NJEA supports A-4704, a bill sponsored by Assemblyman Singleton that would require the boards of trustees of the state-administered retirement systems to conduct and publicly report regular stress test analyses on investment returns and projections to assess how well pension fund investments are doing. The bill was heard by the Assembly State and Local Government Committee on Monday, June 5.
Specifically, the bill calls for an analysis of how pension fund investments are likely to perform in periods when market returns are significantly above or below baseline assumed returns. The bill requires analyses of past investment performance for a minimum of 25 years, including a review of fees associated with investment returns.
This bill requires an additional report of investment returns and fees realized by external managers who are hired outside of the New Jersey Division of Pension Investments (NJDOI). It would mandate that any contract between the State Investment Council and an external manager for the investment of state administered pension funds provide the rate and amount of fees, including performance-based earnings. The stress test analyses and outside manager fee reports would be required to be posted on the Division of Pensions and Benefits website.
Under the Christie Administration, the NJDOI has adopted an investment strategy of placing a significant amount of the seven state pension funds into alternative assets.
An alternative asset is a higher-risk type of asset that has not been traditionally considered part of an investment portfolio. Alternative investments include private equity, hedge funds, managed futures, real estate, commodities and derivatives contracts. These higher-risk investments can yield higher investment returns.
Due to the nature of these higher-risk investments, alternative asset management fees charged to our pension funds are many times higher than either third-party management fees on conventional assets or in-house money management expenses.
NJEA has long held that the only criteria for deciding how to allocate investments and choosing investment managers should be the health and growth of the pension funds.
While the crux of New Jersey’s pension struggles will not be resolved by investment strategy, NJEA supports greater transparency of investment fees and believes stress test analyses will provide a better understanding of the effects of economic swings and long-term performance of different pension investments.
NJEA believes this type of analyses and transparency will help inform and improve our investment strategy, but maintains that additional pension funding would do far more to improve the health of our pension funds.