WRS News Online

Pension Funds Plan to Increase Internal Management

Over the next three years, a growing number of public pension funds across the country reportedly plan to reduce their dependence on outside money management firms by overseeing more investments in-house — a practice the State of Wisconsin Investment Board has been following for more than a decade.

A recent global survey from State Street, a worldwide financial services holding company, found that 45% of public pension funds — including even the largest funds such as the California Public Employees' Retirement System (CalPERS) and the California State Teachers' Retirement System (CalSTRS) — plan to increase the amount of funds they manage internally. CalPERS announced earlier this year it had reduced the number of outside managers used by 25%. CalSTRS is currently managing approximately 49% of its portfolios in-house and plans to raise that number to 58%.

Pension funds are looking more to internal management for a variety of reasons, including better oversight of the investments, but most of all to decrease costs. However, the process to increase internal management of funds is not always an easy one for public pensions. Many public pension funds face governance issues that keep them from moving quickly to bring more funds in-house.

SWIB, with the support of the governor and the state legislature, has the flexibility to build a strong internal management program. Over the years, this flexibility has provided a significant financial benefit to the retirement system. Since 2007, SWIB has increased the share of the state's retirement funds managed internally from 21% to almost 67% today.

"We recognize that having highly-qualified money managers on staff benefits Wisconsin, our members and the state's public employers," SWIB Executive Director Michael Williamson said. "Over time, we have put in place an internal management strategy that allows us to better oversee the investment funds and lowers the cost of management for those funds. Internal management is part of the reason the Wisconsin Retirement System is one of the best-funded pension funds in the country."

The net savings from SWIB's internal management initiative is $57 million per year. This amounts to about one-fifth of the cost to hire outside money managers to invest in the same assets externally.