In the United States, the combined value of pension plan assets held by state and local governments is over $4 trillion. These pensions are overseen by boards of trustees comprised of lay men and women who generally lack any knowledge or expertise in investment matters. There are a few state and local laws which require one or more board members of public pensions to possess some financial experience but such requirements are extremely rare.
Typically public pension boards include some individuals, such as active or retired teachers, cops, firefighters, and sanitation workers, who are supposed to represent the interests of workers and pensioners. Other board members are appointed by politicians, such governors and mayors who are supposed to represent the interests of voters, aka taxpayers.
Again, typically none of the worker or political representatives knows anything about investing—yet they decide how trillions in public pension assets are invested.
What could possibly go wrong, you might ask?
Everything and far more than you can imagine.
For example, with $354 billion in assets under management, the California Public Employees Retirement System, America’s largest state pension, has historically been considered the “gold standard” for public pensions in its investment approach, its integrity and its management.
How well is the nation’s “best of the best” American public pension managed?
In 2016, the former chief executive of the pension was sentenced to a prison term of 4.5 years after pleading guilty to a conspiracy charge for taking more than $250,000 in cash and other bribes from his friend and former CalPERS board member Alfred Villalobos. Prosecutors said Villalobos, who killed himself weeks before he was due to stand trial, reportedly made $50 million as a middleman for investment firms looking to get a piece of CalPERS’ business.
Later that same year, a former director of New York’s massive public pension was charged with accepting crack cocaine, money for prostitutes and other lavish bribes to steer more than $2 billion in securities trades.
Preet Bharara, U.S. attorney for the Southern District of New York said at the time, “The hard-earned pension savings of New Yorkers should never serve as a vehicle for corrupt, personal enrichment. The intersection of public corruption and securities fraud appears to be a busy one, but it’s one that we are committed to policing.”
A recent study of U.S. public pensions concluded that oversight of these funds is vitally important to government officials, plan participants, and taxpayers. The effectiveness of pension boards depends on their structure, composition, size, and member tenure. Most important, better board composition is associated with a higher 10-year investment return on fund assets. Hardly surprising.
Members of public pension boards and pension staff may be crooked for hustling cash, hookers and blow, but they’re Boy Scouts compared to the wolves of Wall Street who make billions selling their latest high-cost, high-risk, complex and opaque deals to unsophisticated public pensions.
When it comes to stealing from Main Street, no one does it better than Wall Street.
Corporate or private pensions are generally no better off than government pensions. Usually someone from the Human Resources or Finance Department has been assigned responsibility for the neglected pension but it’s not his or her full-time job.
(I remember a deposition when the Chief Financial Officer responsible for overseeing a multi-billion dollar corporate pension sheepishly admitted after repeated aggressive questioning that he only spent 10 percent of his time on pension matters.)
By the way, Human Resources experience is scarcely relevant to pensions and even corporate finance isn’t very helpful.
Pensions are unique and complex. I don’t think it’s too much to ask that the person safeguarding your retirement savings, as well as the savings of thousands or millions of workers have some special training.
Fortunately, there are globally-recognized experts in pensions and investments who offer sound advice on how pensions should be prudently managed.
You’d think pension overseers, especially financially-illiterate public pension boards, would listen to these experts. As I explain in my book, Who Stole My Pension? you’d be wrong.
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