New law, advocated for by Comptroller Lander, increases the share that City and State pension funds can invest in private market asset classes from 25% to 35%.
This increase in the “basket clause” is projected to generate higher returns over the long term, at a comparable level of risk.
New York City Comptroller Brad Lander welcomed Governor Kathy Hochul’s signing of S8532, which provides additional flexibility for public pension funds in New York State, including the five New York City Retirement Systems (NYCRS), to diversify their portfolios.
The legislation, which was sponsored by New York State Senator Robert Jackson and Assembly Member Peter J. Abbate Jr, makes changes to the “basket clause,” contained in New York Retirement and Social Security Law § 177. The new law increases the share of their portfolios that pension funds can allocate to private markets investments (including infrastructure, real estate, private equity, opportunistic fixed income, hedge funds, venture capital, and some foreign equities) from 25% to 35%.
“Safeguarding the retirement of New Yorkers in our public pension systems requires making prudent investment decisions for the long term,” said New York City Comptroller Brad Lander. “I am grateful to Governor Kathy Hochul for signing this critical piece of legislation to modernize the ‘basket clause’ and grant public pension funds the flexibility we need to make investment decisions in the best interest of our members and beneficiaries. Thank you also to Senator Jackson and Assembly Member Abbate for spearheading the legislative effort to make today’s signing a reality. Amid a challenging market environment, we believe this is the most significant long-term adjustment we can make to safely maximize returns. I look forward to working in collaboration with each of our City’s public pension boards to deliver strong returns for New York City’s pensioners”
The “basket clause,” established in 1960, ensures that pension funds are primarily invested in publicly traded equities and fixed income investments. It was last adjusted in 2006, when it was increased from 15% to 25%. Since 2000, private markets as measured against the global public equity index, have increased five-fold. Among all companies with more than $100 million in annual revenue, more than 18,000 are privately held while only 3,000 are publicly traded.
The legislation signed by the governor last Friday increases the allowable limit on private markets investments to 35%, which is in line with the asset allocations of other U.S. public pension funds (California Public Employees 33%, Texas Teachers 35%, and Florida State Board 33%). It is also well below that of foundations and university endowments, which average 57%.
Projections show better NYCRS performance with an increased basket cap, greater flexibility, and greater diversification. A recent analysis by an independent consultant shows an expected increase in annual returns of 60bp while keeping portfolio risk unchanged, which would translate to an average expected additional $1.4B of returns per year.
The legislation also applies to New York State Common Retirement Fund and New York State Teachers’ Retirement System. The law does not mandate any change to asset allocation but would provide the Systems with more flexibility as they embark on their next strategic asset allocation process and make investment decisions in the best interests of the members and beneficiaries they serve, and in full coordination with their board and designated consultants.
“Governor Hochul is to be commended for providing our public pension funds with the investment flexibility they need to generate the returns required to provide financial security to New York City retirees,” said Kathryn Wylde, President & CEO of the Partnership for New York City.
“A well-managed pension portfolio provides income security for public servants. A decision of this magnitude must protect pension assets through recessions, pandemics, war and climate change. This bill provides New York City’s pension boards with the tools necessary to take advantage of new opportunities in a changing economy while managing risk. New York City and State pension funds have a long tradition of strong leadership because they pay attention to these important but obscure aspects of the people’s business. Governor Kathy Hochul, City Comptroller Brad Lander, Senator Robert Jackson and Assemblymember Peter Abbate have done the right thing to protect the promises made to New York’s retirees,” said Tom Sanzillo, Former First Deputy Comptroller of New York State and Former Assistant Deputy Comptroller for New York City.
“Increased flexibility in public pension investments is essential in times of economic uncertainty. The ability to further diversify our assets will provide long-term stability for our members. We thank Governor Hochul for passing the “basket clause” bill and appreciate the partnership of the Comptroller’s office in advocating for this legislation,” said District Council 37 Executive Director Henry Garrido.
“The UFOA celebrates the signing of the “basket clause” bill (S8532) into law. This important legislation will allow the pension fund greater flexibility in making investment decisions, helping diversify the portfolio, and allowing for increased investment returns while minimizing risk. That is the goal of every pension fund investor in New York City. We thank Senator Jackson and Assemblyman Abbate for crafting this bill and shepherding it through both houses of the legislature. Governor Hochul signed the final version of the bill last week making it law and continuing her support for the working people of New York State. The UFOA looks forward to working with Comptroller Brad Lander, the Bureau of Asset Management, and other pension funds to implement this added ability to increase returns,” said Jim McCarthy, President of the Uniformed Fire Officers Association.
“I want to thank the governor, the legislative leaders, Comptroller Lander and my fellow trustees for their support and leadership on this important issue. Passage of this bill will provide the tools necessary for the funds to be invested in a more modern way that promotes prudent growth of the funds while safeguarding the assets and providing for the retirement security of our members,” said Debra Penny, Treasurer of the United Federation of Teachers.
“Allowing greater diversification while holding portfolio risk constant is the smartest step we could take in today’s investment environment for our beneficiaries,” said Bryan Berge, Director of the Mayor’s Office of Pension and Investments and Chair of the Board of the New York City Employees’ Retirement System. “As the Mayor’s representative on four of the five pension boards, I extend thanks on behalf of the administration of Mayor Eric Adams to Comptroller Lander, Senator Jackson, Assembly Member Abbate, and Gov. Hochul for their vision and wisdom in advancing this important measure.”
“We would like to thank the New York State Legislature and Governor Hochul for their work in increasing the basket clause cap from 25% to 35%. This permits New York City pension systems such as the New York City Board of Education Retirement System (BERS) to make investments in a more complex landscape. This will also allow for better diversification of investments between public and private markets and for realized returns that will make it possible for current and future members of BERS to retire with the dignity they earned in service to New York City’s public schools,” said Thomas Sheppard and Donald Nesbit, Co-Chairs of the New York City Board of Education Retirement Systems Board of Trustees.
A detailed explanation of the ‘basket clause’ and answers to frequently asked questions can be found here.
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