transparency | Pension360

Redacted Document Demonstrates Secrecy Surrounding Pension Funds and Private Equity Investments

The New York Times recently obtained a copy of a private equity limited partnership agreement from Carlyle Partners, and the document offers outsiders a rare peak into the opaque world of private equity investments.

[Document can be viewed at the bottom of this post, or by clicking here.]

The document is heavily, heavily redacted, but it’s important because it reveals just how few details are publicly available regarding the private equity investments of pension funds.

Many pension funds sign agreements just like this one – in fact, the list of pension funds that invest in Carlyle funds is long:

New York City Retirement Systems

CalPERS

CalSTRS

Illinois Teachers’ Retirement System

Florida State Board of Administration

Michigan Retirement Systems

Texas County & District Retirement System

New Mexico Public Employees Retirement System

Los Angeles County Employees’ Retirement Association

and many more.

Pension360 has previously covered how private equity firms encourage pension funds not to comply with FOIA or public records requests pertaining to private equity investments.

That sentiment is reflected in the Carlyle agreement, which pushes pension funds to resist public records requests if possible. From the New York Times:

Another blacked-out section in the Carlyle V agreement dictates how an investor, like a pension fund, also known as a limited partner, should respond to open-records requests about the fund. The clean version of the agreement strongly encourages fund investors to oppose such requests unless approved by the general partner.

Some pension funds have followed these instructions from private equity funds, even in states like Texas, which have sunshine laws that say “all government information is presumed to be available to the public.”

For an in-depth foray into the redacted elements of the agreement and its implications, head over to this Naked Capitalism post or the New York Times article.

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Few Details On New York Pension’s Partnership With Goldman Sachs As Comptroller Remains Quiet

New York State Comptroller Thomas DiNapoli, the sole trustee of the states $181 billion Common Retirement Fund (CRF), announced last month a partnership between the pension fund and Goldman Sachs.

CRF will give Goldman $2 billion to invest in global equities. But few other details have emerged about the partnership. That led one think tank, the Pioneer Institute, to push for more clarity. But the Comptroller’s office has remained mum on specifics. From Public Sector Inc:

The lack of transparency in portfolio management and the conspicuous absence of a board of trustees overseeing the investment process is troubling, if not perilous.

Matthew Sweeney, a spokesman for the comptroller’s office, answered some of a dozen questions about the GSAM deal. Here are a few of those he did not comment on, completely unedited:

– Which other investment management firms applied to the competitive bidding for the $2 billion allocation?

– What were the specific criteria on the basis of which GSAM was selected?

– Can you share the investment policy sheet that was publicized as part of the RfP for this portfolio segment? This would include targets like concentration risk and counterparty risk limits as well as a number of other parameters related to the asset classes included, long/short ratios, other risk metrics, geographies and other relevant characteristics of the desired portfolio.

– What are the performance targets in terms of risk and return for the performance-based compensation, if any?

– What are the benchmarks selected to evaluate the performance of this portfolio sleeve in the coming years?

Mr Sweeney did answer a question regarding the compensation structure in the contract – with the laconic: “Fees are disclosed on an annual basis.”

[…]

With so much pension money at stake, why didn’t Mr DiNapoli’s office publicize the selection process, a clear rationale for the investment and the performance objectives he has (or so one hopes) for Goldman? What value are Goldman’s undoubtedly well-compensated analysts and investment bankers supposed to add?

The so-called partnership “will initially focus on dynamic manager selection opportunities in global equities to enhance returns” and then provide “improved analytics and reporting on its portfolio and enhanced evaluation and due diligence on current and potential active managers.” In other words, the CRF added a potentially expensive actively managed distraction for its global investment team days before CalPERS announced ditching its $4 billion hedge-fund allocation precisely because it was too small to make a dent in overall return and too expensive in terms of time and money to manage.

The bottom line is that, because of their sheer size, most pension funds can do little but focus on efficient cost and risk management. An open and competitive bidding process is essential to keeping costs down. And a critical part of risk management is having a robust, transparent and accountable investment process, which the CRF appears to be patently lacking. One need not look far afield to see where this sort of conduct ultimately leads.

The Common Retirement Fund paid $575 million in management fees in fiscal year 2013-14. The fund manages $181 million in assets.

You can read more coverage of the Goldman Sachs deal here and here.

New York Comptroller DiNapoli Touts Pension Reforms in Letter

New York State Comptroller Thomas P. DiNapoli is likely to win re-election to his post without much trouble, according to recent polls.

But amidst questions about conflicts of interest in the New Jersey pension system, DiNapoli seized an opportunity to tout his own pension reform measures in a letter to the editor of the Times-Union:

A recent commentary rightfully condemned the culture of “pay to play” in which politically connected financial executives gain access to public pension money in exchange for political campaign contributions (“Public pensions, politics don’t mix,” Oct. 3).

