NEW YORK - John Nichol joined the Ohio Public Employees' Retirement System in his hometown of Columbus as an analyst right out of business school. He planned to work there until his own retirement.
He bolted after eight years. That was in September, when Federated Investors Inc. offered to raise his $75,000 salary more than 50 percent - before bonus.
"For me to leave, there had to be a big incentive," said Nichol, 37, who now runs a utility stock mutual fund at the Pittsburgh-based firm. "Federated took care of me."
While public pension funds have never been known for high pay, the gap between public and private pay has been widening. "The private sector is increasing salaries at a much faster rate," said Scott Henderson, former executive director of Massachusetts' Pension Reserves Investment Management Board.
The Wisconsin Investment Board lost 15 of 57 investment staffers in two years, to companies such as Menomonee Falls, Wis.-based Strong Capital Management.
Three top executives left the California Public Employees' Retirement System in the first five months of 2000, including Chief Investment Officer Sheryl Pressler. The $170 billion fund, known as Calpers, took eight months to find a new head of real estate investing.
Taxpayer-funded public pension plans cover about 13 million employees and pay benefits to 5 million people. While about 95 percent of funds' future liabilities are covered by the $3 trillion in fund assets, any shortfall in pension payments would have to be paid with tax dollars.
Public funds control 10 percent of stocks in the United States, according to the Employee Benefit Research Institute. In addition, they own billions of dollars' worth of bonds, international stocks, real estate and privately negotiated investments in companies.
Managed assets, the total of every U.S. mutual and pension fund, grew 16 percent a year in the 1990s, to $20 trillion by 1999, according to Sanford C. Bernstein & Co.
That has made demand for experienced money managers "white-hot," said a November study by recruiter TMP Worldwide Inc.
Public funds pay managers above the average U.S. salary of $25,000, but a fraction of what private companies offer. At big mutual fund firms, portfolio managers with 10 years' to 20 years' experience are paid a median $500,500 a year, according to a 1999 survey by the Association for Investment Management and Research, and Russell Reynolds Associates.
Calpers money managers receive $88,000 to $105,000, plus a possible bonus of up to 60 percent. Filling positions at the country's largest public fund takes eight months on average, compared with three months for the rest of the industry, according to a Watson Wyatt Worldwide survey conducted for Calpers.
Three of every four prospective candidates turn down the fund when it recruits, the survey said. "They hear about the compensation and say, `You've got to be kidding,'" said Charles Valdes, a Calpers board member.
Public funds find that the jobs most difficult for them to fill are in private equity and real estate. Chief investment officers at real estate firms are paid a median $550,000, plus equity in the deals they oversee, according to TMP.
At the $57 billion Ohio pension fund, several analysts and portfolio manager positions were open for more than a year.
"I'd argue, `How can we outperform with that much turnover?'" Nichol said.
Every fund periodically rejiggers its investment mix - a process known as "asset allocation" that can make the difference between billions of dollars in losses or gains.
Some funds, such as Ohio's, pick most of the investments themselves. Others contract with private firms. Either way, when it comes to money managers, continuity counts.
"When someone leaves, you're talking about institutional memory walking out the door," said Chris Ailman, chief investment officer of the $106 billion California State Teachers' Retirement System, who last fall moved from the same job in Washington state to the higher-paying job in Sacramento.
"If you have a pension fund with a long-term objective, you want a staff that's been there a long time," Ailman said.
The hiring hassles involve more than senior money managers.
In Ohio, "we couldn't even afford to hire MBAs as analysts," said Nichol. "We had to get people with bachelor's degrees and no experience. You can't quantify how much time and energy it took just training them. What you want is an analyst who's been through some investment cycles."
Many funds are trying to increase pay. One-third of state pension systems have instituted incentive plans linking pay with performance, according to a Watson Wyatt study.
The Wisconsin board in 2000 boosted salaries as much as 48 percent and added performance-based bonuses. While Ohio raised pay an average of 25 percent in Nichol's last year there, by then the father of three boys had put out feelers in the private sector.
State investors argue their jobs will get more difficult as the economy slows. Public funds larger than $1 billion had median investment gains of 12.6 percent annually since 1990, according to Wilshire Associates. As markets slumped last year, though, the average fund's return was flat, Wilshire said.
"The rising tide raised all boats, even those with leaks in them," Ailman said.
"Now we may see more of a dispersion in returns."
