Maryland’s Pension Fund Underperforms Despite High Price Wall St. Money Managers

Maryland’s troubled state employee pension fund underperformed a peer group of other state pension funds by two percent last year.
The Maryland Public Policy Institute, which has been covering the state pension system’s woes for years, and the Maryland Tax Education Foundation compared Maryland’s pension fund performance to a peer group of indexed state funds. 
According to data gathered from published comprehensive annual financial reports (CAFRs), market data, and money management fee data, the authors found that peer group of indexed funds returned 12.4 percent versus Maryland, which is run by high priced money managers only returned 10.6 percent.
On five-year annualized investment returns Maryland earned only 0.78 percent versus 1.5 percent for its peers.
The authors argue that Maryland’s use of high-priced Wall Street investment managers has not helped the state’s pension fund “beat the market” as those managers advertise.  The report calculates the opportunity cost of using fund managers at $720 million for last year alone. 
Maryland paid $274 million in 2013 to Wall Street advisors, and $1.5 billion over the last decade, while the state pension fund’s underperformance has cost taxpayers $3.5 billion over the same period.
The report found that the much of the data reveals that actively managed portfolios like Maryland’s can’t beat benchmarked indices.  For example, over the last five years 69 percent of equity funds failed to the beat the S&P index.
The authors suggest that had Maryland dumped the active money managers and achieved average performance $720 million could have been used to decrease fund liabilities, which MPPI pegs at $28.4 billion, or use as an offset to allow the state to cut its annual contribution.
This year, Governor O’Malley cut state’s payment to the pension fund as a major part of his plan to balance the state budget. 
Depending what 10-year period is measured, MPPI notes, the total opportunity cost of using Wall Street money managers ranges from between $2 billion and $3 billion. 

The response from the state pension board and state leaders has been to ignore the problem.  The report authors write:

The response of the System to these facts has been to “shoot the messenger” rather than acknowledge the problem, admit the mistake, and institute reforms. The response of the Governor and the legislature has been to do nothing.

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