🔒The state pension quagmire: How much to disclose

Monitoring and keeping transparency over investments can be costly and difficult, especially when you look at state pension systems.

The Pew Charitable Trusts recently published a public sector retirement report, “Making State Pension Investments More Transparent: Accountability Varies Widely and Can be Improved.” It looks at performance reporting practices for investments by the 73 largest state-sponsored funds, and highlights five steps for improving transparency.

Fortunately, Maine falls within the majority of states — 63% — that break down pension fund investments net of fees, according to Greg Mennis, director of Pew's public sector retirement systems project in Washington, D.C.

He notes that reporting varies widely among states, and sometimes even within states. The report also finds that some reporting practices can make it difficult for taxpayers and beneficiaries to know the actual cost of investments, especially if fund management fees are not disclosed.

Pew began digging into state practices when it noticed the California Public Employees Retirement System, known as CalPERS, which is the country's largest public retirement plan, decided to reveal management costs. Like most public retirement systems, CalPERS pays performance-based fees to external investment managers as part of their compensation. Some 37% of states do not disclose those fees when reporting annual returns. CalPERS initiated its disclosure plan last November, and reported performance fees to external investment partners of $700 million in fiscal 2015.

While that's a whopping amount from the largest national plan, it makes sense for all states to account for such fees. The disclosure by California highlighted the states that do not report or underreport manager fees and expenses, the Pew report noted, especially fees associated with alternative investments such as private equity, real estate and hedge funds. “…and [it] points to the need for greater disclosure in order to provide full transparency on investment costs.” Collectively, the 73 largest state-sponsored pension funds across 50 states studied by Pew total $2.9 trillion, so they have a large impact on the economy as a whole outside each state's borders.

A look at the Maine Public Employees Retirement System, or MainePERS, financial report for the year ended June 30, 2014, shows that of the total investments for the state employee and teacher plan of $10.2 billion, $500,898 went to brokers for securities purchased and almost $8.7 million went to accrued investment management fees. There are similar breakdowns for the judicial, legislative and participating local district consolidated plans. They are spelled out clearly within the liabilities section of the fiduciary net position statement, along with assets such as investments, receivables and collateral.

That's not the case in other states, where Pew recommends:

• Adopting comprehensive fee-reporting standards

• Making investment policy statements transparent and accessible

• Disclosing bottom-line performance, both net and gross of fees

• Expanding reporting to include longer-term performance results

• Reporting results by asset class, net and gross of fees.