N.J. Unions Call on Pension Plan to Get Out of Alternatives

The New Jersey State AFL-CIO and its affiliated public employee unions presented a plan to the State Investment Council to responsibly scale back the percentage of alternative investments in the state pension fund portfolio.

The concerns of public employee unions over asset management fees have intensified as the percentage of alternative investments in the state pension system has grown, according to a statement on the state AFL-CIO website. In fiscal year 2015 (FY15), 36% of New Jersey’s pension fund portfolio was invested in alternatives such as hedge funds and private equity, significantly higher than the national average of 25% invested in alternatives. These alternative investments cost New Jersey $701 million in fees and bonuses in FY15, the unions contend. The year before, the tab was $600 million.

“The performance of the alternative investments does not justify their outrageous cost,” says New Jersey State AFL-CIO President Charles Wowkanech.

The plan developed by independent pension system analyst Jeff Hooke of Focus Investment Bank charts a path forward for the unions to work with the investment policy committee on FY17 allocations that diminish pension investments in hedge funds and private equity. The new asset allocation models should re-allocate the hedge fund money into a 60/40 mix of publicly traded U.S. stocks and bonds. Similarly, models should be developed that let private equity commitments “run off” over time with the freed up cash invested in public equities, mostly managed in-house.

“The idea is to mirror risk/return attributes with lower fees, thus boosting projected returns,” says Hooke, a consultant to the New Jersey State AFL-CIO and the New Jersey Public Pension Coalition.