How the PSERS pension fund ruined its performance, forcing Pa. Ensign to pay more
After Pennsylvania’s largest pension plan botched a crucial financial calculation, the FBI launched an investigation, the fund’s board launched its own investigation, and 100,000 public school workers suddenly had to pay more into the system. of retirement.
Now, The Inquirer and Spotlight PA have obtained new internal funds documents that shed light on this subsequent error. The hardware traced the error to “data corruption” in just one month – April 2015 – over the nearly ten-year period examined for the calculation.
The error was minimal. It falsely increased the performance of the PSERS fund by just $ 64 billion by about a third of a percentage point in a fiscal quarter. Even so, it was just enough to mistakenly mark the fund’s financial performance against a key state-mandated hurdle used to assess performance.
The documents reveal that a fund consultant, Aon, blamed the error on his office staff for entering the wrong data. The material also shows that although the fund hired a consultant, the ACA Compliance Group, to verify the calculations, the consultant performed only limited audits and skipped the month with critical errors.
Experts say the fund has followed the wrong path from the start. They said the plan’s leaders erred months before the failed calculation by dismissing a warning that it avoided unaudited numbers – those that have not been verified by independent analysts. This choice to use new untested numbers had the effect of making the results look better than they actually were. Then, those critics said, the PSERS hampered the ACA review by limiting its scope.
As Robert Lavenberg, a CPA and lawyer who previously led accounting giant BDO’s retirement audits, said: If PSERS wanted to do a thorough review, “you’d do a clean sweep” and check monthly, not just some.
The headaches for PSERS – the retirement system for public school employees – began this spring when its board admitted to approving a bad number for its investment profits. The mistake was significant because as part of a state pension reform, known as risk sharing, active teachers and other school employees hired since 2011 have to pay more to fund the pension system. retirement of 265,000 retirees if returns do not meet benchmarks.
The board triumphantly declared last year that its investment strategies had paid off. He claimed to have placed the fund above the benchmark hurdle, sparing teachers and other staff a raise. In April, he reversed course and ditched the old performance number. He officially adopted a new, lower one and announced that workers would indeed pay more. The increase begins on July 1.
The council had no choice but to fix the number. A prominent tax lawyer has warned the council that failing to do so would be “catastrophic” and force half a million current and retired school workers to immediately pay future pension taxes.
Shortly after the council’s overthrow, The Inquirer reported that the FBI was investigating the calculation, as well as the fund’s spending on real estate in Harrisburg. In subpoenas, federal prosecutors demanded every piece of working paper, from drafts to final drafts, from the pension fund and Aon and ACA consultants dealing with the wrong number.
PSERS conducted its own internal investigation. Records show that some people involved in the review question whether the first digit is not at all a mistake, but a deliberate attempt to inflate the fund’s performance.
And in documents obtained by The Inquirer and Spotlight PA, officials from the state’s Treasury Department – Treasurer Stacy Garrity is a member of the pension board – asked, “Who determined or wrote the scope of the work? of the ACA project and how was it decided? ”
ACA said he wasn’t to blame and just followed what he was asked to do. “ACA was hired to validate the calculation methodology over a defined period of time by performing tests on a sample basis, not to validate or calculate the performance return,” he said in a brief statement. “ACA provided the services it was hired for – our calculation was based on the data provided to us, which we believed now contained an error.”
Indeed, in the documents, consultant Aon, a global company with a PSERS contract of $ 763,000, says it was responsible for the bad numbers from April 2015. He attributes the problem only to “inadvertent office errors at the level of data entry”.
In letters of apology to the retirement system, Aon was contrite even as he downplayed the error.
“On behalf of Aon, please know that we very much appreciate the patience of PSERS as we have struggled to unravel what appear to be data entry errors, as unfortunate as they are,” Steve Voss, Director of North Investments. Chicago-based Americans wrote on April 16.
In the letter, the company does not name the employee (s) who made the error. He declined to discuss the calculation, as did PSERS.
Perhaps the most crucial of the company’s accounting tasks for the pension system has been to compile this performance figure. To do this, Aon had to review nine years of the fund’s earnings, from mid-2011 to mid-2020. The fund had to overcome a “hurdle” of an average annual return of 6.36% to spare teachers and school employees a new tax – and embarrassment for the fund management.
To be sure, the bar seemed relatively low. After all, the S&P 500 index of large US stocks has paid more than 10% a year during those years.
But the test arose amid growing criticism that the plan had performed poorly at best for many years and, at worst, was a dupe of soaring prices, underperforming hedge funds and private equity billionaires. .
Additionally, even before the calculation, PSERS board member Joe Torsella, then state treasurer, had questioned the fund’s executive director Glen Grell on why Aon and Grell had returned. years back to reintegrate and improve the performance of certain fund investments, using unaudited numbers. Grell replied that the changes were routine.
In short, while the pension fund had easily passed two previous reviews of “shared risk” in 2014 and 2017, the test for 2020 was a nail-biting. PSERS managers were nervous.
In a memo. Morgan Lewis, one of at least three law firms hired by PSERS after the scandal erupted, said Aon was made aware of the fund’s concern over its failure, or as said the Philadelphia law firm, “Aon was made aware of this sensitivity. . “
Lavenberg asked why Aon had been so alerted, saying it could have telegraphed the executives’ desired outcome to the consultant. “Wink wink. Nudge, nudge,” he said.
The board was also anxious enough to hire New York-based ACA for $ 60,000 to verify Aon’s work.
The majority of the board in December 2020 said it had passed the main hurdle – albeit barely. He voted to officially declare that annual investments had increased by 6.38%.
Torsella and two other members of the 15-member board abstained in the vote, expressing doubts about the number. But fund management insisted the new result was solid.
In fact, fund executives in a PowerPoint presentation to the board and in a statement to the media said both Aon and ACA endorsed the figure.
“ACA has confirmed the nine-year market value return at 6.38%, which is above the 6.36% risk share threshold,” the board said.
But had ACA, in fact, checked the number?
In a private April 16 memo to the board, ACA explained that its method was sampling, not verification. In the same note, ACA explained why it failed to detect the error. He said he sampled the calculations in just 40 of the 108 months of the 2011-2020 review period.
“April 2015 was not one of the months for ACA’s sample selection and, therefore, ACA did not detect any missing cash flows in the AON calculations for that month,” wrote the society.
As it turns out, Torsella has long had doubts about how the fund measured performance for 2015 – doing so months before the December vote.
Torsella first asked about the 2015 numbers in a letter to Grell last August, noting with skepticism that fund staff were using unaudited numbers and increasing performance for the year “five years after the fact. “.
Grell responded that the fund has new and better data on the performance of certain investments in private companies. Experts say that the valuation of these private investments is inherently subjective, unlike the explicit values placed on companies sold on the stock markets.
John McLaughlin, an auditor who runs his own business in Newtown Square after stints at Aramark and BDO, said fund managers seemed too eager to approve the new numbers. “The council must push back [against management]if you need more time to get the right answer, ”McLaughlin said in an interview. “Don’t blame the accountant. Blame the management. “
None of the documents obtained by The Inquirer and Spotlight PA explore or mention the role of PSERS management in the reassessment of the 2015 figures.
But according to experts who reviewed the documents, ACA ultimately corrected the PSERS data to numbers its auditors had approved.
Mr Lavenberg said: “Why you would one day use an estimate, if you had a verified number for the same time period, makes no sense.”