PSERS board meetings on Thursday and Friday could chart the future of pension funds

Divided trustees of Pennsylvania’s $73 billion school pension fund will begin charting a future without the agency’s longtime executives at a two-day board meeting that begins Thursday.

The board’s bi-monthly investment review will be the first under Robert Devine, the 23-year PSERS veteran named acting chief investment officer last week when longtime chief investment officer James H. Grossman Jr. stepped down at the federal and internal investigations. Grossman was the architect of the pension fund’s controversial mix of private equity, debt and real estate investments.

PSERS executive director Glen Grell, 66, and Grossman, 54, announced their retirement on Dec. 2 after sustained criticism from a group of directors over lagging investment returns. The impending departures come as two federal investigations — by a grand jury reporting to federal prosecutors in Philadelphia, and another by the U.S. Securities and Exchange Commission — are still ongoing, and four reports authorized by the PSERS itself. even should appear soon.

In March, FBI agents issued grand jury subpoenas demanding details about why the PSERS — the public school employee retirement system — overstated its investment returns for 2011 through 2020. The poor numbers had the effect of delaying the increase in school employee contributions to the plan until a later correction imposed by these higher levies.

Federal prosecutors are also looking into the agency’s purchase of real estate near its Harrisburg headquarters for a redevelopment that never happened.

The SEC is investigating why the PSERS used unaudited data to arrive at these exaggerated returns on investment, instead of using its own audited numbers. The SEC is also investigating whether gifts exchanged between any of PSERS’ 180 investment advisers and contractors and fund staff may have improperly affected investment decisions.

At least 120 fund managers, advisers and others prepaid PSERS staff travel or covered other expenses from 2017 through 2019. The SEC subpoenaed records from the office of State Treasurer Stacy Garrity. The SEC is seeking documents related to the PSERS and the calculation and recalculation of its investment returns, a spokesperson confirmed Thursday.

As federal investigations move forward, the board is also awaiting four other reports that could shed light on PSERS’ investment problems.

These include an internal investigation into the “miscalculation” of the investment, conducted by law firm Womble Bond Dickinson. The highlights are expected to be presented to the council at a special meeting on Jan. 18, according to lawyers representing the PSERS.

Governor Tom Wolf and other officials have asked the PSERS to release Womble’s report. Counsel for the board warned the directors that any public disclosure of possible wrongdoing by management could complicate their defense against federal investigations. Earlier this month, the board agreed to extend Womble’s contract through June so it can also review matters the SEC is investigating.

Also pending:

  • An analysis of PSERS investment management operations by Verus Advisory Services of Seattle, which is helping the agency manage its billions while Grossman and other staff face the investigation;

  • A review of the board’s relationship with the staff it’s supposed to oversee, by suburban Detroit-based Funston Advisory Services, under a contract that gives final review to top PSERS staffers before the board does the way ;

  • A detailed internal audit examining the accuracy of the system’s investment assessments. Board members were briefed on the reporting issues discovered early on, but a final report isn’t expected until next year.

Even with Grossman gone, his influence should remain on the PSERS investment program, given the private investment cycle that has been going on for years.

True, administrators voted in August to dump hedge funds from the system, a class that Grossman had championed. But board members said its performance was poor and urged the PSERS to buy more US stocks, pending further scrutiny.

The PSERS would have made billions in extra profits had it ignored Grossman’s exotic investment recommendations and invested more in US stocks during the bull markets of the Obama, Trump and Biden administrations, say Grossman’s critics, including the State Treasurer Garrity and his predecessor Joe Torsella.

As it stands, the PSERS requires $5 billion in “contributions” from taxpayers and more than $1 billion from school personnel this year.

But the new investments directors will review on Friday, the last day of the meeting, include other high-fee investments from Wall Street managers that the agency has used in the past.

New investments on offer include funds managed by Bain Capital, Brookfield Asset Management, ICG Europe and Keystone Partners. All had managed money for PSERS in previous years, and all but Bain presented new investments recommended by Grossman at a June board meeting. But directors refused to even vote on those in June, amid a push by a minority of directors to oust him then.

Friday’s agenda lists different investments from those same managers, not those that didn’t get approval six months earlier. PSERS officials did not respond to questions about the change on Wednesday.

Grossman remains “senior adviser” until May 1, when he will retire and begin receiving his own state pension after completing 25 years of service. He is the highest paid employee in the state and will continue to earn his current salary of $485,000 a year as a senior adviser, just as he did when he was chief investment officer, until his retirement.

An interim replacement for Grell is expected soon. Among the candidates was Terrill Savidge Sanchez, the former PSERS officer who recently held the top job in the state employee retirement system, SERS, and who is due to retire this month, said insiders. His spokeswoman, Pamela Hile, would only say that Sanchez is “focusing on her remaining time as executive director of SERS.”

With vacancies at the top, will the lawmakers who backed a state commission’s proposal to merge investment offices SERS and PSERS to cut costs push to make it happen?

Grell and Grossman have firmly resisted merger talks.

But a key lawmaker who has backed the combination since a state pensions commission recommended it in 2019 says he is hopeful.

“We have a committee hearing in January on [pension] legislation, and I expect them to act after that,” said State Representative Francis Ryan (R., Lebanon), vice chairman of the PSERS board. “Still a lot of problems to solve.”