This Black Friday, consumers across the country will line up as retailers slash prices. This Thanksgiving, however, public pension plans are in for some sticker shock and are about to wake up to deals that were too good to be true. For the first time, public pensions are adding up and disclosing just how expensive their performance fees are.
Up until recently, the California Public Employees’ Retirement System (CalPERS) didn’t know how much it was paying in fees to private equity managers. There are two main types of fees: performance and management. Management fees are usually 2 percent of assets and cover the cost of advisory and administrative services. Performance fees are usually 20 percent of profits, over a specific target, and are meant to reward managers for high performance. Unlike management fees, however, CalPERS hasn’t kept track of the cost of performance fees. Instead, the full price tag on performance fees hasn't been fully totaled up and/or publicly disclosed. Later this week, CalPERS will announce just how much it has paid private equity firms over the past decade and is expected to be in the billions.
This new scrutiny comes after states and local governments already started to shift more and of their investment portfolios toward alternative investments like private equity. From 2006 to 2012, 11 percent of pension assets were invested in alternatives. By 2012, that share had more than doubled to 23 percent.
Who knows if the shift to alternatives would have grown this fast with greater disclosure on fees, but it’s clear that public pensions need greater transparency. Unlike the private sector, which must abide by federal regulations on reporting and fiduciary standards, public pensions have faced significantly less scrutiny. The Treasurer of California, John Chiang, recently wrote an open letter to CalPERS and the California Teachers’ Retirement System (CalSTRS) to disclose all fees charged to public pension funds.
Finally under public pressure, California and other states will need to start facing the cold truth about their fees. With new transparency, states will likely push for lower fees and maybe get a better deal from private equity firms.