Maryland State Pension Now Required to Report Carried Interest on Assets

The new bill, combined with existing state law, means the State Retirement and Pension System must now report all fees paid to outside investment managers.

A bill signed by Maryland Governor Larry Hogan requires the State Retirement and Pension System (SRPS) to report annually the amount of carried interest on any assets in the system, effective July 1.

The first such report must include data from fiscal 2015 through 2019.

SRPS is subject to a fee cap of 0.5% of the market value of its assets, not including real estate or alternative investments, which are not subject to any fee cap. Under current law, by December 31 of each year, the SRPS Board of Trustees is required to report to the General Assembly the actual amount spent for investment management services during the preceding fiscal year.

According to an analysis by the General Assembly’s Department of Legislative Services, in fiscal 2018, SRPS investments returned 8.1% net of fees paid. In fiscal 2018, SRPS finished the year with assets of almost $52.0 billion, so investment management fees of $372 million in that year represented about 0.72% of assets.

The analysis explains that carried interest is earned by investment managers in private markets (e.g., private equity, private real estate) and is the amount that a general partner (investment manager) retains as an ownership interest in the investment profits generated by the partnership. The Department of Legislative Services says carried interest typically represents 20% of the profits generated, but that proportion may be negotiated among the parties involved. As carried interest represents shared profits that are retained by the general partner rather than paid by the investor, it is not typically reported as investment fees paid.

Recently, several public pension plans, including the California Public Employees’ Retirement System (CalPERS) and the Pennsylvania Public School Employees’ Retirement System (PSERS) have released reports showing carried interest earned by general partners managing investments on their behalf.

In its initial report, CalPERS reported that general partners earned $700 million in carried interest in fiscal 2015. PSERS reported that general partners earned $5.17 billion in cumulative carried interest from 1980 through 2017. For calendar 2017, PSERS reported that general partners earned $669 million in carried interest.

In 2016, California Governor Jerry Brown signed a bill requiring public pension funds in the state to disclose fees paid to private equity investment firms.

“For new contracts entered into on and after January 1, 2017, and for existing contracts for which a new capital commitment is made on or after January 1, 2017,” the bill “would require a public investment fund, as defined, to require alternative investment vehicles, as defined, to make specified disclosures regarding fees, expenses, and carried interest in connection with these vehicles and the underlying investments, as well as other specified information.”