It’s Cost Cutting Time at Pension Funds

Is this a sign of things to come in LP-Land? The State of Indiana has proposed legislation that will merge the administrative functions and advisory boards of Indiana State Teachers Retirement Fund and Indiana Public Employees Retirement Fund.

To be clear, they’re not merging the funds (so don’t be deceived by this Associated Press article).

It’s a smart move considering the funds have both posted sizable losses this year. It will save $8.9 million in one-time administrative costs and $1.2 million in annual savings. The funds themselves will stay separate, but with one executive director and a single investment board. Right now Terren B. Magid is the executive director of PERF and Steve Russo is the executive director of TRS.

The first question is, will this lead to a change in strategy? The investment officers won’t change, but a whole new board with a new executive director could lead to some allocation shifts going forward, no? The funds wouldn’t comment, since the legislation still requires a vote in the House. (It passed 50-0 in the Senate, if that’s any indication as to its likely outcome.)

It is important to note that Indiana State TRF has a much smaller PE allocation than Indiana PERF. TRF manages $6.8 billion; it began its alternatives program in 2000 with a 5% allocation. It is 5.7% allocated as of its latest annual report and has made investments in Blackstone Group, Warburg Pincus and Cinven.

Meanwhile, Indiana PERF manages $11.4 billion and has recently raised its private equity allocation goal to 10% from 8% as part of its increase to 30% in alternatives. PERF has invested in Herkules Capital, Avenue Special Situations Fund V LP, Towerbrook Investors, Natural Gas Partners, New Mountain Capital, and Lindsay Goldberg.

The second question is, will we see more of this at state pension funds with who’ve seen their portfolios shrink? We should, and fast, if Bloomberg News’ prediction of a “fomenting” pension fund bailout is correct.

PS. Here is the proposed legislation: Senate Bill 0535. Here is PERF’s 2008 Investment Report. And here is TRF’s 2008 Investment Report.