It’s not about the money

The issue of how much an investment professional earns managing the assets of a public pension fund compared with what money managers earn at private investment firms often crops up in conversation and has done for nearly a decade, underscoring the point that it is not an easy one to resolve.

We were reminded of it when earlier this year, two major public pension systems – the New York City Retirement System (NYCRS) and the Florida State Board of Administration (FSBA) – approved significant increases for dozens of high-level investment officials either in the form of base salary increases, as was the case at NYCRS, or an incentive pay plan, which FSBA implemented in July.

The decision by both organisations was the result of studies; each one commissioned to determine how they fared in comparison with similar-sized pension funds. Finding that they trailed their peers, they decided bumping up pay – in some cases by as much as 75 percent – was imperative in order to not only attract but perhaps, even more importantly, retain the necessary talent to effectively manage their sizeable portfolios of $165.5 billion and $180.3 billion, respectively.

The need to attract and retain talent is at the core of the pay debate. The California Public Employees’ Retirement System (CalPERS), which with total assets under management (AUM) of $301 billion is the largest public pension fund in the US, is in the process of hiring a primary compensation consultant “to provide ongoing, independent compensation expertise,” according to recent meeting materials. Its performance, compensation and talent management committee is concerned that potential misalignment with relevant market compensation could make hiring and retaining qualified candidates difficult.

According to our research and interviews with industry experts, the larger pension funds are regularly monitoring the market to ensure they remain competitive. For example, CalPERS as well as the second-largest public pension fund in the country, the California State Teachers’ Retirement System (CalSTRS), conduct competitive market assessments that include both public and private peers every two years.

Trying to narrow the gap makes sense especially as more public pensions look to cut expensive fees, reducing the number of external managers they use and bringing more of the management activities in-house. Considering the axiom ‘you get what you pay for’, savings on salaries may not result in savings at all if returns on investment suffer as a result.

That said, the truth is that pay in the public sector will never be on a par with that of the private sector. But when making comparisons, one needs to look beyond the pay cheque.

As one investment professional who spent more than a decade on Wall Street and now works for the public sector told Infrastructure Investor: “If you do a bad deal at fund manager XYZ and that firm cannot raise another fund, you’re out of luck, so there’s a lot less at risk when you work in the public sector.” 

In addition to a less stressful environment, the public sector also provides greater job security, a pension and regular hours. “When we look at compensation, people often neglect the value of a pension which is somewhat ironic in the space,” this person said. Not having to work long hours also frees up time for other, non-work related activities. “I can now coach my kids’ teams, I don’t have to worry about cancelling vacation. It’s very different,” this person added.

There’s a lot to be said for having a healthy work-life balance, especially at a time when the more awareness there is regarding its significance, the more it seems to elude today’s society.
Maybe the issue of compensation in the public sector versus the private sector will never be fully resolved. But the added benefits the public sector offers should certainly be included in the discussion. In the end, it comes down to a basic principle – you win some, you lose some.