Friday, July 15, 2011

Robert Steel and Pension Delusions

Toady the NY Times reported on statements made by Robert Steel on Thursday at the Princeton Club in Manhattan. Mr. Steel is the mayor’s deputy mayor for economic development. Mr. Steel was speaking about fixing the NYC pension funds.

Mr. Steel thinks that that by increasing the pension funds’ investments in international stocks would produce higher returns for the pension funds. If this is true, what has the mayor been doing for the last nine and half years? He is the dominant trustee on all of the five city pension systems.

Of course, Mr. Steel may be totally wrong about achieving higher returns with increased exposure to foreign stocks. Just imagine owning more Greek, Irish, Portuguese, Spanish, and Italian stocks. Is that a good idea?

On Thursday he also complained that the pension funds only had a 20% return in FY-2011, while the S&P 500 index had risen 31% in the same period. This statement exposes Mr. Steel’s lack of understanding of pension systems.

The fact that the S&P 500 was up 31% means that a prudent pension could earn 31% on that portion of its balanced portfolio of which it was prudent enough to put in an S&P 500 index fund with its low fee structure. This is what the NYC pension funds generally do but they must also diversify. Only a fool puts all his eggs in one basket.

NYCERS, the largest of the city pension funds, has 34.8% of it assets in US stock index funds, 8.3% in US actively invested stocks, 28.3% position in mostly US bonds, 18% in international stocks, and 10.2% in private equity/real estate limited partnerships. The quoted 20% is a rational return for a prudent investor.

Every investor, however, should do a constant review of comparative strategies in order to make well founded decisions for the future. That is something that the NYC pension funds do not do. Neither does Mr. Steel. I have previously criticized NYCERS investment strategies. There is much that can be done to save a great deal of money.

The mayor has been in office now for nine and half years. Investment strategies can be corrected immediately, as opposed to benefit strategies which take decades. Salary and overtime decisions are also items under direct management control. Why should Albany return authority to the city on pension issues when Albany had to take it away in the first place because of the city’s past mistakes?

Mr. Steel stated that he wants to consolidate the operations of the five city pension systems. The city and the other participating employers might gain some savings but the political hurdles are huge. If the mayor wasn’t able to merge BERS in to NYCERS over the last nine and half years, I don’t think he will have much success in the next two and half years. Besides, the big immediate money is in reforming the investment process. But that will require incredible political integrity, a rare bird.

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