Pension Fund Follies

October 2, 2009 12:28 AM

Missouri's lack of conflict of interest rules for its teachers' pension funds creates predictable problems

Such nuggets as the following can be found within:

Even Yoakum charged $100 for Glamour Shots while in Sacramento, Calif., in April 2007.

posted by reenum (25 comments total)

Corruption? In the financial world? That's unpossible!
posted by dersins at 12:32 AM on October 2

The Show-Me-The-Money State.
posted by Blazecock Pileon at 1:01 AM on October 2 [1 favorite]

Yikes. Meanwhile, KPERS is quasi-bankrupt:

For KPERS to be financially sound, the state would have to defund everything in the budget for 18 months — K-12, higher ed, transportation, social services, etc. — just to pay into KPERS.

The solution I see as likely is a transition from "defined benefits" to "defined contributions". Which basically means you put money in and when it's all gone it's your fault this time, not theirs.
posted by pwnguin at 1:44 AM on October 2

Pension funds are compulsory in Australia. 9% of every pay packet gets skimmed. If you've had a few jobs over the years – even a piddly part time job like working at a fair for 2 weeks – you might have a collection of 10 or more pension funds by the time you hit your late 20s. This has changed a bit recently after the government relaxed the rules about nominating your own fund when starting a job. But I digress.

I read my GESB statement the other day, and all they do is give money to other funds to gouge fees invest. The big cheese recently got a 20% pay rise... and she basically does: NOTHING!

Compulsory superannuation is an absolute rort and all it does is cause asset bubbles and it's fair dinkum gonna start WWIII.

I believe you Americans are toying with the idea? Last year I saw some robust debates about the "privatisation of welfare" or something like that. I believe it's the same thing?
posted by uncanny hengeman at 4:31 AM on October 2 [1 favorite]

Compulsory superannuation is an absolute rort and all it does is cause asset bubbles and it's fair dinkum gonna start WWIII.

To be fair, at least the super funds still have the money. As to the US's "social security" scheme, well, you've seen how cashed up the US government is, right?
posted by pompomtom at 4:58 AM on October 2

My significant other's pension is via this pension fund, so I passed this along to her. To be fair, they really have done better than most pension funds out there, and are in no danger at all of having to fall back on the federal pension guarantee. Still, they shouldn't be wasting money on perks.
posted by jamstigator at 6:35 AM on October 2

Bud Light Bigass with Souvenir Bigass Glass

That's just fun to say out loud. I could see chanting this on the playground.

This Pension Fund was created by state law, but who actually puts the package together-- writes the guidelines, hires the staff? Does Joe "Bigass" Blow say, "I've started a Pension Fund. Give me some money."? Are they started by the State? By Banks? It seems like the failure here is this Pension Fund was set up very loosely with plenty of loopholes to be exploited by the executives. How many businesses today would say, "Keep your expense account 'reasonable'"? "Stay at 'moderate' hotels" without defining 'moderate'? One man's moderate is apparently another man's luxury; I know that New York City is expensive but does $604.39 a night translate to 'moderate' by anybody's standards?
posted by Secret Life of Gravy at 7:05 AM on October 2

seriously - read the article. Their expose is kind of ridiculious. Like the party that cost $40/head? Reimbursing someone for 2 buds and a stella? Christ - you'd have thought it was a '28 Yquem the way the article pitched it.

Yeah there are some dumb things like staying at the plaza and the ritz-carlton - but I thought this article was going to be about some pay to play scandal or something. This is bad judgment and some silly spending by some guys who get paid a lot less then their suppliers do (Asset managers) and want to think they are players every once and a while. Its dumb, but its not a scandal. I can find 50 more scandalous stories involving fund sponsors, money managers, and brokers. I'd rather have my pension plan have expenses out of line a bit rather then my plan hiring a bad manager because they got the blowjobs and ecstacy from a midget stripper while flying on a private jet to the super bowl.

To the more salient points
1) a long-term pension plan being underfunded does not mean it is bankrupt. Their liabilities spread out over the next 70 years at least (assuming the surviving spouses of 22y.o. who just started teaching). They've got plenty of years in which they will outperform the required actuarial return (i.e. the return they need to generate on exsiting assets that combined with future expectations of contributions that will enable them to pay everyones pensions) In fact given the trauma that has gone on in the last year 83% underfunded isn't half bad if they were fully funded right now it would tell you two things - they were not taking enough risk with to earn the required 8% return over time or they were taking too much in contributions from plan participants. Also remember since they published that number we've had another stellar quarter of equity returns.
2)superannuation /=/ social security. Superannuation is really a mandatory 401k in US parlance. The US doesn't require contributions, but tries to encourage them through tax advantages. Australia just said - fuck it people don't know what's good for them - make it mandatory. The Australians are right - look at the US savings rate.
3) I started defending the unfunded nature of social security - but I don't want to start a fight with anyone. Same with the "superannuation causes bubbles" argument.
posted by JPD at 7:29 AM on October 2 [2 favorites]

I believe you Americans are toying with the idea? Last year I saw some robust debates about the "privatisation of welfare" or something like that. I believe it's the same thing?

