Big Massachusetts funds
prepare to unite, set new investment options for local
plans
Massachusetts Treasury officials are making swift
progress on two projects they hope will together make the
state pension system more efficient and effective. Under
new regulations, the Bay State's 104 local retirement
systems can now invest through the Pension Reserves
Investment Management fund according to their own asset
allocations, rather than PRIM's. And in late June, the
Treasury persuaded Governor William Weld to veto an
implementation plan that would have delayed the eventual
merger of PRIM and the $8.5 billion Massachusetts State
Teachers and Employees Retirement System.
PRIM was created as a flagship investment vehicle for
Massachusetts towns and counties. The $7.5 billion
superfund designed the new cafeteria-style investment
system, which Treasury officials will begin actively
marketing this summer, as a way of attracting more local
funds, says Executive Director Gregory White. Local boards
can now use the PRIM asset mix, choose more or less of
certain categories, or only invest in certain asset
classes.
Winning approval for the new regulations was an 18-month
battle for Treasurer Joseph Malone and his lieutenants as
they crusade to overhaul the Massachusetts state pension
system. And gaining approval for the merger required
overcoming a go-slow agenda pushed by State Senate
Democrats, who wanted a five-year impact study to be
performed first.
Investing through PRIM offers local governments
economies of scale, plus significantly reduced paperwork
with the state's pension watchdog, the Public Employee
Retirement Administration. But one key problem from PRIM's
inception in the mid-1980s was that local systems had to
adopt PRIM's asset mix, which was sometimes at odds with
their own goals. The Norfolk County Retirement System, an
early PRIM advocate, had a disproportionate number of
employees in high-risk professions-police and
firefighting-and thus set goals that required a more
aggressive asset mix. When Norfolk concluded in 1992 that
it should have more of its assets in US equities than PRIM
was providing, it had to pull out.
Other local investors shrank away when unwise and
indiscriminate real estate and alternative investments
tanked in the early 1990s, sending PRIM's performance
numbers-respectable in the long term-into a tailspin.
Promised state-subsidized bonuses for signing a five-year
agreement to invest through PRIM began to peter out and
eventually disappeared from the budget. And local fund
administrators, running scared of perennial, often
unsuccessful, legislative attempts to reduce the influence
of local governments, feared PRIM would eventually take
over all local retirement systems.
The result is that today PRIM only manages assets for 27
fully or partly participating local systems-a number that
has remained roughly the same for the past five years.
Local funds comprise about $500 million of PRIM's
assets.
Recordkeeping is critical to the success of the ˆ la
carte system. PRIM officials and their custodian, State
Street Bank & Trust, devised a new program that breaks
down operating costs and returns by asset class, so that
the fund can prorate investment returns and management fees
to local systems.
The new system also separates recordkeeping for the PRIM
core-the funds it invests for the state, and for those
funds that embrace the PRIM asset mix-from the ˆ la carte
portfolios. This way, substantial investment in
international equities by local funds, for example, will
not end up overweighting PRIM's overall commitment to the
asset class.
Segmented accounts in US and foreign stocks and bonds
will be available later this summer, White says. A la carte
accounts for alternative investments and real
estate-difficult to quickly value, and therefore hard to
fit into the recordkeeping system-will be available
later.
Norfolk County Treasurer Robert Hall, who oversees the
county's $250 million retirement fund, says he hopes this
will be sooner rather than later: He wants to consider
hiring PRIM to manage a $5 million alternatives mandate he
is looking to fund before fall. "I've been advocating PRIM
do this ever since there was a PRIM," he said. "It opens a
world of investment opportunity for smaller funds."
Florence Pires, executive secretary for the $120 million
Fall River Contributory Retirement System, agrees. Fall
River's board members will consider using PRIM to fill
their non-US equity assignment, she says, because the
superfund could offer a cheaper rate than most managers
would for a commingled portfolio. PRIM has significantly
improved its performance since 1992, in part through
hardball negotiating and wider implementation of
performance-based fees which have helped it to cut its
average operating costs from 62 basis points to 41 (see
"Cinderella Story," Plan Sponsor, May 1994).
Merger mania
With the cafeteria system now installed, PRIM officials
turn to their next challenge-merging the fund with MASTERS.
"We should have never had a second pension fund," says
Malone, a Republican who is quick to mention that his
Democratic predecessors built PRIM. The treasurer argues
that combining staffs and portfolios could save as much as
$15 million in annual operating costs.
Earlier this year, the state House of Representatives
approved a state budget that included enabling legislation
for the merger. But the Senate's version would have
required MASTERS and PRIM to submit an implementation plan
to the Senate and place at least $5 million in cost savings
from consolidation into a separate Pension Adjustment
Fund.
The adjustment fund would allow legislators to see the
captured savings-and perhaps use them to help fund
cost-of-living increases in the state's 40-year liability
funding schedule. But Malone said the Legislature was not
clear on what it would do with the fund, and accused Senate
Democrats of foot-dragging. Governor Weld agreed, and last
month used the line-item veto to kill the implementation
plan. The full Legislature is now expected to vote on the
bill, without this provision, in the fall, and Weld has
said he will block any attempts to derail the merger.
Meanwhile, MASTERS and PRIM are already taking steps to
ease the switch to a combined fund. They now share the same
general consultant, Wilshire Associates. Both use State
Street Bank as custodian, for a joint annual fee of
$700,000. The funds have compatible information systems.
And officials successfully lobbied the state to permit
securities transfer between the two funds, eliminating
significant liquidation and repurchasing costs.
MASTERS has turned over its real estate and alternative
investment portfolios to PRIM, eliminating the need for
dual sets of consultants for those asset classes. And both
funds have openly communicated and worked together to slash
their operating costs and improved performance: "We're
doing more and it's costing less," says First Deputy
Treasurer Thomas Trimarco, who directly oversees
MASTERS.
If the two funds are joined into a $16 billion statewide
scheme, local funds could still invest as they currently do
in PRIM, White says. While the potential makeup of a united
fund is still under construction, officials have chosen a
target asset mix (see chart).
But they have yet to determine staff composition, or who
would be chief investment officer of the combined fund. The
two funds currently employ a total of 20 staff, but many
MASTERS employees already share duties with PRIM or
Treasury. The consolidated staff will likely total about 16
people, says White.
Malone, White, and Trimarco all point out that merging
the funds would be a winning move for taxpayers and
pensioners. The losers in the deal would be some of the
50-plus investment managers who now serve the funds.
Officials agree that no more than 40 of those would survive
consolidation.