In the best of times, pensions exaggerate, or outright lie about, their investment performance ... [+]
Over the course of my 35-year career examining thousands of pensions, I have never seen a pension openly acknowledge that its investment performance is poor. Obviously, there to be some pension laggards but you’d never guess it from reading the glowing performance reports they provide to participants and the public.
So, how can every pension claim to have superior investment results?
As I explain in my new book, Who Stole My Pension?, they outright lie —or to put it more kindly, don’t tell the complete truth. In the best of times, pensions manipulate their investment performance results. In the worst of times, fuggedaboutit!
Given the severe impact the has had on the markets to date and the likelihood that of at least state and local government pensions will not improve by fiscal year-end, get set for a season of feverish pension lying about investment performance results.
Since your 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
For example, the overseers of the Employee Retirement System of Rhode Island claim to “deliver strong long-term returns and reduced risk for the state’s investments.” The fund’s website indicates that for 5-year and 10-year has beaten the Total Plan Benchmark which supposedly represents the hypothetical performance of an average fund with the same asset allocation as Rhode Island and a 60/40 Blend hypothetical portfolio benchmark that consists of 60% US stocks and 40% US fixed income.
Beware of meaningless or misleading benchmarks selected by pensions themselves to gauge their performance against!
The Rhode Island pension may have beaten a convoluted “Total Plan Benchmark” it created for itself (to easily beat), but that’s irrelevant. If it hadn’t beaten its Total Plan Benchmark long enough, the pension would have simply changed it—which is exactly what it did a few years ago. Further, the pension is not remotely invested 60% in publicly traded stocks and 40% in bonds—its portfolio is far, far riskier. Thus, whether a 60/40 hypothetical portfolio benchmark is equally irrelevant.
So, you need to dive deeper. The performance of the pension should be compared against a relevant benchmark which you can readily determine—like the S&P 500 or Russell 3000.
Suddenly, Rhode Island’s performance doesn’t look good at all.
For the 10-year period ended June 30, 2019, gambling at the Rhode Island state pension resulted in a mere 8.75% return, massively the 14.41% return of the far less costly, far less risky Russell 3000 Index. For all other periods—1, 3 and 5-year, the pension significantly underperformed the index. In other words, the pension took on greater risk for which it was not rewarded but punished severely.
There have been volumes written regarding the best ways to evaluate investment performance. You probably do not wish to spend an expert on the subject. So, keep these simple points in mind.
Whenever presented with investment performance results for your pension, you should be suspicious. Due to what I refer to as “gross malpractice generally practiced,” almost all pensions will consistently perform poorly compared to an appropriate benchmark index. Thus, pensions are always searching for ways to make their bad or mediocre performance look stellar. Pensions in this effort by investment consulting firms which have mastered the art of investment performance chicanery.
Trust me, the people running your pension will never, ever admit to participants or the public that they’ve done a bad job.
Think about it: If they did, they’d lose their jobs.
Make sure performance is shown for all time periods—1, 3, 5 and ten years. Short-term performance is less important than long-term because you’re going to be in the pension for decades.
The choice of benchmarks and the changing of benchmarks are both telling. It’s safe to assume that whenever a benchmark changes, it means performance against the benchmark looks bad. Also, “custom” benchmarks, like Rhode Island’s Total Plan Benchmark are always designed to be confusing, easy to manipulate, easy to beat and make the pension’s performance look good.
Here’s the current composition of the Rhode Island state pension’s Total Plan Benchmark:
GROWTH
Total Public Growth
40% MSCI
Total Private Growth
11% ILPA All Funds Index
2.5% ODCE + 2.5%
1.5% ILPA/Cambridge Distressed Securities Index
INCOME
1.5% Alerian MLP Total Return
3.5% Liquid Credit Custom (50% BoA HY/50% CS LL)
3% S&P LSTA Lev Loans + 3%
STABILITY
Crisis Protection Class
4% CS Managed Futures 18% Vol Index
4 Long Duration US Treasury Index
Inflation Protection
2% CPI + 4%
4% NFI-ODCE Index
1 1-10 Year TIPs Index
1% BB Commodity Index
Volatility Protection
11.5 Agg
6.5% HFRI FOF Composite
3.0% BofA Merrill Lynch US T-Notes 0-1 Yr
It’s complex, with lots of movable parts to tweak to produce a favorable comparison.
Confused? Of course you are! So am I! That’s exactly the intended result.
So, when attempting to evaluate the performance of your pension, stick with simple, straightforward benchmarks like the S&P 500 for American pensions and the MSCI World Index for foreign pensions.
Finally, as pensions increasingly gamble in alternative funds with hard-to-value portfolios, investment performance 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.
Given the profound impact the has had on the economy and financial markets to date, be especially suspicious when your pension next published its investment performance results.
