STUMP » Articles » Setting the Stage for 2017: Questionable Pension Asset Management Practices » 4 January 2017, 03:28

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Setting the Stage for 2017: Questionable Pension Asset Management Practices  


4 January 2017, 03:28

Let’s look at the asset side of pensions — and not only public pensions.


This came over my transom today:

Trifecta Of Imprudence: Forensic Investigation Of Critical And Declining New York Teamsters Pension

The New York State Teamsters Pension Fund is a multi-employer pension plan which is failing.

With a funded percentage of 45.8 percent and liabilities exceeding its assets by approximately $1.7 billion, the Fund is projected to become insolvent and require financial assistance from the Pension Benefit Guaranty Corporation, the federal agency that backstops corporate pensions, by 2027. Many of the over 34,000 participants in the Fund have asked how this could happen to their retirement savings plan—a pension that was nearly fully-funded in 1999. As recently as Fall 2014, a Fund Newsletter reassured participants in response to the question “whether there will be sufficient money to pay pension benefits that have been earned and promised:

The simple answer remains: Yes!”

My firm, Benchmark Financial Services, Inc. recently completed a forensic investigation funded by the Teamsters Alliance for Pension Protection, a non-profit organization with hundreds of active and retired participant donors, into whether mismanagement of plan investments (including fiduciary breaches, conflicts of interest, undisclosed or excessive fees and wrongdoing) contributed to the demise of the Plan. To our knowledge, this is the first-ever forensic investigation into a failing Teamsters pension.

As detailed in the report, it appears that (a) opacity; (b) fees and expenses; and © illiquidity, conflicts of interest and related risks, all have dramatically increased as the Fund’s financial condition worsened—all contrary to prudent fiduciary practice. In our experience, such a trifecta of imprudence is all-too-common among failing pensions.

The Fund has an 8.5 percent assumed rate of return on its investments and acknowledges that its investment return assumption is “higher” and even “aggressive.”

The Fund’s assumed rate of return is significantly higher than the average cited in a 2016 Milliman Multiemployer Pension Funding Study for all 1,300 multiemployer plans. According to Milliman, multiemployer assumed returns are generally between 6 and 8 percent, with an average of just below 7.5 percent. It is noteworthy, says Milliman, that about 200 plans have decreased their assumed rate of return over the last several years.

The Fund, on the other hand, increased its investment return assumption from 8 percent to 8.5 percent in 2007 and has maintained that higher assumption since then. Increasing a plan’s assumed rate of return results in lower liabilities, which decreases the overall shortfall of these plans.Within months of the increase in the assumption, the Plan was certified as being in “endangered status” by its actuary for the Plan Year beginning January 1, 2008.

The fees the Fund pays its external advisers to manage approximately $767 million, or 64 percent of its portfolio invested in alternative hedge, private equity, real estate and infrastructure funds are exceptionally high—an estimated annual 2 percent asset-based and 20 percent performance fees, plus additional underlying and operating fees and expenses (as much as 6 percent). We conservatively estimated the Fund’s equity-related expenses are closer to 4 percent, or eight-times-greater, than Buffet’s .5 percent estimate. Plus, the Fund has paid millions to multiple costly consultant and manager “helpers.”

In our opinion, based upon the Fund’s risky asset allocation, high investment-related expenses and actual sub-par investment experience, there is no reasonable basis to conclude the Fund will outperform Buffet’s estimates by 2 percent. Rather, the high-risk, high-cost asset allocation virtually ensures the Fund will consistently underperform on a net basis.

While the need to examine failing pensions is great, forensic investigations of such plans are rarely undertaken. Nationally, there are over 10 million workers/retirees in 1,400 multiemployer plans. Approximately 150 to 200 of these plans are projected to run out of money within the next 20 years. The PBGC, which has become responsible for almost 4,800 failed single-employer and multiemployer plans, has never once conducted a forensic investigation into the demise of any pension—despite repeated demands by participants, as well as litigation brought against the agency to compel such investigations.

The time to examine what causes pensions to fail is long overdue.

