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Markets
WALL STREET RAKED IN $1.7 BILLION IN FEES FROM NYC PENSIONS LAST YEAR
* Fees paid to managers rose at faster rate than pension assets
* City pensions’ used 36 private credit firms in fiscal 2023
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Public pensions have latched onto private credit because it offers higher yields
than US government or corporate bonds.
Photographer: Michael Nagle/Bloomberg
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By Martin Z Braun
October 30, 2023 at 9:34 AM HST
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New York City’s pensions paid Wall Street money managers about $1.7 billion in
fees last year, a roughly $150 million increase from the prior year.
Fees paid by the city’s five pensions rose 10%, faster than the growth rate of
assets, according to the city’s annual comprehensive financial report, released
Friday. The value of the funds for the city’s police officers, fire fighters,
teachers, civil service employees, and school district personnel rose about 6%
to $253.3 billion for the fiscal year ending June 30.
The report also showed an increase in fund managers that extend private loans to
companies or buy distressed debt. The pensions used 36 “alternative credit
managers” in fiscal 2023 compared with 27 last year.
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Public pensions have latched onto private credit because it offers higher yields
than US government or corporate bonds, while protecting funds from price swings
in public markets. Investors get paid more because they hold assets that are
less liquid and harder to trade. Private debt comprised 6.7% of total assets
among state pensions with dedicated allocations to the category, according to a
August 2023 report from KBRA.
“While rising interest rates have the potential to negatively impact companies’
cash flows and, ultimately, their ability to make loan payments, investment
returns have been sound despite the elevated percentage of floating rate
obligations within most private debt portfolios,” the KBRA report said.
The city’s five funds used 321 managers, with more than 70% overseeing more
costly alternative assets like private equity, according to the financial
report.
In fiscal 2023, pensions for the city’s retirement funds returned about 8%,
boosted by a rally in domestic and international stocks in the first half of
2023. Since the gain exceeded the funds’ 7% target, the city’s required
contributions to the pensions will decline by about $550 million over the next
five years.
Still, the pensions’ gain was almost four percentage points lower than a
benchmark that represents the return of a portfolio with a mix of 65% equity and
35% fixed income, according to the city.
The five funds are $40.1 billion short off the assets needed to cover promised
benefits, or about 83% funded, according to the financial report. Nationwide, US
state pensions had assets sufficient to cover 78.2% of promised benefits as of
June 30, according to pension consulting firm Wilshire.
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