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Illinois Pensions Get $50 Million From S&P Settlement

Credit ratings agency Standards & Poor’s announced a $1.375 billion settlement with 18 states today over the alleged inflated ratings it gave mortgage-backed securities which eventually turned toxic.

Illinois will receive a $52.5 million chunk of that settlement – with most of the money going towards its pension systems.

More from the Chicago Sun-Times:

It won’t solve Illinois’ pension crisis — not by a long shot — but it’s “better than nothing,” state Attorney General Lisa Madigan said Tuesday, announcing a $52.5 million settlement connected to the 2008 economic collapse.

[…]

Madigan’s office sued S&P in 2012, alleging the credit ratings agency “compromised its independence as a ratings agency by doling out high ratings to unworthy, risky investments to increase its profits, while its misrepresentations spurred investors, including Illinois’ pension funds, to purchase securities that were far riskier than their ratings indicated.”

“S&P abandoned its critical role in the years leading up to the economic crisis, blinded by its unyielding desire for profits,” Madigan said during a news conference Tuesday morning at the Thompson Center in the Loop.

The majority of the state’s portion will be reinvested in Illinois’ pension systems, Madigan said. To date, the state has recovered approximately $400 million for losses the state pension systems sustained after investing in mortgage-backed securities, Madigan said.

Though Madigan acknowledged the latest settlement will have little impact on the state’s pension mess, she said it nevertheless sends a message.

The Justice Department statement on the settlement, which includes a list of the states receiving money, can be read here.

New York Comptroller Candidates Spar Over Private Equity Pension Investments

In the race for New York State Comptroller, incumbent Thomas DiNapoli is guarding a comfortable 20-point lead in the polls.

But his challenger, political unknown Bob Antonacci, isn’t holstering his guns quite yet.

Both candidates over the weekend sparred about the place of private equity in New York’s pension portfolio.

Under DiNapoli, New York’s Common Retirement Fund (CRF) allocates 8 percent of assets to private equity. Antonacci thinks that’s far too much.

From the New York Post:

DiNapoli’s challenger in the state comptroller’s race warned that private-equity investments look good now, but can turn bad very quickly.

“Private-equity investments can be very risky,” says Republican Bob Antonacci.

He agrees that it is a good idea to diversify state retirement portfolios beyond stocks and bonds. But 8 percent in private equity is excessive, he says.

“I think the problem is that he (DiNapoli) is putting too much emphasis on risky investments,” Antonacci said.

He added that the comptroller is seeking out chancier investments because his goal is to obtain a 7.5 percent return a year. That, Antonacci adds, is an unrealistic expectation.

“We are taking chances on getting returns that aren’t going to be there in the long run,” Antonacci says.

DiNapoli’s office responded:

“The comptroller sees private equity as diversifying the investment portfolio and getting better investment returns,” says DiNapoli spokesman Matthew Sweeney.

[…]

The recent numbers show that using private equity reduces risk through portfolio diversification, DiNapoli’s spokesman said. That, he adds, reduces risk.

New York State and Local Retirement Systems earned 14.9 percent over the past decade on the private equity part of the investments, according to a new report from the Private Equity Growth Capital Council (PEGCC).

The State Comptroller oversees $181 billion in pension assets. Recent polls have DiNapoli leading Antonacci, 58 percent to 31 percent.

Photo by Awhill34 via Wikimedia Commons

Pulitzer Prize Winner: Hedge Funds Not Worth The Risk For Pensions

David Cay Johnston, former Pulitzer prize-winning reporter for the New York Times and lecturer at Syracuse University, has written a column calling for pensions to stop risking assets with hedge funds.

He says the nature of hedge funds make the investment “not suited” for pension funds. First, he takes hedge funds to task for their fee structure. From the piece, published on Al-Jazeera:

Hedge funds charge hefty fees. Many hedge funds charge what is known in the trade as 2 and 20. That is for a 2 percent annual management fee, or $20,000 per $1 million, and 20 percent of all gains. Julian Simon’s Renaissance Technologies charges a 5 percent base and 44 percent of gains. From 1982 through 2009, when it averaged extraordinary 35 percent annual returns after expenses, that was a great deal, but since then, Simon has underperformed the market.

Compare these numbers with the very well-managed ExxonMobil pension fund, which its latest disclosure reports show has overhead charges of less than $1,200 per $1 million. Vanguard 500 investors pay as little as $500 annually to manage $1 million.

To get a better sense of the numbers, consider a year when the market return is 5 percent and a hedge fund earns that. On a $1 million investment, after a 2 percent management fee and a 20 percent profit performance fee, the hedge fund investor will be ahead by $19,200, or less than 2 percent; the Vanguard investor will be ahead by $49,950, or almost 5 percent.

The other facet of his argument is that hedge funds, while not necessarily a bad investment for other entities, are not a “prudent” investment for pension funds to make. From the editorial:

Hedge funds simply are not appropriate for taxpayers and public-sector workers. They are, rather, for wealthy speculators willing to take big risks in the hopes of earning big rewards while being able to tolerate the chance that an investment will shrivel or even be wiped out.

Pension money should be invested prudently. “Prudent” comes from the word “provident,” meaning to prepare for the future. And while its origins are in religious concepts, failing to prudently handle earthly money can turn the end of life into hell.

Given survivor benefits in pension plans, these pools of money should be treated as widows-and-orphans money. Under ancient and well-tested principles, the money of such vulnerable people must be invested with exceptional care to safeguard from loss. That means investment-grade bonds (more on that below) and either blue chip stocks or broad indexes.

Only with the rise in the last six decades of modern portfolio theory — investing in many different arenas to spread risk — have we gotten away from the idea that for widows, orphans and pensioners, only high-grade corporate bonds and a few blue chip stocks paying big dividends are appropriate investments.

The rest of the piece can be read here.