Analyst Suggests Fewer Wall Street Investment Managers Would Bring Better Pension Returns

By Megan Poinski,

ANNAPOLIS—After officials from the State Retirement and Pension System shared a positive investment outlook with members of the Senate Budget and Taxation Committee on Tuesday, Jeff Hooke of the Maryland Tax Education Foundation told the senators about his idea for bigger returns: fire the Wall Street managers.

In fiscal year 2011, Maryland’s pension system posted a 20% rate of return. But over the last several years, volatile markets have brought much lower rates of return. As part of its budget analysis, the Department of Legislative Services looked at rates of return for other comparable pension systems and found that in the last three years, Maryland had outperformed them.

Between fiscal years 2009 and 2011, Maryland has posted an average rate of return of 3.07%, outranking 12 of 26 comparable pension systems which had an average 2.9% rate of return.

Hooke looked at rates of return farther out. Comparing Maryland to other states in the last five years and in the last 10 years, he found that the state’s average rate of return is about 1% lower than its peers in six nearby states and other large public pension funds.

While 1% is fairly small, Hooke said that with something as large as the state’s $38 billion pension system, it adds up to a lot of money.

“This is a very serious number,” he said. “It adds up to $3 billion over 10 years.”

In the last decade, Hooke said the retirement system has paid more than $1.5 billion to Wall Street managers to handle the system’s investments. Hooke said these substandard returns shows that the managers are not worth what they are being paid.

He suggested that the committee put a provision in the budget that indexes what the financial managers are paid to the returns the system brings in.

“Are these losses you talk about because the fees are too high or because of the markets?” asked Sen. Ed Kasemeyer, D-Howard, the committee chairman.

Hooke responded he thinks that both facets share the blame.

“We seem to be similar to other states, and I’m a little perplexed why we’re not doing well,” Hooke said.

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