NYC Pensions Revamp Asset Mgmt Unit after Scathing Report
The New York City Pension Funds office has overhauled its asset management unit after a damning report last year found a widespread lack of operational and risk processes.
The $170.5 billion system has adopted formal investment committee processes, hired risk management staff and adopted new technology as part of sweeping efforts to improve middle- and back-office processes, compliance and risk controls.
The pension system this month outlined 59 separate changes to its Bureau of Asset Management (BAM). These cut across six risk and operational categories and have, or will be, completed throughout 2016 and 2017, according to a Feb. 15 presentation seen by FundFire. These changes are led by former TIAA technology and operations v.p. Cara Schnapel, who was hired in February 2016, a month after an independent report found New York City Employees’ Retirement System (NYCERS) had compromised its ability to act as a fiduciary or manage operational risk due to having such poor oversight.
One change the system has made is to standardize BAM’s investment committee, creating, for the first time, a formal investment committee process.
"Over the past two years we have formalized and standardized both our due diligence and manager approval processes. All BAM proposals that are heard by our five Systems boards must be pre-approved by this internal investment committee," a spokesman for the comptroller writes in response to emailed questions.
Another change listed in the presentation states the system "proposed new asset allocations" in Q3 although no further detail is given.
Risk management has been a key theme of the changes.
The pension will install a new risk management system, for which it is reviewing responses to an RFP released in Q4, 2016. A vendor will be chosen in Q1, according to the presentation document. The system also shifted to a State Street product after dropping the QED accounting platform and moving away from using spreadsheets.
In addition, BAM will work with the NYC Comptroller’s Bureau of Accountancy to streamline fund accounting processes.
A number of changes are directed at revamping middle office functions, which will be run by Lynne Fleischman, director of investment operations support. She was brought on in 2017 and previously worked at EY and Citi, according to a LinkedIn profile. She oversees 24 support roles, which will grow to 27 throughout 2017. Nine of these roles were new in 2016, including a research and management support function and system support and change management role, while a further three – all third party services roles – will be created this year, according to the presentation. A comptroller spokesman did not break out the cost of the staff increase, but says it was accounted for in the 2016 budget.
The Comptroller’s office says no single change was more important than others, but that "the critical difference is that the Comptroller and BAM leaderships now have a new focus on addressing long-standing, complicated organizational issues, from updating the accounting platform to building compliance and middle-office capacity," the spokesman writes.
Large public plans can often resemble sizeable asset managers, but often fall short on operational resources, says Freeman Wood, principal for Mercer Sentinel, the investment consultant’s operational unit.
"We’re seeing a very significant increase in public pension as well as private organizations, asset managers, private corporate pensions, endowments and foundations, all really starting to look at this type of analysis – internal controls, associated risks. This is definitely growing and there is increased demand for doing that," he says.
There are risks to a pension executing a campaign of sweeping changes, but the immediate friction is often worthwhile, he says.
"There are clearly short-term costs, but the longer-term objective is to make things more efficient. That leads to lower risk. Trying to make a process stronger, well controlled, but also efficient – getting to a spot where you’re not adding incremental costs in the long haul."
Another area the pension system is targeting is on-site manager due diligence, according to comments made by Scott Evans, deputy comptroller for asset management, chief investment officer for New York City Retirement Systems, during a May meeting.
Prior to his arrival in 2014, the pension system did no site visits as part of its external manager due diligence, he said.
"It’s just not good due diligence. You have got to go out, you have got to meet not only the heads, but you have to meet the 14 people who are in the shop, running the organization, meet the compliance people, talk to the operations people, see for yourself what kind of firm you are investing in," he said.
The system’s $300,000 travel budget will go towards visiting managers, including those overseas, he adds.
"Our people will travel to Edinburgh, Scotland to visit them. They will not be playing golf on the trip. They will not be staying in fancy hotels; they will not be flying first class… But if we can’t afford to send people to Edinburgh to kick the tires of the manager that we have hired from Edinburgh, we shouldn’t hire an Edinburgh fund manager."
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