Big Vacancies Filled, Pension Exodus Is Over… For Now

Some of the pensions that have named CIOs in the past two years include the $76 billion Oregon Investment Council, which hired John Skjervem; the $150 billion New York State Common Retirement Fund, which hired Vicki Fuller; the $77 billion North Carolina Retirement Systems, which last month hired Kevin SigRist; the $26 billion South Carolina Retirement Systems, which promoted Hershel Harper; the $14 billion Kentucky Retirement System, which promoted T.J. Carlson, and the $55 billion Virginia Retirement System, which lured Ronald Schmitz from Oregon.

The $37 billion Maryland State Retirement and Pension System promoted Melissa Moye to be its CIO, and Lee Ann Palladino was promoted to be the CIO at the $25 billion Connecticut Retirement Plans and Trust Funds. Meanwhile at MassPRIM, Michael Trotsky, who also serves as the pension’s executive director, added the CIO role to his duties.

Some of the new private equity chiefs include Réal Desrochers at the $248 billion California Public Employees’ Retirement System, the nation’s largest pension fund. Desrochers had been CIO at the Saudi Arabian Investment Company, but shortly before that he had been the long-time head of private equity at the $153 billion California State Teachers’ retirement System. The $112 billion Texas Teachers’ Retirement System promoted Richard Hall to be its private equity chief, replacing Steve LeBlanc, who left for the private sector.

The $153 billion Florida State Board of Administration promoted Trent Webster to be its private equity chief, replacing Jim Treanor, who also left for the private sector. MassPRIM’s Bailey, who will soon start as that pension’s private equity chief, came from the private sector. He replaced Wayne Smith, who left for advisory shop Pathway Capital Management, where he’s a director. Apart from CalPERS, whose previous private equity chief, Leon Shahinian, resigned amid that pension’s pay-to-play scandal, most of these vacancies were created by private equity chiefs who left for jobs in the private sector.

Unfortunately for sponsors, who prize stability in their LPs, the comparatively low salaries being offered in these roles relative to the private sector mean that many big public pensions will continue to bleed top talent in coming years. “Turnover at pensions is not new,” said Kelly DePonte, a partner at Probitas Partners, a placement agency that often works with big pensions.

Among base salaries that were immediately available, Oregon’s Skjervem will make $350,000 annually, New York Common’s Fuller will make $300,000, North Carolina’s SigRist has a $350,000 salary and MassPRIM’s Trotsky will make $295,000 in salary.

Of these new CIOs, only Oregon’s Skjervem and New York Common’s Fuller came directly from the private sector. The other new CIOs were either promoted from within their pensions (South Carolina’s Harper, Kentucky’s Carlson, Maryland’s Moye, Connecticut’s Palladino and MassPRIM’s Trotsky) or were lured from other pensions (Virginia’s Schmitz and North Carolina’s SigRist). And among the nine CIO departures that originally created these vacancies, a majority (five) left for the private sector, two joined foundations and endowments, one left for another pension, and one retired.  

Another flight risk for top pension talent is the extreme level of salary variance among top investment officials. While Texas Teachers’ Britt Harris IV, the nation’s top paid chief investment officer, earned more than $1 million during 2011, Tim Walsh, the chief investment officer at the $71 billion New Jersey Division of Investment, earned just $192,000 that same year—even though over the last five year period (but not three-year period), New Jersey’s pension system performed better.

MassPRIM’s Trotsky told Buyouts in October that a recent study his pension commissioned revealed that pay at MassPRIM was well below its public pension peers. “We lose just about 100 percent of our top employees to the private sector,” he said.

Solving the problem of turnover would appear to be straightforward: pay CIOs and investment officers more in salary and bonuses. But paying investment officers, say, several times the average annual pension payout of the pensioners that they serve can be controversial, especially if the connection between pay and performance is not well-established.

DePonte said pensions often ask: “How can we justify paying someone at the pension more than the governor of the state? If you look at it that way, paying high wages becomes extremely difficult to do politically.”

There are encouraging signs, however, that pension boards are starting to recognize a connection between salaries and hiring and keeping top-level talent, and that they both inform investment performance. In the case of MassPRIM, Trotsky, the pension’s executive director and chief investment officer, pushed through a proposal to increase the value of incentives that his top investment officers can earn if they produce excess returns.

And at the Virginia Retirement System, the board landed Schmitz by offering him a contract with potential compensation of up to $900,000, nearly triple what he could have earned at Oregon Investment Council. In a 2011 interview with Buyouts, Schmitz confirmed that compensation was a factor in his decision, saying “Oregon is a bit below the mean and Virginia’s offer is a nice step up.”  

At Texas Teachers, CIO Harris was awarded $1.05 million in salary and performance bonuses during 2011; the pension fund also expanded a bonus pool to reward investment officers who outperform their benchmarks.

The other good news for pensions is that despite offering salaries that are lower than comparable work in the private sector, there are still plenty of talented young people who want to work at them, said David Fann, chief executive of TorreyCove Capital Partners, a private equity advisory firm to pensions. Most pensions, he said, “are able to pay a relatively attractive salary of at least $100,000.”

Indeed, in private equity, one of the main reasons that pensions can often recruit top-notch young talent is the same reason they soon lose that talent to the private sector.

“Pensions are basically private equity universities,” said Probitas Partners’s DePonte. “PE is not something you learn at college. It’s an apprenticeship business. And if you’re working for someone like Réal Desrochers at CalPERS, you’re not getting an MBA in private equity, you’re getting a Ph.D.”