For besieged pension fund, mixed messages from a $ 400,000 consultant
Even before an unsuccessful effort to oust the leaders of the giant pension fund PSERS showed a deep split in the plan’s board, the panel was fracturing.
To solve this problem, the 15-member board did what it often does – hired a consultant. He authorized the payment of nearly $ 400,000 last fall to a Michigan company specializing in the âgovernanceâ of state pensions.
The aim was to find a way to reach consensus, but so far the effort has provided ammunition to both sides in the division of the fund. A “preliminary recommendations” report, obtained by The Inquirer, recommends increasing the power of the same top executives that a block of board members wants to fire.
Perhaps this was not surprising, since these leaders have had an unusual influence and the final say in shaping what is supposed to be analysis for the board.
The stakes are high for PSERS, the $ 67 billion public school employee retirement system. The fund, one of the top 25 in the country, receives money from taxpayers, working teachers and its own returns on investment and sends more than $ 6 billion a year in retirement checks to 265,000 retirees.
This year, the system was faced with an FBI investigation examining the board’s erroneous adoption in December of an inflated number for its investment performance, as well as its purchases of real estate near its headquarters. The board has also faced other headaches, ranging from criticism of luxury travel for its investment staff to long-standing shortfall of $ 40 billion to meet future demands.
Frustration over low investment returns boiled over earlier this month when dissidents on the board unsuccessfully attempted to gain majority support to fire executive director Glen Grell and chief investment officer James H. Grossman Jr. In a sign of the deadlock on the panel, the same board there weren’t enough votes to fire the two men also didn’t have enough votes to approve the latest call from the same leaders for $ 1 billion in new investments.
PSERS spokeswoman Evelyn Williams said last week she had no comment on the consultant’s work pending a final report, due later this year.
One of the general conclusions of the draft report was that the agency needs a ‘cultural reset and governance transformation’ to ensure that unpaid board members perform. their responsibilities to taxpayers and retirees, rather than serving their own allies. The nominated and elected members come from various constituencies – legislative caucuses of the Democratic and Republican states, teachers’ unions, school boards, among which are among the most important.
The draft was produced by Funston Advisory Services, a leader in its niche of providing governance advice to public pension plans. The firm, based in a suburb of Detroit, was founded a decade ago by Frederick Funston, a former executive at giant consulting firm Deloitte. For Deloitte, he was the ânational practice leaderâ in governance and ârisk oversight,â says Funston Advisory.
In his preliminary report, Funston warned that “a persistent lack of board cohesion will destabilize the system and adversely affect its performance.” The project said the panel spent too much time relative to other pension funds on the details of individual investments and too little charting general policy.
He also cautioned against âmanagement capture / control potential,â his expression for a danger that paid staff take over decisions that should be made by the board. Tellingly, he said it was not clear whether the PSERS consultants worked for the board or for the staff.
These issues happened to be the main complaints of the dissenting board members. In their public letter calling for a management reshuffle, six board members led by state treasurer Stacey Garrity described PSERS staff as having usurped the powers of the PSERS board. Dissenters complained that leaders delayed giving information to the board, controlled the selection of staff and consultants, and even fired dissenting board members to the media.
But even though reports cited a need for âindependenceâ on the part of the PSERS board, the draft advised other measures that would increase staff powers. In particular among them: that the leaders be authorized to choose numerous investments without the approval of the board of directors.
He also said that the PSERS, depending on $ 5 billion in taxpayer money a year, should have unlimited power to hire and set salaries, without the current procedures under which other senior officials l ‘State review these decisions.
Funston’s employment contract included provisions that have troubled other corporate governance experts. The pact, posted on a state website, stipulated that senior PSERS officials would oversee Funston’s review “without limitation” – and that the consultant’s reports would be “subject to review, review and for the approval of the management of the PSERS â.
In contrast, Funston contracts with other funds, including PSERS’s sister fund – SERS, the state’s workers’ pension scheme – called on the company to report directly to boards.
Staff approval of board material would not fly in American companies, says Charles Elson, a professor of management at the University of Delaware and a corporate governance consultant. âA governance report on the board of directors is sent to the board of directors,â he said. âThis should not be subject to staff review. “
Chris Tobe, a former Kentucky government auditor and pension board member, agreed. (Now a consultant, he was part of a rival group that bid for the governance review post, but lost to Funston.) âThis contract is designed to prevent independent reporting,â Tobe said.
When asked about the requirement for staff to have this kind of oversight, consultant Funston said he was not ready to respond. “The final report has not been submitted,” he said.