Lawyers for a Delaware County public school teacher have filed a lawsuit over problems at Pennsylvania’s largest pension fund, alleging that poor advice from highly paid outside consultants has cost the retirement plan billions and forced 100,000 teachers to pay millions in extra pension contributions.
The complaint says two consultants were “grossly negligent” in their dealings with the $67 billion PSERS plan but does not identify the fund itself as a defendant. Legal experts say the big retirement plan is generally protected from liability under the state’s Sovereign Immunity Act.
The suit names as defendants Aon Investments USA, of Chicago, and Hamilton Lane Advisors Inc., a national firm based in Bala Cynwyd. It also names 812 Market, a company formed by PSERS to hold title to real estate it has bought near its offices in Harrisburg. Earlier this month, the fund said it would correct official forms it had filed stating that its investment staff was being paid by both PSERS and 812 Market.
Kate McGann, a spokesperson for Hamilton Lane, said it had yet to be served with the lawsuit. “But based on what we’ve heard, there would be no merit in any action against Hamilton Lane,” she added. “We take our fiduciary responsibilities very seriously and would vigorously defend our reputation, track record, and commitment to serving our clients.”
Aon declined to comment, as did PSERS, the Pennsylvania Public School Employees’ Retirement System.
The lawyers asked Philadelphia Common Pleas Court to accept the case, initially filed for Kevin Steinke, a middle school teacher in Springfield Township, as a class-action suit representing about 100,000 other school employees hired since 2011.
Those staff members are to be charged an average of $240 a year more in pension costs, starting next month. The increase was triggered when the pension fund acknowledged this spring that its investment profits had fallen significantly below the plan’s goals.
Under state law, teachers hired after 2011 have to pay more when returns miss certain targets. The goal is for teachers to share the pain with taxpayers when investments do poorly. In total, the increase will drive up the teachers’ yearly payments by about $26 million.
The lawsuit draws together into one package a series of issues that have bedeviled the fund in recent months. The suit cites two issues — a mistake in the calculation of investment returns and the fund’s purchase of Harrisburg real estate — that are under FBI investigation.
In 2017, PSERS gave Hamilton Lane a $7 million, five-year contract to help find alternative investments not sold on the stock market. The goal, according to Hamilton Lane’s more than 1,000-page contract, was to achieve “superior” returns compared with ordinary stocks.
Over the last five years, the fund has also paid $3.5 million to Aon for “general investment consulting.” Its work includes tracking how well investments have done.
But Aon acknowledged an error in recent work it did in computing a figure for investment returns. Citing “clerical mistakes at a data-entry level,” Aon said it had come up with an incorrect — and exaggerated — figure for returns last year. In April, an embarrassed PSERS board disavowed that result and adopted a new, lower figure. This reversal led to the increase in teacher pension payments.
According to the lawsuit, the error exposed “significant structural problems” with PSERS’s investment strategies. Echoing a complaint from board dissidents, it said those decisions had led to “significant and traceable losses” from “alternative” investment vehicles.
Among bets that “any prudent investors would have avoided,” the suit cited investments by Hamilton Lane-approved managers, in publicly-traded bonds backed by a Kurdistan oil field shortly before it was seized by the rival Iraqi government, and money put into Securus Technologies, a prison contractor.
Although PSERS officials approved the investments, the suit does not identify the agency as a defendant. J.J. Conway, one of three lawyers representing Steinke, said “it would be premature” to comment on whether the agency might be added later. The other plaintiff lawyers are Gerard Mantese, based in Michigan, as is Conway, and Gregory B. Heller, based in Philadelphia.
Paul Drucker, a Paoli lawyer who battled PSERS several years ago in a civil action, said that under state laws dating back four decades, it is hard to pursue a lawsuit against PSERS itself, as it is an arm of state government. In general, he said, private lawsuits in many circumstances against PSERS are barred by the fund’s sovereign immunity protection.
The retirement plan has hired the law firm Womble Bond Dickinson to conduct its own internal investigation of the performance error and the Harrisburg properties, at a cost of up to $367,500. That investigation is ongoing.
The agency has also hired teams of defense lawyers headed by William Sullivan, of the Pillsbury Winthrop Shaw Pittman law firm, and a former U.S. attorney for the Eastern District of Pennsylvania, Zane David Memeger, now with Morgan Lewis & Bockius, to respond to the federal investigation.
Newly public state contracts show the pension agency is paying five Morgan Lewis partners from $875 to $1,210 an hour. PSERS also agreed to pay Pillsbury lawyers $495 to $925 an hour.
Those two law contracts have no limit on how much PSERS can spend, though the firms have agreed to notify the fund every time they expect to bill $75,000 more. The agency’s bylaws say it can spend up to $40 million defending any one case.