Forensic investigations in Rhode Island, North Carolina, Kentucky and Ohio reveal that gambling 30 percent or more on high-cost, high-risk, secretive alternative investments has exposed pensions to massively greater risks and reduced net returns. The time is ripe for legislators, regulators, and law enforcement to act to stop the looting.
A recent New York Times
NYT
article revealed that putting more than half of the $62 billion Pennsylvania state teachers’ retirement fund’s assets into risky alternative investments hadn’t worked out well for the pension and had spurred an investigation by the FBI. The FBI is investigating reporting fraud—returns allegedly falsified to avoid increased worker contributions to the pension.
Law enforcement investigations into public pension funds that lie about their returns are long, long overdue.
As I explained in my recent book, Who Stole My Pension? all pensions lie about their investment performance.
Over the course of my 35-year career examining thousands of pensions, I have never seen a public pension openly acknowledge that its investment performance is poor. Obviously, there have to be some laggards but you’d never guess it from reading the glowing performance reports pensions provide to participants and the public.
So, how can every public pension claim to have superior investment results?
They lie—or, to put it more kindly—they don’t tell the complete truth.
Over the past two decades pension funds have increased their alternative investment holdings from around 5 percent to 30 percent or more. As pensions increasingly gamble in alternative funds with hard-to-value portfolios, investment performance claims become all-the-more suspect. Alternative managers can be counted on to overstate the value of assets they manage to boost their performance-based compensation. Pension performance will, likewise, be inflated when they do so. The managers of alternative investments and pension overseers are complicit in the performance puffery.
Forensic investigations I have undertaken involving the state pensions in Rhode Island, North Carolina, Kentucky and Ohio have revealed that gambling 30 percent or more of pension assets on high-cost, high-risk, secretive alternative investments has exposed these retirement plans to massively greater risks and reduced net investment returns. Fees to Wall Street have skyrocketed, as performance has plummeted and retirement benefits slashed.
The fundamental problem alternative investments pose for public pensions is that while Wall Street covets the lavish investment fees they can earn from these government retirement plans, these firms are unwilling to play by the rules, i.e., comply with the special state laws that apply to managing public monies. First and foremost, alternative investment funds have refused to comply with state public records laws that mandate full transparency. Alternative investment funds not only refuse to disclose critical information related to investment costs, conflicts of interest, strategies, portfolio holdings and risk to the public, they also refuse to fully disclose such information to the fiduciaries overseeing pensions.
As a result, public pensions do not even know all the investment fees that are being taken out of the alternatives in which they invest, or even if the charges are legitimate.
Today, no pension board knows for certain the true costs of the alternatives in the portfolio and all pensions have taken to lying—understating—their alternatives investment costs.
For those Wall Streeters who claim alternative investments reduce pension risk—get real.
Secrecy never reduces risk.
Participant-funded forensic investigations and law enforcement criminal investigations will reveal in the months ahead that the lack of transparency—secrecy—alternative investment managers demand has utterly undermined the financial integrity of public pensions.
For more on protecting your pension see: Who Stole My Pension? How to Stop the Looting