Public pensions just reported their worst quarterly investment performance in over a decade. Thanks ... [+]
Public pensions just reported their worst quarterly investment performance in over a decade. But results related to 25%-50% of their riskiest investments aren’t included. Thanks to secrecy agreements, reporting delays and valuation wiggle-room granted to hedge, private equity, real estate, infrastructure, venture capital and other private asset managers, the full extent of the losses has not been disclosed to pension stakeholders. Complicity with Wall Street allows public pensions to avoid accountability and push bad performance results off until the next quarter, year or even decade.
Given the severe impact the coronavirus has had on the financial markets to date and the likelihood that investment performance of state and local government pensions will not improve by quarter and fiscal year-end, get set for a season of feverish pension lying about investment performance results, I wrote five weeks ago.
The preliminary public pension performance results for the first quarter of the coronavirus are in and as dismal as they are, they’ll get worse.
According to Wilshire Trust Universe Comparison Service data released this week, public pension plans lost a median 13.2% in the three months ended March 31, slightly more than in the fourth quarter of 2008. March’s stock market swoon led to the biggest one-quarter drop in the 40 years the firm has been tracking.
How will public pensions soften the bad news to pensioners and taxpayers?
Over the course of my 35-year career examining thousands of pensions and over a trillion in assets, I have learned that all pensions lie about their investment performance—or to put it more kindly, don’t tell the complete truth.
A side effect of the coronavirus, then, is more pension puffery.
It’s axiomatic: Lying by pensions inevitably increases as portfolio performance plummets.
Since your state and local pension can be counted upon to continue to lie to you about its investment performance, you need to know how to look beyond the performance puffery and get to the truth about how it’s really doing.
Understanding how public pensions have conspired with Wall Street to hide bad performance is essential.
As I explain in Who Stole My Pension?, in recent decades public pensions, in hopes of boosting investment returns, have shifted assets away from highly-transparent traditional investments, such as publicly-traded stocks and bonds. Today many state and local pensions hold a quarter, half or more of their assets in “alternative” investments such as private equity, venture capital, real estate and hedge funds.
To protect your retirement security, you need to pay particularly close attention to your pension’s investments in these riskiest of investments because these deals are riddled with abusive provisions amounting to a license to steal—from you.
More damning is the fact that when taxpayer-funded (and supposedly subject to public scrutiny) pensions invest in these funds, the pension overseers routinely agree to keep secret key information, including portfolio and performance information.
There are two sinister levels of secrecy you should be concerned with:
1. The pension agrees to keep secret (from you and the general public) certain key information it receives from the alternative investment manager handling pension assets; and
2. Pension overseers agree the alternative money manager may keep secret—withhold—certain key information from them. As illogical and perverse as it sounds, there are officials at even the largest multi-billion pensions who are subject to a legal—fiduciary duty—to watch over the investments, yet agree to be kept in the dark with respect to certain investments.
What this means is that these pension assets simply disappear off the radar screen—no one knows for sure what these funds are invested in, how they are performing, or if someone has run off with the money, for that matter.
Wall Street is allowed to delay reporting of performance, as well as self-value the hard-to-value assets held in alternative funds. Since managers are paid a percentage of gains, assets are almost certainly over-valued and performance inflated with respect to these least transparent investments.
Further, my investigations regularly reveal that pensions conceal and underreport the percentages of their riskiest investment holdings in their financial statements. While certain funds may be properly categorized as “alternatives,” other alternatives such as real estate, precious metals, distressed debt, infrastructure, inflation-linked bonds, and credit opportunity funds may not be properly categorized.
Since most alternative funds have a minimum 10-year life, which can be extended for years, even decades, and are permitted to manipulate their interim performance results, it may be at least a decade before the results of gambling by public pensions is exposed/disclosed. (Note: the worse these investments perform, the longer their lives will be extended and a final accounting delayed.)
Chances are the people who made the decision to enrich Wall Street at the expense of your state and local pension will be long gone before the results of the gamble are disclosed. That’s exactly why if you are a participant or stakeholders in these funds, you need to speak up now—you can’t afford to wait.
