The arrest of a fundraiser for New York city comptroller John Liu and the ongoing federal investigation into his finances confirms the need for the governance reform planned for the city’s five public pension funds, Columbia Business School Professor Andrew Ang says.
While Liu does not yield the power of his state counterpart Thomas DeNapoli, who is the sole trustee of the $146 billion New York State Common Retirement Fund, Ang says planned reforms will result in an independent board that will reduce the potential for political interference.
“The role of pension reform, though, is far larger than just one person,” Ang says.
“The fact that a politician can be tarnished points out clearly the need to have an independent board so that the fortunes of beneficiaries do not rise and fall based on the ratings of politicians.”
Liu has been embroiled in controversy since one of his fundraisers was caught in a sting operation by an undercover FBI agent.
The undercover agent is alleged to have approached Liu’s fundraiser, Oliver Pan, with an offer to donate $16,000 – more than three times the city’s legal limit for a single donation.
Pan is alleged to have been caught on tape detailing an arrangement to funnel the donation to up to 20 other people. The donations to each of these so-called straw donors would be less than the legal limit for individual donations, and would also qualify for matching amounts of public electoral funding.
Liu has denied any knowledge of the activities of Pan, who faces a string of wire-tapping indictments that can each carry up to 20-year jail terms.
Under the reform plans for New York city’s five public pension funds, the Comptroller’s office would remain as custodian for the funds’ combined $120 billion in assets.
The five boards – the Police, Fire, Teachers’ Retirement System of the City of New York (TRS), New York City Employees’ Retirement System (NYCERS) and Board of Education Retirement System of the City of New York (BERS) – would delegate investment advisory authority to a pension investment board.
An independent investment management company (IMC) would also be established to manage the investment strategies of the five funds, which cover more than 237,000 retirees and 300,000 municipal employees.
IMC would be a government body, with its own CIO appointed by the pension investment board.
The composition of the board would include representation from municipal employees; the Mayor; and the Comptroller.
This board would set the strategic direction, policy and investment goals for the five funds, in consultation with their five existing boards.
Assets would not be co-mingled and the performance of each fund would continue to be tracked independently.
Ang – whose financial studies students at Columbia Business School undertook a study of New York’s State Common Retirement Fund’s single trustee model – says the municipal funds face the opposite governance problem, namely, responsibility being shared by too many.
“There are, right now, 58 trustees with 66 votes,” he says.
“There are too many in charge with too few accountable.”
Ang points to the Canadian Pension Plan Investment Board (CPPIB) as an example of best practice when it comes to balancing the role of elected officials within a pension system with the need for an independent investment board.
Appointments to the CPPIB must be made by the federal finance minister in consultation with the participating provinces, and with the assistance of a nominating committee.
A director’s term lasts for three years and the nomination process aims to ensure that only those with expertise in investment, business and finance are appointed to the board.
The nominating committee is a federally appointed body, which is balanced by each participating provincial government appointing one representative.
Candidates for appointment and re-appointment are made to the federal finance minister by the nominating committee. In turn, the federal finance minister makes the appointments in consultation with the provincial finance ministers.
Ang, who is the Ann F Kaplan Professor of Business, has been a vocal supporter for the push to reform the city’s pension plans.
Previously, he has said the reforms will bring more investment decisions in-house cutting costs to beneficiaries. The streamlining of investment decision-making will also allow the IMC to take advantage of funds’ long-term investment horizons and scale to boost returns.
The “independent” pension board as currently proposed will have representation by both the Comptroller and the Mayor’s Office, so it does not seem that it will be either independent or apolitical. Further, the proposal grants full investment discretion to an appointed Chief Investment Officer, and seeks to do away with all procurement rules. These together effectively grant more power to the CIO than the sole trustee system of NY State that many have been seeking to change given the potential for abuse. The pension reform goes the wrong way and eliminates many of the checks and balances that are inherent in the NYC System, notwithstanding their complexity. Pension Staff should not report solely to one elected official, but the reform as proposed creates more issues that it solves.