Pensions Find Riskier Funds Fail to Pay Off

Thanks to Phil for passing this along.

Searching for higher returns to bridge looming shortfalls,public workers’ pension funds across the country are increasingly turning toriskier investments in private equity, real estate and hedge funds.

But while their fees have soared, their returns have not. Infact, a number of retirement systems that have stuck with more traditionalinvestments in stocks and bonds have performed better in recent years, for afraction of the fees.

Consider the contrast between the state retirement fund forPennsylvania and the one for Georgia.

The $26.3 billion Pennsylvania State Employees’ RetirementSystem has more than 46 percent of its assets in riskier alternatives,including nearly 400 private equity, venture capital and real estate funds.

The system paid about $1.35 billion in management fees inthe last five years and reported a five-year annualized return of 3.6 percent.That is below the 8 percent target needed to meet its financing requirements,and it also lags behind a 4.9 percent median return among public pensionsystems.

In Georgia, the $14.4 billion municipal retirement system,which is prohibited by state law from investing in alternative investments, hasearned 5.3 percent annually over the same time frame and paid about $54 milliontotal in fees.