After 13 years, it’s taking months for PSERS, the $70 billion Pennsylvania school pension system, to end its fraught relationship with Aon Investments USA, the consultant that tracks its gains and losses.
On July 31, PSERS filed a lawsuit against Aon, accusing the firm of breach of contract, breach of fiduciary duty, and other civil offenses, alleging it committed errors which misled the system to exaggerate its profits for 2011-2020.
When the errors were fixed, back in 2021, 100,000 mostly younger, local school employees got an unpleasant surprise: Due to PSERS’ underperformance, they had to pay an average of $300 a year extra into the pension plan for the next three years. Last fall, trustees agreed to hire another firm, sue Aon, and end Aon’s current five-year, $3.4 million contract early. In the suit, PSERS demands Aon reimburse at least $8.8 million that PSERS paid for the investigations, defense lawyers, and consultants it had to hire to sort this out.
And yet on Aug. 10, Aon staff were back at PSERS’ board meeting, reporting to PSERS trustees on their latest measurement of PSERS profits and losses. Indeed, PSERS plans to use information Aon compiled in its pending 10-year review that will determine how much teachers will have to pay from 2024–2027.
If Aon performed poorly enough to end its contract and warrant a lawsuit, why is it still doing this work for PSERS?
‘A seamless transition’
Back in June, PSERS hired replacements for Aon. Verus Advisory, another firm helping PSERS manage its investments, agreed to take over Aon’s role, including the performance calculation that helps decide payroll deductions.
But “to ensure a seamless transition from Aon to Verus, Aon continues to assist PSERS,” including prepping performance data for the upcoming review, said PSERS spokesperson Evelyn Williams.
The work will be checked by yet another consultant, Adviser Compliance Associates LLC (ACA), the same firm that checked Aon’s prior work and failed to find errors.
“We anticipate that Aon’s assistance in the areas noted above will be complete later this year,” Williams concluded.
Aon won’t comment on the lawsuit, but has said in legal proceedings that PSERS’ claims about its work are false.
Indeed, Womble Bond Dickinson, one of the law firm whose fees PSERS wants Aon to reimburse, has revisited an internal investigation that was supposed to settle the question of what went wrong last time, after acknowledging conflicts between statements made to different lawyers by senior PSERS staff.
Better this time?
Assuming this year’s report, due in December, doesn’t have to be revised like the last one, more than 100,000 Pennsylvania school workers hired since 2011 will learn if they’ll get a break, trimming half a percentage point from the roughly 8% of their paychecks they are required to contribute to the retirement plan.
For teachers making an annual salary of $60,000, that could total $300 a year in savings.
Together, school staff pay around $1 billion a year into the retirement plan, through payroll deductions. State and school district taxpayers pay another $5 billion; plus, a varying amount comes from around $70 billion in state funds invested to pay future pensions, depending on how much they make or lose in a year.
The state’s “shared-risk” pension law is designed to reward, or punish, school employees, when those investments do significantly better or worse than expected.
Every three years PSERS and its sister agency for state workers, the State Employees’ Retirement System, review past investment profits and determine whether public workers hired since 2011 ought to pay more, less, or about the same, toward their pensions, for the next three years.
That depends on whether pension investment managers roughly met, significantly beat, or fell badly short of their boards’ investment return goals. For the past 10 years, PSERS’ goal is an average of around 7.3%.
When PSERS missed its long-term goal last time, teachers hired since 2011 were hit with a half-percent surcharge, boosting their pension payroll deduction to that average 8%. (The most recent hires had to pay a little more — a three-quarters of a percent surcharge.)
But under provisions of the shared-risk law, if the dozens of state employees and hundreds of outside Wall Street money managers who invest PSERS funds managed to come within one percentage point of the 7.3% target for the past 10 years, the half-percent surcharge will end, and they’ll go back to paying around 7.5% —for the next three years.
On the other hand, if their investment performance comes in lower, teachers and other school staff would keep paying the higher rates. (And if the 10-year average return came in much higher, they could get a further reduction.)
What are the chances?
The 10-year period PSERS is reviewing ended June 30.
PSERS says it won’t publish last year’s results until later this year. But, for the first nine years, the system has reported an average of roughly 7.3% annual returns per year, matching its long-term target.
The smaller State Employees’ Retirement System, which uses a calendar fiscal year (and thereby missed the stock market’s rapid rise late this spring), says it averaged 6.8% a year over the 10 years that ended on Dec. 30. That’s below target, but still high enough that state judges, troopers, corrections officers, legislators, state college staff, and other state workers won’t have to pay a surcharge for the next three years.
California’s CalPERS system, which, like PSERS, includes a range of public and private, U.S. and foreign investments, has already reported its return for fiscal 2023 at a 5.8% return on investments.
A similar return for PSERS would cut the contribution rate back to where it was before last time’s error, saving hundreds of dollars each for thousands of PSERS members.
