New York City’s Pension System In Danger Of ‘Operational Failure’ by Funston Advisory Services

Full report below – story and H/T to Susanne Craig of NYT 

New York City’s Pension System In Danger Of ‘Operational Failure’ – Introduction

The Comptroller of the City of New York (the “Comptroller”) is custodian by law and responsible by delegation for the investment of the $162.9 billion in assets (as of June 30, 2015) of the five (5) New York City retirement systems (each, a “System” and collectively, the “Systems” or “NYCRS”) and 11 related variable and miscellaneous supplemental funds (“Related Funds”). The Systems include: (1) Teachers’ Retirement System of The City of New York, (2) New York City Employees’ Retirement System, (3) New York City Police Pension Fund, (4) New York City Fire Department Pension Fund, and (5) Board of Education Retirement System of The City of New York. Together, the Systems protect the retirement security of over 700,000 New Yorkers.

Since 2001, the value of the Systems’ investment portfolio has nearly doubled and the Comptroller’s Bureau of Asset Management (“BAM”) program has become increasingly complex as new asset classes were added to the portfolio to improve diversification and the expected risk-adjusted returns. The System Boards approved funding to support additional BAM headcount and related costs in 2005 (37 additional investment staff) and in 2012 (24 additional investment staff) to assist in managing this added scale and complexity.

This Best Practice Review is part of a systematic process of reform undertaken by the Comptroller and the five Systems to transform BAM into a world class organization. The Review focused on a study and analysis of the management, operations, processes and performance of BAM and includes a number of recommendations on best practices. The Comptroller and the Systems recognize this will take years given the constraints under which BAM must operate and that the transformation must be accomplished in incremental steps.

[drizzle]The current transformation process began in January 2014, when, with the support of the Systems, Comptroller Stringer introduced a number of reforms in the way BAM oversees and manages the assets of the Systems, including a six-point plan to improve compliance and assure integrity; the appointment of a highly respected Chief Investment Officer; the appointment of an internal auditor for the entire agency; and the appointments of a chief risk officer and a chief compliance officer for BAM. The internal auditor, chief risk officer and chief compliance officer each report directly to the Comptroller, to ensure that these reforms operate effectively.

In October 2015, BAM also modernized its facilities and combined them on the 8th floor of 1 Centre Street. Additionally, the Systems also recently agreed to the Comptroller’s request to fund compensation increases for the BAM investment staff with compensation set at the median level for public pension funds. This is expected to improve BAM’s ability to attract and retain qualified investment professionals.

Finally, on December 3, 2015, the Comptroller and the Systems announced that they had agreed to move to a single Common Investment Meeting (“CIM”) from 54 individual meetings per year amongst the five Systems. The CIM will occur a minimum of 6 times per year, with other meetings to be scheduled when necessary for the timely processing of investment recommendations.

This is a major accomplishment that should significantly increase the time available for BAM staff to focus on high priority tasks such as investment manager due diligence and monitoring. It is an important and necessary step to transforming BAM into a world-class investment organization and we understand that this has been a matter of discussion between the Comptroller’s Office and the Systems for some time. It was an issue that repeatedly arose during the course of our review and that led to a number of related findings, conclusions and recommendations throughout our report. We anticipate that this will facilitate improved management of System assets and more efficient and cost-effective use of Comptroller’s Office staff.

New York City's Pension System

The Purpose of the Review

The purpose of this review was to complete “a comprehensive examination and independent evaluation of the Comptroller’s current asset management policies, processes, procedures and internal controls; gauge the cost effectiveness and efficiency of BAM’s asset management operations; identify operational weaknesses and opportunities for improvement based on industry and market trends; and, identify industry best practices and the needs of BAM.”

As part of our review, Funston Advisory Services (“FAS”) conducted surveys of the Comptroller’s Office staff and the Trustees and Executive Directors of the five Systems (see Appendix 2 for a summary of the BAM Self-Assessment results). We interviewed over 75 people (some multiple times) from BAM staff, the Comptroller’s Office staff from other Bureaus, Trustees and Executive Directors, as well as investment managers, consultants, transition managers, evaluators of transitions, the custodian bank, the foreign exchange and securities lending providers, and the external auditor.

In addition, we evaluated profiles of each division and compared them to our benchmark knowledgebase. We also received more than 3300 documents for our review. We evaluated the collective performance of BAM, but not the performance of individuals. We submitted two draft reports and sought and incorporated feedback from BAM to validate and verify the factual basis of our findings, refine our conclusions and recommendations and identify any missing elements.

Accordingly, FAS prepared a gap analysis comparing the current state of BAM’s operations to industry leading practices taking into account the unique conditions and constraints under which BAM has operated. We do not believe there is a single “best practice” applicable to all organizations at any stage of development. Accordingly, we have identified what we believe to be “leading practice” and leave it to the judgment of BAM, the Comptroller and the Systems to determine what is best for BAM given its unique circumstances.

Throughout this report we have identified the expected capabilities, processes and procedures of leading practice organizations and compared BAM’s operations to those standards. The recommendations included throughout the report address these capability gaps. The recommendations are evaluated for priority in Appendix 3: Recommended Priorities and Related Appendices.

It should be noted that Funston Advisory Services LLC is not an investment advisor, and no conclusions or recommendations contained in this report should be construed as investment advice. Any references to the fund or investment portfolio are with respect to the capabilities and capacity of the current BAM organization to effectively and efficiently manage the portfolio and advise the Systems.

New York City's Pension System

The Scope of the Review

The Comptroller’s Request for Proposal required an in-depth review of 20 areas of operation with 184 specific elements, a comparison of current practices to leading practices and the identification of priority gaps and recommendations to close them. The Summary Dashboard at the end of this Executive Summary provides an overview of our evaluation and a summary of our recommendations for improvement but the core of the report lies in approximately 240 recommendations regarding people and organization, policies and processes, systems and information for decision making and external factors. These recommendations have been tailored to the specific circumstances and current capabilities of BAM.

As requested, we have attempted to provide considerable specificity in these recommendations

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