I haven’t read his whole 73-page report yet, which is at the bottom of this page. But Siedle has done several of these pension fund audits… and it’s generally about the asset management. Just stick a pin in that to ruminate over.

The NY Teamsters fund is one of the plans that has applied to cut benefits, as I mentioned in the previous post.

I agree with Siedle that there needs to be more thorough investigations into why these pensions fail. I have my own suspicion as to the main driver, but I will leave that for another time.

Here is the Teamsters Alliance for Pension Protection page.

I expect more pointing-of-fingers at hedge funds and other alternative assets for both MEPs and public pensions.

Heck, it’s much more likely than blaming the actuaries (mainly because we’re boring. And have less money to grab.)

There supposedly is an investigation going on re: the Dallas Police and Fire Pension involving the FBI and the Texas Rangers. Here are some links:

I have no idea if anything criminal went on with the asset management side of the Dallas Police and Fire Pension Fund. Maybe something will come out of the investigation, like self-dealing. It’s happened before. Calpers had its own pay-to-play scandal. When you’ve got huge pots of money lying around, and not much oversight, it’s amazing what shenanigans can happen.


Are Public-Employee Pension Funds Now Too Big To Fail?

It’s no accident. “CalPERS has … steered billions of dollars into politically connected firms,” wrote Steve Malanga in City Journal, back in 2013. “And it has ventured into ‘socially responsible’ investment strategies, making bad bets that have lost hundreds of millions of dollars. Such dubious practices have piled up a crushing amount of pension debt, which California residents — and their children — will somehow have to repay.”

That’s happening now. California’s famous Highway Patrol, for instance, has grossly underfunded its pensions. So it got the state to agree to a $10 hike in car registration fees to help make up the shortfall. No doubt, it will be asking for more soon.

It’s not just California. Across the country, pension funds have been underfunded, mismanaged and in some cases looted by managers. Today, according to the Fed, pension funds across the country are $2 trillion in the red — after being overfunded as recently as the year 2000. That means tax hikes are coming, like it or not.

In a scathing, just-released report, the American Legislative Exchange details how “rather than investing to earn the best return for workers, (politicians and fund officials) use pension funds in a misguided attempt to boost their local economies, provide kickbacks to their political supporters, reward industries they like, punish those they don’t and bully corporations into silence and behaving as they see fit.”

It’s quite an indictment. It’s time for a national commission to look into the misconduct and mismanagement — which pose a clear danger to the financial system — and answer the scariest question of all: Have public employee pension funds become too big to fail?

Here’s that report from ALEC, and it includes some questionable practices I’ve covered before.

Keeping the Promise: Getting Politics Out of Pensions

by Jonathan Williams, Kati Siconolfi, Ted Lafferty & Elliot Young

Pensions are a valuable non-wage benefit that a large majority of state and local governments offer their employees as part of their compensation packages. With approximately $3.8 trillion in total assets, millions of workers rely on the promises made by governments to provide a secure retirement through a lifelong pension. In order to keep these promises, pension funds should be managed for the exclusive purpose of providing retirement benefits to workers, with pension trustees doing their best to achieve the greatest possible return on investments.

Unfortunately, many lawmakers and pension plan officials have other priorities besides doing what is best for workers. They see the billions of pension fund dollars they manage as an opportunity to advance their own agendas. Rather than investing to earn the best return for workers, they use pension funds in a misguided attempt to boost their local economies, provide kickbacks to their political supporters, reward industries they like, punish those they don’t and bully corporations into silence and behaving as they see fit.

As lawmakers and trustees knowingly make inferior investment decisions, sacrificing better returns in order to advance political agendas, pension funding declines, jeopardizing workers’ retirement benefits and leaving taxpayers to pick up the tab. This reckless decision to place political agendas ahead of what’s best for workers is known as pension fund cronyism, and it is happening every year in pension funds across the country. This report exposes these dishonest practices and shows state and local policymakers what they can do to get politics out of their pensions and focus on keeping the promise to workers and retirees alike.

Here’s the full PDF of the report.

I haven’t dug through the whole thing, but the table of contents indicates this is all about the asset side of public pensions.

Again, push that into the back of your mind to think about.

