Sovereign Wealth Funds
What If One Man Controlled Your Pension Fund?
That's the case for $140 billion US plan.
March 8, 2011
If I told you that a single individual had absolute investment decision-making authority over a portfolio of 140 billion dollars, in what city would you say that individual probably resides? Seriously, take a second and guess.
As it turns out, this all powerful investment titan is from the city of…wait for it…Albany, New York. The man? State Comptroller Thomas P. DiNapoli. Huh? Well, in New York State, the Comproller is the sole trustee and manager of the State Common Retirement Fund (CRF), which weighs in at roughly $140 billion these days.
Somehow this remarkable factoid had evaded me until I read Edward Regan’s opinion piece in the Sunday New York Times. It’s a very interesting oped, as Regan was the State’s Comproller for 14 years up until the mid 1990s. So, he knows a thing or two about the responsibility of running the pension fund. More to the point, he understands how vulnerable the fund can be without the appropriate governance procedures in place:
“The unusual nature of New York State’s pension governance helps explain why one of my successors, Alan G. Hevesi, was able to use the fund for his own purposes. In October, he pleaded guilty to steering millions of dollars in state pension money to an investment firm in return for kickbacks and campaign funds.”
Agree to agree. The solution Regan espouses is to set up a board of trustees to oversee the pension. This is the setup for pretty much every other major public institutional investor I can think of. So, it’s obvious that this is what needs to be done in New York, right?
Maybe. As Regan notes, he himself once tried to set up such a board to oversee operations, but he later decided against it when special interest groups began try to hijack things:
“In the 1980s, when I was the comptroller, I proposed legislation calling for a small board of investment experts for the pension fund, representing local governments and active and retired state government workers. Within weeks of its introduction, however, the bill was the subject of amendments intended to grant additional seats to favored interest groups. So I withdrew my support.”
And that is the biggest problem, in my opinion, facing US public pension funds. How do you reconcile the desire to have a representative board all the while ensuring that the same board has the necessary expertise to go about investing billions of dollars? It’s not easy.
So, I can (in theory at least) see how an ethical, skilled and knowledgeable Comptroller at the helm of the fund might offer some comparative advantages over trustee boards numbering in the teens. For example, the Comptroller could respond quickly to changes in the market, and there would be clear accountability for poor pension performance. Interestingly, this is pretty much exactly how the Comptroller’s website sees the situation:
“In New York, the State Comptroller is sole trustee of the New York State Common Retirement Fund (CRF). Under this model, Comptroller DiNapoli is directly accountable for the performance, oversight and management of the Fund…Having one person ultimately responsible for the CRF has enabled comptrollers to act quickly to respond to market changes and to protect the CRF from being raided by past governors.”
Fascinating. Anyway, does that mean all states should be investigating this ‘benevolent dictator’ governance model for their pensions? Probably not. But I do think Regan’s article misses an opportunity to point out that there are some potential positive aspects associated with New York’s pension fund governance.
This post originally appeared on the Oxford SWF Project website.