Rescaling of American public pension finance: are state and local plans running away from Wall Street?

摘要

Thwarted by the failures of investment managers and consultants, institutional investors are increasingly interested in bypassing private contractors to invest their assets. State and local pension plans, which face unfunded liabilities worth US$1.2 trillion, could save billions of taxpayers' money annually by insourcing long-term direct investments in private markets and by outsourcing their public markets investment to low-cost passive fund providers. Hitherto, there is little comprehensive evidence on their actual practices in both respects. This paper addresses this gap empirically. It assesses the investment strategies of a sample of 31 state and local pension plans in conjunction with the evolution of 12 leading national asset management centres (AMCs) between 2006 and 2012. The results show that public pension funds manage close to one-third of their assets in-house. Preliminary econometric analysis shows the significance yet limited influence of economies of scale and suggests that geographical distance from AMCs is associated with higher levels of insourcing. Overall, state and local plans display a high degree of institutional and geographical heterogeneity. In light of these findings, it is argued that public pension management is to a large extent driven by bottom-up local political processes that undermine the implementation of sound investment management arrangements.