Rescaling of American public pension finance: are state and local plans running away from Wall Street?

Authors: Michael Urban*, University of Oxford
Topics: Economic Geography, Political Geography, United States
Keywords: economic geography, financial systems, industrial clusters, state and local pension plans
Session Type: Paper
Day: 4/6/2019
Start / End Time: 1:10 PM / 2:50 PM
Room: Chairman's Boardroom, Omni, East
Presentation File: No File Uploaded

Thwarted by the failures of investment managers and consultants, institutional investors are increasingly interested in bypassing private contractors to invest their assets. State and local pension plans, which face unfunded liabilities worth 1.2tn USD, could save billions of tax-payers’ money annually by insourcing their investment functions. Hitherto, there is little comprehensive evidence on their actual reliance on external contractors. This article addresses this gap empirically. It assesses the in- and outsourcing strategies of a sample of 31 state and local pension plans in conjunction with the evolution of 12 leading national asset management centres (AMCs) between 2006 and 2012. In spite of compelling evidence in favour of insourcing, state and local plans are shown to outsource about two-thirds of their assets and to have increased their reliance on external contractors over the period. The analysis shows the significance yet limited influence of economies of scale and suggests that the centripetal forces of AMCs may be less important than previously suggested. In light of these evidences, and the notable institutional and geographical diversity of state and local plans, I argue that public pension management is predominantly driven by bottom-up local political processes which undermine the implementation of sound investment management arrangements.

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