Something from Harvard Business Review about keeping politics out of public pension fund management:

Public Pension Funds Perform Better When They Keep Politics at Bay

Interference by elected officials — from imposition of local economic development obligations to excessive constraints on head count and compensation that impede recruitment of talented staff — has contributed to poor investment choices, higher total costs, diminished organizations, and disappointing performance at some institutions.

From my advisory work, research, and private discussions with executives and board members of pension funds, pension funds that succeed in keeping politics at bay combine strong governance with deft, often pre-emptive, management of issues that could spark a political backlash.

Strong governance. Autonomy for pension institutions starts with a strong governance framework. Some institutions, such as the Canada Pension Plan Investment Board, are stand-alone legal entities with an independent board and a requirement to operate at arm’s length from government. In recent years, a number of jurisdictions, such as the state of Oregon, have explored introducing this model.

Another way to keep politics at bay is to ensure there is a counterweight to check elected officials. In Wisconsin, where beneficiaries of the public pension system share the burden if investments yield poor results, member associations have not only lobbied for greater resources for the State of Wisconsin Investment Board but have kept an eye on politicians to ensure they don’t meddle inappropriately.

Deft, pre-emptive management. Pension institutions that enjoy a high degree of independence are fully aware that their freedom is never ironclad. Many have developed finely tuned political antennae so they can identify and defuse potential threats to their cherished autonomy early on.

Good luck with that. Public employee unions are pretty damn politically active in picking their bosses, so you’d better believe they’ll play politics with their pension funds as well… as well as the politicians they picked out for themselves.


One of the asset-side political games the ALEC report covers are the various divestment pushes.

I have covered divestment drives for public pension funds previously:

Now specific sectors may be in decline, and from a prudent investment standpoint, one should divest.

But most of these divestment drives have very thin veneers of allowing the fiduciaries to go along with this crap.

So NY pensions divested themselves of gun retailer stocks last year:

New York City’s employee pension fund will sell all its holdings of three American retailers because they sell guns, and will continue to press ahead in its efforts to get Walmart and a division of the supermarket chain Kroger to remove guns from their store shelves.

The $59 billion New York City Employees’ Retirement System voted to divest itself of the shares on Thursday at its board of trustees meeting. The fund is selling shares in Dick’s Sporting Goods, Cabela’s and Big 5 Sporting Goods. The holdings, worth $10.5 million as of mid-June, are about 0.02 percent of the pension’s portfolio, according to a letter to the board of trustees from the city’s public advocate that was reviewed by The New York Times.

However small the divestment is on behalf of New York’s city employees, the move culminates a yearlong effort by some in city government to take action against the gun industry. The public advocate, Letitia James, proposed last July that the city’s pensions sell their holdings of Walmart. She has also filed complaints with the Securities and Exchange Commission about disclosures made by the gun makers Sturm, Ruger & Co. and Smith & Wesson, in addition to putting pressure on local banks to stop lending to gun makers.

It’s a bit rich, when the cops need to get their guns from somewhere.

But wait — there’s more!

In 2013, Chicago looked to purge itself of gun manufacturer stocks in the pension funds:

Fresh from persuading a $5 billion pension fund in Chicago to divest from companies that make firearms, the city’s mayor, Rahm Emanuel, on Thursday urged the chief executives of two major banks to stop financing companies “that profit from gun violence.”

Mr. Emanuel sent letters to TD Bank, which provides a $60 million credit line to Smith & Wesson, and to Bank of America, which provides a $25 million line to Sturm, Ruger & Company, asking the C.E.O.’s to push the companies to “find common ground with the vast majority of Americans who support a military weapons and ammunition ban.”

Mr. Emanuel’s effort to enlist banks in the gun control movement is just one example of a new willingness by a public official, galvanized by last month’s carnage in Newtown, Conn., to wield the power of the purse.

New York State’s big public pension fund and California’s fund for teachers have already frozen or divested their gun holdings, and California’s fund for other public workers, known as Calpers, is expected to take up the issue in February.

Given that Obama has been such a boon to gun manufacturers and retailers… oh wait, what’s this?

