New York City is attempting to restructure the governance of its pension plans, which have more than $100 billion under management.
Since the economic crisis began, the media has focused its attention on the underfunding of public pension plans, while the governance of public pension plans has received scant attention.
However, it is the governance of public pension plans that needs to be restructured to assure that pension funds are being appropriately invested and protected.
New York City has five primary pension plans. There are five boards, 58 trustees and, together, the trustees have 66 votes.
The boards, with the help of 10 consultants, determine which asset managers to invest New York City’s pension funds with, and those 362 asset managers then invest the pension money.
New York City has little visibility into which investments the money is placed and where there is the greatest exposure to risk. If, for instance, significant amounts are invested in European bonds and Europe implodes, New York City’s pension plans would suffer.
New York City studied the best investing models to bring the governance of its pension funds into the 21st Century.
For instance, New York City looked to Ontario’s Teachers’ pension funds, which is known to be top of its class, and observed that 95% of its investment decisions are made by professional investment managers.
With Ontario’s Teachers and other best-in-class pension systems mind, New York City is proposing to completely restructure the management of its pension funds.
Rather than 5 boards and 58 trustees, the proposal will bring together the 5 pension plans under one roof to be managed by professional investors and a non-partisan staff.
If approved, New York City will take the politics out of its pension plans and will streamline the asset management process. This restructuring is critical as the pension money needs to be protected and have the greatest opportunity to realize a reasonable rate of return.
In today’s economic environment, when taxpayers are feeling the stress of the economy, it is time to apply best of class governance techniques to New York City’s pension system.
Jon Henes is a partner in the restructuring group at Kirkland & Ellis LLP where he has led some of the most complex restructurings in a variety of industries, including media, chemicals, energy, manufacturing, real estate, retail and telecommunications. Jon has also frequently appeared on CNBC's "Worldwide Exchange" as a guest expert on various financial and economic topics and is a member of the Economic Club of New York.