WRS News Online

SWIB Continues to be a Low-Cost Pension Manager

There is a saying, a dollar saved is a dollar earned. For the State of Wisconsin Investment Board, that proved to be the case millions of times over in 2014. By reducing costs through asset allocation, managing more funds internally and passively, and negotiating lower fees for external managers, SWIB’s costs were $207 million less than its peers–substantially below the peer median, according to an independent report from CEM Benchmarking, Inc., an independent provider of objective benchmarking for public pension plans.

“Every dollar we are able to save through our management choices benefits the trust funds just like every dollar we earn through investment returns,” SWIB Executive Director Michael Williamson said. “Controlling costs, along with making money and managing risk, is at the center of our mission to ensure the Wisconsin Retirement System remains among the best funded public pension systems in the country and is able to fulfill the promised retirement benefits to its members.”

Fewer Higher-Cost Assets
SWIB has implemented an investment strategy designed to take less risk and generate favorable returns while helping to protect the Core Fund from the volatility that comes from the stock market. A key to this strategy, which also helps stabilize annuity adjustments and contribution rates, is the diversification of investments.

In addition to investments in stocks, the Core Fund also includes holdings in other asset classes such as real estate, hedge funds and private equity. These assets, while important to the diversification of the Core Fund, can be expensive to manage. SWIB’s decision to investment in fewer higher-cost assets saved $144 million in 2014, according to CEM.

Internal Management, Lower Fees Save Money
As important as the types of assets SWIB chooses to invest in is how those investments are managed. By using more of its own staff and negotiating lower external management fees, SWIB generated an additional $63 million in savings in 2014.

A majority of that savings, $56.5 million, came from SWIB managing more assets internally, approximately 62% of the retirement trust funds, and passively, approximately 40% of assets, than its peers. The value added above market returns to the trust funds, after costs, has been significant, generating $1.5 billion over the past five years. Managing a significant portion of the assets internally helps keep SWIB’s total costs lower than its peers, according to CEM.

“Over the past several years, we have been building a stronger internal management program that is providing a significant financial benefit to the retirement system,” Williamson said. “We have a very talented and skilled staff that is able to manage the assets of the WRS for a fraction of the cost of using external managers. And for investments that our staff is not able to manage internally, we work hard to negotiate the lowest fees possible with the external managers we hire.”

SWIB reports on cost of management to the Board of Trustees and the Legislature annually.