South Carolina’s $26 billion pension fund paid excessive fees while trailing peers after an overseer invested half the plan’s assets with hedge funds and private-equity firms, state Treasurer Curtis Loftis said.
The South Carolina Retirement System would have done better between fiscal 2007 and 2011 by investing in a mix of 40 percent bonds and 60 percent equities, Loftis said yesterday in a statement prepared for a legislative hearing. He said Robert Borden, the pension’s chief investment officer until he resigned in December, oversaw a plan that placed 49.3 percent of assets in “alternative investments.”
The fund paid $343.6 million in investment-management fees, or 1.3 percent of assets last year, compared with 0.6 percent spent by the $54 billion Virginia Retirement System, Loftis said in the report. In 2005, the South Carolina fund’s comparable costs were about $22.4 million, or 0.9 percent of assets, according to Loftis.
“We have an underperforming pension fund that is expensive, overly complicated and places the taxpayers and pension plan members at excessive risk,” Loftis said. “Many of these deals were constructed outside the normal framework of the pension plan and if problems are found they will take long periods of time to unwind.”
The South Carolina fund had a return on assets of about 18 percent last year, compared with about 21 percent for an index of similar plans from Bank of New York Mellon Corp., according to Loftis. He said allocations of 60 percent bonds and 40 percent equities would have produced $3.4 billion more in earnings than the fund had from 2007 through 2011.
Borden defended the pension asset allocations in an interview yesterday.
“We ranked in the top third of our peer group over the last three years,” Borden said by telephone. “The plan was fairly defensively postured going into June,” he said, citing concerns that equities would decline because of issues tied to European debt.
More than three quarters of the pension is committed to partnerships managed by third parties, and the structure of the arrangements was known only to Borden among plan officials, Loftis said.
For the five years through June, the South Carolina fund had annualized returns on assets averaging 3.95 percent compared with 4.91 percent for public pensions with assets greater than $5 billion, according to data from the pension plan and Wilshire Associates in Santa Monica, California.
13% Average Allocation
Borden, who oversaw the plan’s assets from 2006 until he left in December, prompted allocations into such areas as real estate, hedge and private-equity funds, as a way to diversify, according to Loftis. The average amount invested in alternatives at other public pensions was about 13 percent in 2010, he said. He cited figures from the National Association of State Retirement Administrators.
Borden has joined a money management firm in Chapel Hill, North Carolina. Adam Jordan, chief of staff at the South Carolina fund, didn’t respond to a telephone call seeking comment on the Loftis report.