Why does N.J. pay private financial managers to invest its pension fund money?

A recent state report showed that New Jersey’s pension fund paid more than $720 million in fees and performance bonuses to private financial managers in the fiscal year ending in June 2015.

The news had some people questioning whether the state ought to be paying outside investors that much money for their financial know-how, a practice that’s relatively new but now commonplace among states.

In New Jersey, private investors manage about 30 percent of the assets overseen by the Division of Investment, the office responsible for investing pension fund money. Not long ago, they managed none.

“The state’s policy was to invest all of its long-term money in equities and it was managed by state employees,” said Marc Pfeiffer, assistant director of the Bloustein Local Government Research Center at Rutgers University. “And they did very well.”

But when the recession of the early 2000s began to affect state governments, New Jersey lost around 30 percent of its pension funds and began to reconsider how it invested those assets.

“The world started to switch to diversification,” said Pfieffer. That included changing the types of investments as well as “using outside fund managers, because we saw the rise of hedge funds, which were producing very large returns.”

Treasury officials now turn to private investors for savvier bets that state employees may not be equipped to make.

“This diversification has not only benefited the fund by producing strong returns,” said Christopher Santarelli, a spokesman with the NJ Treasury Department. “It has reduced risk, limiting New Jersey’s exposure to more significant losses during the financial crises of 2008 and 2009.”

But not everyone agrees that it is the best use of the state’s money.

“It’s outrageous that they could justify these kinds of bonuses and commissions,” said Charles Wowkanech, president of the New Jersey AFL-CIO.

“If that money were going back into the [state] fund, the pension system would be a lot healthier.”

Last fiscal year, the state pension fund earned a 4.16 percent rate of return on its investments, including those by state employees and private investors, down from double-digit returns in prior years.

The pension fund ended the fiscal year with $79 billion, roughly $2 billion less than it had in June 2014.