and more efficient operations at future workshops and planning meetings.
The document also noted that other states, including Missouri, Oregon and “a couple others” are also looking at how to implement a better business model.
None of those states are taking formal, legislative action to change their business model. Ailman, who has brought up the issue of the government business model in the past, said “all I’m asking this year is for our board to actually discuss it”.
At this point, discussion of the business model has been informal in Oregon. According to a statement from the Oregon State Treasurer’s Office, the Treasury “has asked some questions about alternative structures as part of the state’s ongoing efforts to ensure it uses the best practices and has the best possible business model, in order to continue to meet our fiduciary responsibility to the funds under management. The conversations are preliminary and no changes are envisioned in the immediate future”.
Missouri State Employees Retirement System executive director Gary Findlay said the legislature has not discussed the issue in Missouri.
Industry experts have long contended that the business model for government pension funds is less efficient. CalSTRS cited a 2004 Ennis Knupp (now Hewitt EnnisKnupp) study proving the point. That study found that over an eight-year period from 1995 to 2002, endowments – which typically have more independence in investment offices than public pension funds – earned an additional 55 basis points of risk adjusted return per year over public pension funds.
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