After I was appointed state comptroller, my top priority was to restore the office’s reputation after it was badly tarnished by a scandal based on this corrupt practice. We took immediate steps to set new standards and controls to codify ethics, transparency and accountability.

In time, we have returned the office’s focus to where it should be – on the investments and performance of the New York State Common Retirement Fund. This was accomplished by: Banning the involvement of placement agents, paid intermediaries and registered lobbyists in investments; issuing an executive order and pressing the U.S. Securities and Exchange Commission to prohibit “pay-to-play” practices; and expanding vetting and approval of all investment decisions.

I’m proud to say the latest independent review of the pension fund by Funston Advisory Services found it operates with an industry-leading level of transparency and that our investment team acts within ethical and professional standards.

This review is a validation that we are on the right path and should reassure the people of New York that the pension fund is being managed properly and ethically.

DiNapoli (D) is running against political newcomer Robert Antonacci (R).

Photo by Awhill34 via Wikimedia Commons

Colorado Treasurer Candidates Differ On Pension Reform

Reforming Colorado’s largest pension plan, the Public Employees Retirement Association (PERA), is one of the looming issues in the state’s upcoming Treasurer election. And the candidates have very different takes on the situation.

Betsy Markey (D) is a former congresswoman who says she’ll fight for financial transparency but isn’t making pensions a central issue of her campaign. From the Durango Herald:

Markey is not overly concerned [about PERA], pointing out that legislative steps have been taken to put PERA on a sustainable path. She said the PERA board voted to lower the anticipated rate of return from 8 to 7.5 percent.

“When you’re looking into the future, the PERA board itself expects to close that unfunded liability gap within the next 30 years,” Markey said. “And they don’t expect that there will be a time in the next 30 years where they will ever not be able to fully meet their obligations to retirees.”

Incumbent Walker Stapleton (R), meanwhile, has made pension reform one of the central issues of his campaign and tenure as Treasurer. Still, he admits the state’s unfunded pension liabilities grew under his watch.

Walker responded to Markey’s position on pensions:

Stapleton said Markey’s position suggests an “alarming lack of knowledge for public-finance issues.

“PERA’s liability has only grown since I’ve been in office.” Stapleton said.

He added: “She said that PERA was fine, and I’m obsessed with it. … But she would also lower the rate of return for PERA? You can’t be for lowering the rate of return and not for additional work to be done.”

[…]

Stapleton has found himself at odds with the state employees’ union and those who manage retirement benefits.

He filed a lawsuit seeking to open the books of the Public Employees’ Retirement Association fund, and he has repeatedly fought to lower the projected rate of return on investments. He has also advocated for lowering cost-of-living raises and increasing the retirement age.

As of 2012, Colorado’s PERA was 63 percent funded and was shouldering $23 billion of unfunded liabilities.

A New Era of Pension Transparency In Boston? Not So Fast.

Last week, the Massachusetts Bay Transportation Authority (MBTA) agreed to disclose its member’s pension benefits and to beef up its previously inadequate annual financial reports.

The retirement fund, called the “T” Fund, is among the most tight-lipped in the country because it is not required to follow public records laws.

But a Boston Herald editorial warns us not to cheer for this measure quite yet. The newspaper calls the agreement a “half-measure” that could easily be reversed. From the Boston Herald:

A deal struck between the MBTA and a union representing 3,000 of its workers to disclose more information about employee pensions is a disappointing half-measure. A mere contractual agreement, it could easily be revised in the future. To ensure public access to this vital financial information the disclosure agreement needs the force of law.

Data on T pensions has long been shrouded in secrecy. The MBTA retirement fund was originally formed as a “private” trust, and state courts have upheld that status. That means neither MBTA fare-payers nor state taxpayers have the legal right to data on the pensions that they subsidize.

Amid public pressure over the fund’s secret operations — the board’s investment decisions are private, too, and its meetings aren’t open to the public — Beacon Hill last year passed a law intended to subject the T’s pension fund to state public records and open meeting laws.

But opponents of the new requirement resisted the effort, and actually succeeded in convincing the state’s supervisor of public records that the fund still wasn’t required to open its books.

So much energy wasted, all to keep the public from examining data that should be available for anyone who’s ever swiped a Charlie Card to examine.

The deal struck last week requires the union to turn over data on employee pensions to the T monthly, and the T will then post it on the state’s Open Checkbook website. We are supposed to greet this development with cheers.

But we’d be curious to know what T management had to give up during negotiations to secure the agreement. And we’d note once again that a provision like this negotiated into a labor contract could easily be negotiated out in the future.

