Public pensions squander tens of billions of dollars each year on risky, poor-performing alternative investments.
By Gary Livlin and cross-posted from The Intercept
Thousands of Kentucky public school teachers swarmed the state Capitol earlier this year, angry not about low salaries, but about their shrinking pensions. Among their concerns: the high portion of their money that has ended up in the hands of Wall Street in opaque, high-cost products that seem to benefit no one aside from the people who sold them. Rising pension costs helped to send teachers in Colorado into the streets in protest a few weeks later. In the last year, pension woes have also prompted teachers in Ohio and Oklahoma to march. And police, firefighters, and other public employees in Michigan have been staging protests since at least 2016 to preserve their public pensions, more than one-third of which is invested in “alternatives”: private equity, hedge funds, commodities, distressed debt, and other opaque Wall Street investment vehicles.
A “Wall Street coup” — that’s how pension expert Edward “Ted” Siedle describes it. Public pensions across the country now squander tens of billions of dollars each year on risky, often poor-performing alternative investments — money public pensions can ill afford to waste. For all the talk of insolvency, $4 trillion now sits in the coffers of the country’s public pensions. It’s a giant pile of money of intense interest to Wall Street — one generally overseen by boards stocked with laypeople, often political appointees. “Time and again,” Siedle has written, “hucksters successfully pull the wool over these boards’ eyes.”
In 1974, in the wake of the spectacular collapse of the Studebaker car company and its pension plan, Congress passed a piece of landmark legislation, the Employee Retirement Income Security Act. Under ERISA, companies are required to adequately fund their pensions and follow what was then called the “prudent man” rule, which barred those in charge from putting pension dollars into overly risky investments. The departments of Labor, Treasury, and Commerce were charged with overseeing the country’s pensions and a new body was created, called the Pension Benefit Guaranty Corporation, that would backstop pensions should a business default.
Except Congress left out public employees entirely — with a yawning loophole that granted an exemption to public pensions. ERISA expressly exempts public pensions operated by state and local governments — the plans that provide for the country’s teachers, firefighters, police officers, and librarians in their retirement. Forty-four years after the passage of ERISA, these public workers comprise the majority of active employees still contributing to pension plans. And they have been left largely unprotected.
Siedle calls it “the loophole that is swallowing America”…