SEI tapped to invest Pa. pension funds

SEI Investments Co. manages more than $200 billion of other people's money and counts some of the world's big corporations, including Comcast Corp. and SAP AG, among its clients.

Last week, SEI, of Oaks, won its first investment from the $35 billion Pennsylvania State Employees' Retirement System. PaSERS's board voted to hire SEI to buy up to $50 million in prime mortgage debt. SEI joined more than 100 firms that manage money for PaSERS, in addition to its own investment staff.

State Rep. Robert W. Godshall (R., Montgomery), a PaSERS board member whose district lies a 10-minute drive north of SEI, said he tried "for years" to get SEI hired, but made no progress until recently.

"They are a local company paying millions of dollars in taxes to the state" and employing 2,000 local workers, Godshall said. "I thought it was beyond belief that we wouldn't give them some consideration in their home state."

PaSERS turned down SEI before because earlier proposals duplicated investments the system's staff was already making, PaSERS spokesman Robert Gentzel said.

"There's always been a recognition that they're a good Pennsylvania firm, and we had looked at some potential relationships in the past, but it never quite came together," he said. "This time they had a product that was a good vehicle to get into a space that the board and [investment-office] staff wanted to get into."

But Godshall attributed the change to last July's departure of PaSERS chief investment officer Peter Gilbert, who Godshall said had "sandbagged" his earlier efforts to get SEI hired. PaSERS executive director Eric Henry left June 6 to join the Texas Municipal Retirement System, and Gilbert announced his retirement the same day. Gilbert is now chief investment officer of the Lehigh University Endowment Fund.

Henry was replaced by PaSERS audit chief Leonard M. Knepp, and Gilbert by public markets director John C. Winchester. The two were confirmed in those jobs by the board Wednesday, the same day SEI was hired.

Gilbert "kept SEI out," Godshall said. "I never did find out what was in back of it. He was pretty dogmatic."

Gilbert did not return calls to his Lehigh office seeking comment.

"There was more openness" to SEI's proposal after the pension system changed leaders, said Paul Klauder, SEI vice president and managing director for institutional clients. Gilbert preferred to use PaSERS staff to make investments when possible, Klauder said. But he also thinks Gilbert might have agreed to use SEI for collateralized loan obligations if he had stayed with the system, given SEI's experience with those investments.

PaSERS spokesman Gentzel said there was no connection between SEI's hiring and the change at the top of the pension system.

When Henry and Gilbert quit, PaSERS issued a statement calling the departures "two unrelated developments." Board member Godshall and spokesman Gentzel both said Henry and Gilbert took jobs that paid more than their PaSERS salaries.

Gilbert earned $229,000 at PaSERS, plus yearly bonuses capped at 25 percent of his salary. The board recommended a base salary of $224,000 for his successor, with the same bonus provision. Henry earned $155,000; the board has recommended $160,000 for his successor.

Pennsylvania "pays decently and compares reasonably with their peer group of public pension plans; with no exception, those plans pay less than the private sector," said Mary Hobson, executive vice president of Denver-based EFL Associates Inc., which helped Pennsylvania in the job search.

"We did have some candidates out of the private sector who would have been taking a pay cut, but they said they would have done that for the opportunity to run that large pool of money" at PaSERS, Hobson said.

She said that compensation "was a factor" with Henry's departure, and that Gilbert qualified for retirement and was attracted by the opportunity to be the first chief investment officer at Lehigh.

Pennsylvania has reported pension investment returns above the national average for state funds in recent years. The numbers are difficult to independently verify because the fund is roughly 40 percent invested in hedge funds, private equity, real estate, venture capital, and other private funds whose portfolio investments and values are not publicly disclosed. PaSERS says its results are audited and conform with state requirements.

Even with its strong reported returns, Pennsylvania - like New Jersey and other states with relatively generous pension benefits - will require increased taxpayer subsidies unless it can generate strong investment results. Gentzel said PaSERS hoped to reduce its projected subsidy increases when it announced its annual funding estimates next month.