Thursday, March 11, 2021

Retirement Systems Cut $350 Million in Investment Costs in Four Years Investment Management Division Exceeds Efficiency Goal by 250%

Mar 11, 2021

(Raleigh, N.C.) – One of State Treasurer Dale R. Folwell’s first initiatives when taking office in 2017 was to cut Wall Street fees and other investment costs associated with the $115 billion pension plans. He pledged to cut $100 million in fees during his first term in office. It was announced during a recent Investment Advisory Committee meeting that that goal had been exceeded by 250%, resulting in more than $350 million in incremental cost-efficiencies as of Dec. 31, 2020, for the North Carolina Retirement Systems’ (NCRS) investment program.

"The money in these pension plans belongs to those that teach, protect and otherwise serve the people of this state, not Wall Street,” said Treasurer Folwell. “All of the credit for this great accomplishment goes to the incredible staff we have at the Investment Management Division. They’re the ones who sharpened their pencils and got it done."

In fact, according to a recent CEM Benchmarking (CEM) report, the NCRS has the lowest investment costs of any state in the peer group analyzed for the report. Investment costs are broadly defined as the costs associated with making investments, including management fees and oversight costs of running the investment program. CEM has been used for benchmarking services by previous treasurers.

The report analyzed pension investment costs, excluding transaction costs and private asset performance fees, from 2015-2019. It compared the NCRS with 48 U.S. pension plans and 14 peer states of similar-sized investment portfolios. The median value of the NCRS during that time was $100.9 billion while the peer group was $91.5 billion. It is currently valued at almost $115 billion.

CEM reports that North Carolina’s investment cost was the lowest of any peer state compared. The state’s total investment cost of $323.9 million (0.32% of value) was 0.20% below the peer median of 0.52%, which equates to a savings of approximately $198 million per year.

In addition, in 2016 North Carolina’s total investment cost was approximate with peers and the U.S. public plans’ average. However, over the next three years North Carolina’s costs dropped 36%, while the national and peers’ average remained steady.

The report cites North Carolina’s implementation style and asset mix as two factors contributing to the reduction in costs. North Carolina does not have comparable holdings in highest-cost asset classes (real estate, infrastructure, hedge funds and private equity) and more than half of North Carolina’s holdings are managed internally.

In 2017, Treasurer Folwell and the public equity team announced the first-ever Department of State Treasurer internally managed passive index fund. As of Dec. 31, 2020, the Internal Passive Equity Fund’s assets under management was $15 billion. Together with the fixed income team that manages just over $43.4 billion, 51% of the pension’s total assets of $114.9 billion are managed in-house.

“We’ve achieved so much in the last four years but have so much left to do,” said Treasurer Folwell. “I’ve always said that I’m standing on the shoulders of others to achieve such success. And that is certainly the case here. These savings are directly due to the investment division’s loyalty to the taxpayer.

The North Carolina Retirement Systems is widely regarded as one of the best funded in the nation. In fact, Moody’s Investors Service recently reported that North Carolina’s Retirement Systems, which includes state and local employees, is the best funded in the nation when looking at its Adjusted Net Pension Liability.

Additionally, a recent “stress test” by The Pew Charitable Trusts concluded that North Carolina’s state pension fund is well-positioned to maintain solvency during tough economic times. This assessment has been borne out during 2020’s volatile market conditions as the pension system’s valuation has, at times, reached historic levels of more than $115 billion.

The North Carolina Retirement Systems is the ninth-largest public pension fund in the country. It provides retirement benefits and savings for more than 950,000 North Carolinians, including teachers, state employees, local governments, firefighters, police officers and other public workers.

For Treasurer Folwell's comments in an audio file, click here, or watch the video below.

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