Many public pension trustees remain unconvinced that divesting from gun makers is consistent with their duty to protect the financial interests of retirees. Union officials in particular often say their job is to get maximum benefits for their members.

“People understandably fear that there are constraints or limits to their fiduciary responsibility,” said Amer Ahmad, the Chicago comptroller, who pushed that city’s main pension board to divest on Wednesday. “But to the contrary, the mayor and I have made a long and, I feel, persuasive case that if we don’t act, we are actually failing in our fiduciary duty.”

How quaint, thinking that the pension funds should be invested with the benefits of the participants in mind, as opposed to throwing one’s political weight around.

Good luck suing the trustees for pissing away your fund values because they wanted the investments to be politically correct.

But it’s all in the name of losing money in a noble cause, so the pensioners finding their benefits getting cut and the taxpayers finding their taxes being raised for service given decades ago can feel warm and fuzzy about it all.


At least some (most?) of the divestment people come up with the argument that the sectors they’re divesting in are on the wane (even if it turns out that they’re very very wrong about that.)

Some have odder ideas:

Public pension funds should invest the retirement savings of government workers to secure their financial future, not undermine it. Yet across the country, these funds are financing companies that privatize their own workers’ jobs. And because many of these investments are funneled through *private-equity companies, the problem is still largely hidden from public view.

Pension trustees who are rightly concerned about these investments too often find themselves silenced by a subtle legalistic maneuver that took place six years ago last month and that could be stopped with the help of President Obama’s Labor Department.

Consider the public school system in Chelmsford, Mass. The schools employed custodians who were once paid $25 an hour and were promised a modest pension. For decades, the jobs had been reasonably stable. But as Bloomberg News reported, these custodians learned in 2012 that their jobs had been privatized and they were being fired. They were then offered the same job, at a 50 percent pay cut, by Aramark, a private firm that had been funded by their own pension funds. In other words, the pension plan was invested in a company that made money by slashing the future pensioners’ wages.

This pattern is surprisingly pervasive: The retirement funds of firefighters, teachers, prison guards and others are invested in private firefighting companies, private public-school-service companies and private prisons. These companies may offer the promise of high investment returns, but they may achieve those returns at the expense of the public employees themselves. The Florida Retirement System, with half its assets belonging to teachers and other school employees, bought Edison Schools, a company that ran public schools. Pension funds have financed the privatization of school bus companies, water utilities and libraries. Displaced workers not only stop contributing to the funds, losses that can harm other workers and retirees, but also often must turn to public assistance to survive, undermining the argument that taxpayers benefit from these transactions.

Sorry, but there is actually not much in the way of shared interest between retired public employees (who cannot strike and will not be accruing more pay or benefits…. well, we’ll leave reality on that score for later) and active employees.

I get it, but the pension funds need their returns.

According to this bulletin, the statutory command that trustees act “solely in the interests of participants and beneficiaries” really means that they should act solely in the interest of “the plan.” Under this plan-centric view of loyalty, trustees can invest in companies that seek to privatize their own members’ jobs, focusing exclusively on the investment return to the plan.

Proper understanding of the duty of loyalty should empower trustees to weigh the impact of investments on jobs. That doesn’t mean abandoning a core focus on investment returns, and it doesn’t mean blindly boycotting privatizing investments. It means asking whether exiting would work or whether it would simply lead to replacement by another, indifferent investor. It means asking whether engaging the investee to reduce the jobs impact could advance the economic interest of members.

In restoring this proper understanding of a trustee’s role, a few well-placed lawsuits might help. Indeed, some helpful legal precedents already exist. Favorable pronouncements from state attorneys general or legislatures could also move things in the right direction.

Best of all would be a new interpretive bulletin from Obama’s Labor Department, with its national voice and its powerful, if informal, influence over state and local pensions, clarifying that when the duty of loyalty says that trustees should invest “solely in the interests of participants and beneficiaries” it means just that — not in the interests of “the plan,” or anyone else.

There are problems with private equity groups but that they’re used for outsourcing some functions of government is not the problem.

The problem is illiquidity and lack of transparency, as mentioned by Ted Siedle.

