New York State Comptroller Thomas P. DiNapoli today released an independent fiduciary and conflict of interest review of the New York State Common Retirement Fund (Fund) that commended the Fund for its strong policies and ethical management, stating that DiNapoli’s office “maintains a very high level of ethical, professional and conflict of interest standards.” Funston Advisory Services (FAS), who conducted the review, repeatedly warned, however, that existing constraints on the Fund’s staffing and compensation could have current and future consequences.
“Since taking office, I have sought to establish our state’s pension fund as a leader in transparency, ethics and effectiveness. It’s gratifying to have an independent voice affirm our efforts,” DiNapoli said. “Our staff has helped build one of the nation’s strongest pension funds, but only with competitive compensation and additional resources can we accomplish all that we need to do to manage the Fund effectively and efficiently. Our task going forward will be to expand and enhance our team and our internal expertise to better meet the challenges and risks of an increasingly volatile global market.”
The FAS review determined that DiNapoli met all of his fiduciary duties as the Fund’s trustee:
“The Comptroller consistently acts in the sole interest of the members and beneficiaries of the retirement system. We did not identify any instances where a decision appeared to be contrary to those interests.”
To complete its review, FAS examined over 1,000 contract documents and conducted interviews with staff, advisory committee members, and external service providers. FAS reviewed documents relating to every new investment that closed during the three-year review period and found that all were approved and closed according to the Fund’s sound policies and legal requirements.
The analysis also concluded that:
“While the Fund is currently well-managed, compared to most peers it remains severely understaffed for its scale and complexity, with underdeveloped risk analysis and management capabilities and an over-reliance on outsourced investment management and support functions. In addition, independent compensation benchmarking indicates that [investment] staff compensation levels are in the bottom quartile for similar public pension funds. There is justifiable concern that current staff will leave if compensation is not increased, and it is likely that [the Fund] will struggle to recruit needed new staff and stem turnover at current compensation levels.”
DiNapoli, the Fund’s Chief Investment Officer (CIO) Vicki Fuller, consultants and independent investment advisory committees agree that staffing and compensation need to be addressed and note the cost of enhanced staffing and compensation would be offset by fee savings that would be realized by shifting some costly external management to in-house staff.
The report is the second Fiduciary and Conflict of Interest Review of the Fund undertaken since DiNapoli took office and introduced reforms of the Fund’s operations. The independent review is mandated every three years as part of the regulatory framework established by New York State Department of Insurance (now known as the Department of Financial Services) in 2008.
The first review, released in 2013, commended DiNapoli’s work and made 47 recommendations to further improve the Fund’s policies and procedures. The latest review, covering the period of 2012-2015, concludes the Fund has implemented 40 of those recommendations, despite significant staffing constraints. FAS determined that implementing the remaining seven reforms, as well as the eight new recommendations from the latest report, including creating a formal training program for investment staff, will require additional staffing. A separate compensation review, commissioned by the Fund, found that its staff salaries were well below the median salaries paid to staff at peer pension funds.
This is the first review period entirely under the leadership of CIO Vicki Fuller, who joined the Fund in 2012. The report credits Fuller with many of the Fund’s recent improvements.
“I’m pleased this review reflects the high standards and hard work of our investment staff,” Fuller said. “Global financial markets have changed dramatically over the years. There are market challenges and risks that require the Fund to increase its sophistication, bring more investment expertise in-house and be an increasingly nimble investor. It’s clear that without more staff and improved compensation we cannot operate at the level we need to meet our rate of return.”
The review generally lauded the Fund’s governance, compliance and transparency, as well as its progress in addressing the needs previously identified.
The Comptroller agreed with the recommendations, in particular the need for additional resources.
“The New York State Common Retirement Fund needs to attract and retain the best and brightest investment talent that it can in order to remain one of the best-funded public pension plans in the country,” DiNapoli said. “We’re taking steps and examining all of our options to address the shortage of resources that this report identified.”
Read the Fiduciary and Conflict of Interest Review of the New York State Common Retirement Fund or go to: http://www.osc.state.ny.us/reports/pension/NYSCRF_Fiduciary_and_Conflict_of_Interest_Review_2016.pdf
About the New York State Common Retirement Fund
The New York State Common Retirement Fund is the third largest public pension fund in the United States with estimated assets of $178.1 billion as of March 31, 2016. The Fund holds and invests the assets of the New York State and Local Retirement System on behalf of more than one million state and local government employees and retirees and their beneficiaries. The Fund has consistently been ranked as one of the best managed and best funded plans in the nation. The Fund’s fiscal year ends March 31, 2017.