The “T” fund is still refusing to disclose documents related to investment losses associated with certain hedge funds.

Photo by Truthout.org via Flickr CC License

Washington Pension Board Declines to Divest From Fossil Fuels

The Washington State Investment Board (WSIB), the entity that handles investments for the state’s pension systems, at its latest board meeting weighed whether to divest from fossil fuel-based companies.

The Board ultimately decided against divestment. But the members said they would continue to evaluate whether climate change posed any risk to pension investment returns, and would use their power as major shareholders to push companies for transparency about financial risks posed by climate change.

The WSIB has major stakes in oil and coal investments.

Further details on the board’s decision, from the Olympian:

When evaluating a future investment, the SIB said it will consider whether climate change poses any financial risk to its expected returns.

It should not stop investing in lucrative but controversial energy projects. That would expose the board to potential legal action over its failure to produce as much value as possible.

Outgoing SIB Chair Jim McIntire, who is also the state Treasurer, proposed a more responsible strategy for showing sensitivity to environmental issues. He said the SIB should press companies for greater transparency about the risk from climate change, and how they are mitigating that risk.

A large institutional investor such as the state of Washington can use its leverage to change company policies. McIntire said that’s the SIB’s preferred approach.

[…]

The SIB’s legal mandate is to make money for the pension funds it manages. Its fiduciary duty is simply to get the best return possible for the individuals who will someday depend on those pensions.

But setting investment policy is more complex than that. The SIB members are responsible for examining the short- and long-term risks of its investments. And that requires assessing both internal and external factors that might influence an investment’s return.

The WSIB presents an argument many pension funds have made over the past few months: divestment isn’t as effective as lobbying for change as a major shareholder.

No public pension funds in the U.S. have yet divested from fossil fuel companies on the grounds of climate change.

CalPERS Is Ramping Up Its Real Estate Portfolio. Why?

Last week marked a big shift in investment strategy for CalPERS, and it goes beyond hedge funds. The pension fund’s hedge fund pullout got all the headlines, of course, but CalPERS also decided to invest an addition $1.3 billion in real estate.

The reasoning behind dropping hedge funds has been made clear. But what about the real estate investments? Over at GlobeSt.com, Erika Morphy explores some of the reasons that could be behind CalPERS’ deep dive into real estate.

From GlobeSt.com:

It’s business as usual

It was just real estate’ turn, says Stephen Culhane, who heads the investment management practice at the law firm Kaye Scholer.

“Institutional investors are always assessing and reassessing their allocations,” he tells GlobeSt.com. “Commercial real estate valuations are strong and it is perceived as a bit as a safe haven particularly for non US and long-term investors.”

It’s a shift in investment philosophy – and not just a change in asset allocation

CalPERS handles over $300 billion for over 1 million current and former state employees. Their investing philosophy is transitioning from a classic hedge fund, 60/40 model, to more of an endowment model, says Jeff Sica, founder and CIO of Circle Squared Alternative Investments.

“CalPERS is aiming to reduce volatility and obtain a more predictable annual return across their portfolio,” Sica tells GlobeSt.com. “Their move into real estate provides them with stability and a quantifiable income stream. With reduced volatility and a stabilized annual return, it will be more beneficial to them in the long run instead of fluctuating with the equity market,” he says.

Hedge funds have lost their appeal.

Despite CalPERS careful explanations, this is the theory of Bill Militello, co-founder and CEO of Militello Capital.

“The increasing trend of moving away from hedge funds is due in part to their lack of transparency and a lack of understanding of the investments—they are intangible,” he tells GlobeSt.com. “Hedge funds are simply public securities in a different wrapper, they are not an asset class, they are a compensation scheme.”

There is also evidence that hedge funds on an overall basis have actually underperformed versus passively managed funds, Chauncey M. Swalwell, partner with Stroock & Stroock & Lavan LLP, tells GlobeSt.com—”making the relatively high fees typically paid to hedge fund managers untenable at CalPERS.”

It is an inflation hedge

This is the flip side of fund’s decision, Militello adds. “Properly purchased real estate in supply constrained markets with built in demand drivers provides access to well-insulated investments that protect against rising interest rates.”

There isn’t space here to list all the potential reasons listed. You can read all seven reasons here.

LACERS also committed an additional $190 million to real estate investments last week.