State pension plans putting politics above retirements:

State public pension funds love buying shares in local companies, but it is not so much a matter of “buying what you know” as “buying shares of companies with political clout.”

A new study of equity holdings of self-managed state public pension funds finds that they have not only a bias towards in-state companies, but in particular towards those with political connections and influence.

What’s more, these investments aren’t winners; this bias towards in-state politically connected firms costs the typical state pension fund about $225 million in annual decline in fund performance, according to estimates in the study, which is slated to be published in an upcoming Journal of Financial Economics.

“We find that state pension funds overweight these politically active firms and doing so is detrimental to fund equity performance,” write authors Daniel Bradley and Xiaojing Yuan of the University of South Florida and Christos Pantzalis of the University of Massachusetts at Lowell. (here)

“Our evidence is most consistent with the political bias hypothesis.”

It should be noted that the study used a relatively small sample size: 16 pension funds which manage their own money and made Securities and Exchange Commission disclosures for at least 20 consecutive quarters between 1999 and 2009. That said, the sample included large and well-known pension funds including the Virginia Retirement System, the California Public Employees’ Retirement System (CalPERS) and the New York State Common Retirement Fund.

To determine which companies qualify as politically connected or active, the study constructed measures to weigh the extent that a given fund invests more with firms making political action committee (PAC) contributions to home state politicians or engaging in lobbying.


The finding was that state pension funds will tend to overweight their holdings of local firms that make PAC contributions by 23 percent and those that lobby by 17 percent relative to their neutral weight in a market portfolio.

Interestingly, the only local companies that displayed significant positive outperformance were non-politically connected local firms. Perhaps if you are good enough to overcome a biased, politically influenced system your company might actually be a winning investment.

As well, state pension funds tend to hold on to the stocks of politically connected companies longer. They are also poor at making decisions about when to buy and sell these politically connected stocks: selling winners too soon and riding losses too long. This phenomenon is not present for non-politically active stocks, according to the study.

Unsurprisingly, the degree of political bias in state pension funds is linked to how they are governed. Local political connection bias – the tendency to own the shares of politically connected local firms – is stronger in state pension funds with a higher percentage of politically affiliated trustees.

And while having an influential member of Congress in your home state might help bring home some political bacon in government spending, it is a drawback for pension governance. States with more influential politicians in Congress tend to invest more in politically connected local firms, suffering the underperformance that that implies.


There’s a reason it’s tough to remove politics from public pension asset management. Think about it for a second, and it should become obvious.


I mentioned this in NCPERS and its Public Pensions Blacklist, but here’s a different group from 2013: American Federation of Teachers with its report “A Retirement Security Report on Money Managers for Trustees”

Now, this ranking should be about performance, right? Value for fees paid, don’t you think?

Let’s read it!

The retirement security of working families is under attack as never before. Public sector defined benefit pension plans have repeatedly been attacked by right-wing think tanks and political committees. While much of the money flowing to these organizations remains unreported, many of the organizations attacking defined benefit plans are funded by hedge fund and private equity managers, some of whom solicit investments from public sector pension plans. These fund managers are all too eager to seek investments from the deferred wages of teachers, firefighters and other public servants, while simultaneously attacking their economic interests.

Some asset managers have directly backed initiatives that harm the retirement security of plan participants, to whom trustees have a fiduciary duty. The purpose of this report is to make transparent the role that certain financial interests play in seeking to eliminate pensions or dramatically cut the benefits they provide. With transparency and disclosure, trustees can make informed decisions about the risks their plans face. The American Federation of Teachers examined three organizations that advocate directly for eliminating defined benefit pension plans, and reviewed publicly available material to track connections between those organizations and fund managers.

No, that’s not fiduciary duty. Pretending there’s no trouble with public pensions is not necessarily being a friend to those pensions, especially as the money runs out. The most recent version of this document seems to be from 2015.

In that doc, I see the following verbiage:

In discharging their fiduciary duties with respect to selecting, monitoring, terminating and replacing
investment managers, plan fiduciaries must, first and foremost, rely on economic criteria.

But interestingly enough, none of the asset managers on the list are being evaluated on that basis.



Or not.

But assets are just one part of the equation…. wait for the next….

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