Final PSERS report suggests how the Pa. school pension should prevent errors, defuse conflicts of interest

Four years after federal investigations of exaggerated investment returns and secretive land deals rocked PSERS, Pennsylvania’s $77 billion school pension agency, the firm its trustees hired for an internal investigation has urged the board to adopt reforms to avoid future errors and conflicts of interest by its managers, who include some of the state’s highest-paid employees.

PSERS has paid Womble Bond Dickinson $1.5 million since hiring the London-based multinational law firm in 2021. In early 2022, its team, led by lawyer Claire J. Rauscher, issued a detailed but inconclusive report. Supporters of PSERS’s then managers called that report an exoneration because it did not identify illegal activity, though the firm said it was unable to get answers to some queries.

The embarrassing revelations, leading to a downward revision of the system’s 2011-20 returns and a three-year increase in pension contributions by 100,000 mostly younger teachers to make up part of the shortfall, sparked a division in PSERS’s board of trustees, followed by the departure and replacement of the system’s top officers. Aon Investments USA, a PSERS data consultant, agreed to pay $7 million to PSERS and $1.5 million to the Securities and Exchange Commission to settle civil accusations related to calculation errors. The government in its own investigations decided against a criminal prosecution.

But the board wasn’t done with Womble. Trustees kept Womble on as a consultant to make “governance recommendations.” The board has been headed since 2024 by Richard Vague, a developer of frequent-flier credit cards who became a well-known Philadelphia investor, author, charitable and political donor, and Pennsylvania’s banking secretary under former Gov. Tom Wolf.

The resulting report, presented to trustees at their January meeting, focused on oversight for the agency’s powerful investment office, whose former leaders bet heavily on private equity and hedge funds, enriching high-fee Wall Street money managers but missing out on the U.S. stock market’s gains in the 2010s.

Get better data. PSERS and its data consultants calculated and analyzed their own investment data on an Excel spreadsheet. That created “not only the possibility for human error” but also “a potential conflict of interest” in rewarding investment staff who juice their own results — a conflict PSERS’ own lawyers failed to see, Womble found.

Instead, Womble said PSERS ought to purchase “an independent, consistent and more reliable” daily data source for performance reports. Such data, Womble noted, is generated by a firm PSERS already uses for longer-term data — BNY (the former Bank of New York Mellon). Using BNY’s daily valuations service “would have obviated this entire issue,” Womble found. “There should be no reliance on internal calculations which create the potential for a conflict of interest and possible human error.”

Check your work. “All data should be independently verified.” Though it wasn’t directly noted in the Womble recommendations, the consultant PSERS used to check Aon’s calculations missed all the months in which the data was in error.

End the climate of fear. Lower-ranking PSERS staffers felt “concern” and “frustration” by the use of internal data instead of standard Wall Street databases to measure the agency’s investments but were afraid to tell their managers. “It was clear that the employees were reluctant to voice their concerns to their direct senior management.” Womble suggested setting up a way to report such concerns directly to the board’s audit committee, bypassing managers who might resist change.

Wake the watchdogs. PSERS’ financial office, not just the investment managers, “should be informed and part of the valuation process, so that there is no perceived conflict of interest” in having investment officers collect and report their own performance data.

Womble said interviews with PSERS staff showed PSERS financial officials “may not have been fully informed or consulted” on how investment staff arrived at the numbers they put in reports. PSERS has already taken steps to put its financial managers in charge of future valuations, Womble added, “to avoid conflicts of interest and/or human error” in future valuations.

Report problems faster. In October 2020, PSERS staff admitted to trustees that they had found “materially inaccurate” price valuations for tens of millions of dollars’ worth of gold, commodities, and construction investments tied to derivatives trades.

Womble noted that investment staff knew of these data errors but failed to tell other staff or trustees about it, even as they were calculating the state-mandated “risk share” measurements that determined whether teachers would have to pay more for their pensions over the next few years. Womble said the board’s audit committee should require faster disclosure of data problems.

Admit mistakes. Womble urged that errors in performance data “must be immediately identified, marked, and timely disclosed” in PSERS’s regular financial reports. This echoed a complaint of former state treasurer and PSERS trustee Joe Torsella that staff had effectively swept errors under the rug. Womble recommended that the audit and finance committees make a strict rule about reporting errors and fixing wrong reports.

Womble concluded that the PSERS board should “accept, in principle, the recommendations” and implement them. PSERS in its resolution about the report agreed only that it “accepts the submission” of the recommendations and will have board committees consider what may change.

“We are grateful for the work Womble did and we are very, very glad they are complete,” Vague said in response to the report. “We will be implementing proposals and adding some of our own over the next year or two.”

PSERS has already enacted some of Womble’s recommendations, added spokesperson Steve Esack.

The PSERS leadership that will consider further changes continues to evolve. Executive director Terrill Savidge Sánchez plans to retire in June. Investment committee chair Jason Davis, one of five Pennsylvania State Education Association union members on the 15-member board, resigned in January after departing midyear from his job as a teacher in the Penn-Trafford School District in western Pennsylvania. Davis was replaced by elected State Treasurer Stacy Garrity, who has worked closely with Vague on the board.