Public Pension Funds Drive Venture Capital Boom, But Performance Is An Issue

The venture capital industry is becoming a major force again, and pension funds are the major driver of the resurgence. From Businessweek:

Public pension funds—the state-run investment pools responsible for the retirement benefits of nearly 20 million Americans—have quietly been funding the recent boom in venture capital. The investment pools are made up of tax dollars and contributions from state employees. For the last few years, they have made up the biggest single source of funds flowing to venture capital, according to the most recent Dow Jones Private Equity Analyst Sources of Capital survey. In 2014, they contributed 20 percent of the sector’s overall haul, down slightly from a 25 percent contribution in 2013.

Indiana’s Public Retirement System allocates (PDF) 1.6 percent ($363 million) to venture capital, which is on the higher end as a percentage of assets; the California Public Employees’ Retirement System (CalPERS) allocates a more typical half percent of assets, although the fund is so big that this meager fraction totaled $1.8 billion in 2013. The amounts are small enough that if pension funds’ entire venture capital investments were to evaporate, pensioners would still be all right. In most states, pension obligations are guaranteed by state constitutions. If the investments—in venture capital or anything else—don’t pay off, taxpayers are on the hook for the shortfall.

But there’s a problem: some of the best venture capital funds don’t want to do business with public pension funds. From Businessweek:

Because public pensions must be transparent about their investments, which are subject to the Freedom of Information Act, many top-performing venture capital funds won’t accept pension money; they don’t want to publicly disclose their portfolios. This makes public pensions pick from other—often lesser-performing—funds.

Like hedge funds and other kinds of private equity, venture capital funds charge an annual management fee of 2 percent, plus 20 percent of profits. Performance is an open question. Many funds fail to perform (PDF) as well as an Standard & Poor’s 500-stock index fund. Diane Mulcahy,senior fellow at the Kaufmann Foundation, has observed that many venture capital funds aren’t profitable and that steady fee income diminishes the funds’ incentive to find profitable investments.

Other institutional investors are funding the VC resurgence, as well. Endowment funds provided the VC industry with 17 percent of its capital in 2014, according to the Dow Jones survey. Corporate pension funds accounted for 7 percent, while union pension funds accounted for 2 percent.

Photo by c_ambler via Flickr CC License

A Step Toward Pension Transparency in Boston

As part of recent contract negotiations, the Massachusetts Bay Transportation Authority (MBTA) has agreed to disclose more of its pension data to the public.

The MBTA retirement fund is among the most tight-lipped public pension funds in the country, due to laws that exempt it from following public records laws.

The MBTA will now release its members’ monthly pension benefits to the public. It will also improve its annual financial reports to include more information.

Reported by the Boston Globe:

Under the contract, the Boston Carmen’s Union adopted language to require the $1.6 billion T retirement fund to disclose members’ pension benefits to the MBTA at least monthly. The MBTA in turn will post them on the state website that discloses all public employee pensions, Open Checkbook.

In addition, the union agreed that fund trustees will improve the annual report to meet the standards of the Government Finance Officers Association.

The fund’s annual report for years has left out essential elements, prompting warnings from auditors. The fund also failed to disclose a $25 million loss on a hedge fund investment in 2012, until the matter was reported by the Globe last year. Currently, the loss is posted on the pension fund’s website.

The union, which also won a 10 percent pay increase over the next four years, approved the pension and work agreements last weekend. The Massachusetts Department of Transportation affirmed the $94 million accord Wednesday.

The T pension fund, partially supported by taxpayers, is organized as a trust and not required to follow public records laws. That position was upheld by the state Supreme Judicial Court in 1993.

Transparency advocates didn’t get everything they wanted, however. The fund is still refusing to disclose documents related to investment losses associated with certain hedge funds.

Photo by Truthout.org via Flickr CC License

BNY Mellon Launches Service To Aid Pension Funds’ Compliance With New GASB Rules

BNY Mellon has announced a new “regulatory support group” to help its pension fund clients to prepare for and comply with new GASB accounting standards, which went into effect last June. From a BNY Mellon press release:

BNY Mellon has developed reports that will enable plan sponsors to seamlessly compile Statements of Net Assets and Net Changes, new requirements called for under GASB 67. The reports are easily customized and available to clients through Workbench™, BNY Mellon’s technology portal. Additional solutions are designed to help clients meet their GASB 67 performance reporting requirements, with capabilities that feature:

–       Annual money-weighted returns integrated into existing standard and interactive reporting

–       Money-weighted returns available across all return types, including net-of-plan expenses

–       Returns reported by calendar or fiscal periods, as well as customized time periods

–       Extended time-period returns reported on an annualized or cumulative basis back to inception date.

“As new standards like GASB 67 continue to impact plan sponsors, they need investment servicers with a solid understanding of the financial regulatory landscape,” said George Gilmer, BNY Mellon head of Asset Servicing for the Americas.

The new GASB rules are designed to improve transparency and accountability in the financial reporting of public pension funds.

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