Social security. There are a few issues mixed up. Social security functions as a quasi-pension (your benefit depends on the salary you made and were taxed on), but it's also a safety net program to reduce elder poverty as well as a massive inter-generational wealth transfer to the boomers.

If you go to a defined-contribution model where you make contributions that sit in an account and are invested in some way, then you have less of a problem with institutions pretending that they make appropriate contributions when they don't. For example the Illinois pension funds are (last I saw) $90B in the hole (which may or may not include their losses this year). The state has revenue of $27B per year. GM went bankrupt largely because it made extravagant retirement promises and did not put anything approaching the right amount away to pay for it. Instead, I have an account which I actually own which sits in a third party institution.

On the other hand, then you have to build in the safety net as add-ons. You also have to cleverly deal with the fact that most people are terrible at investing. As a result of the poor oversight that most people exercise, you don't necessarily get rid of the grafting.
posted by a robot made out of meat at 7:34 AM on October 2

I believe you Americans are toying with the idea? Last year I saw some robust debates about the "privatisation of welfare" or something like that. I believe it's the same thing?

The reputation of the US government's retirement plan for federal employees, the Thrift Savings Plan is absolutely spotless, and it is often held up as an example for how retirement plans should be operated. The investment options are small and unconfusing, and the fees are ridiculously low.

I think that expanding the plan allow non-federal employees to participate would benefit everybody. Of course, that is not exactly what was proposed previously.
posted by Quonab at 7:40 AM on October 2 [2 favorites]

Oh boy. Mrs. zsazsa used to teach in Missouri and has a fair amount of money in this system. Up until now they've appeared to be a pretty good operation, so when the stock market went south we didn't decide to pull her money out of it. Turns out this might not have been the best decision.
posted by zsazsa at 7:46 AM on October 2

Bear in mind in the US social security is not means tested unlike the UK or Australia - so its a safety net that everyone gets. IMO that's silly - but politically it would be impossible to change it.

Company defined benefit plans tend to run into trouble when the enterprise that sponsors the fund begins to shrink. In 1972 when GM ran the numbers on how much it needed to put away for each employee they (reasonably) assumed the future was going to be somewhat like the past. Things didn't quite work out like that. Also for reasons I'm not really sure of, the US does not require enterprises to fund healthcare obligations as incurred, rather they are allowed to pay them as they are expensed (Pay-as-you-go). When GM shrunk as much as it did, and when the healthcare premiums paid by the much smaller workforce was not even remotely close enough to cover the peak healthcare costs of the much greater number of retirees they had a massive problem. This is part of the reason why some large businesses have been supporters of a public option - basically allows them to put this expense to the government.
posted by JPD at 7:47 AM on October 2

my point was - a government pension plan like this one is really only threatened if that state saw massive depopulation that required many schools closing.
posted by JPD at 7:51 AM on October 2

There are two problems:
1. When you combine small amounts of money from a large number of people, it adds up to a lot of money, and though each person may be poor, when you put all their money together, it looks like they are rich (hey, it's a lot of money, isn't it?)

2. All people, no matter how old or professional they are, have a little selfish, greedy child inside them. Given access to a lot of money, this little child often comes out.

A friend of mine in the finance industry had a 'sticky money' theory. When you get near a lot of money, even though it may just be going in one door and out the other, somehow some of it just sticks to you. So your career goal should be to try to get near large amounts of money.

I think this explains a lot of corruption in government and in finance. This is why you should never trust anyone who ends up near accumulated money. There must always be independent checks and balances.
posted by eye of newt at 7:56 AM on October 2

The solution I see as likely is a transition from "defined benefits" to "defined contributions".

This has already happened. The only defined benefit plans left are legacy plans. Most employers have either terminated or frozen their DB plans and have replaced them with defined contribution plans (and sometimes company matching). In 20 years, no one will know what Title IV of ERISA is (unlike now where it is SUCH a popular topic of conversation at cocktail parties...)
posted by Falconetti at 8:28 AM on October 2

The SEC should be all up their collective behinds, if only to find out which brokers or fund companies are plying them with gifts.
posted by Gungho at 8:40 AM on October 2

“I frankly have never heard of free cars,” said John Hood, president of the John Locke Foundation, a public policy think tank based in North Carolina. “You either get mileage or you get a car. But you don’t typically get a car plus whatever fuel you want.”

Free cars for the educators' pension fund managers? And I thought hotshot high school sports stars got those kind of perks from college scouts and pro teams.
posted by filthy light thief at 8:50 AM on October 2

I don't see what the problem is... its way cheaper for these companies to give the people that make these sorts of investment decisions a great night out on the town, a free car, and free gas than it is to actually pay for a retirement fund...

This is just smart business planning...

If anyone wants to bribe me for my opinion on this sort of thing, I'll gladly memail you my paypal information...
posted by Nanukthedog at 8:55 AM on October 2

Falconetti: "This has already happened. The only defined benefit plans left are legacy plans."

KPERS then, is an existing legacy pension plan. You contribute a specific percentage of income every month, and upon retirement, you are paid according to a specific formula accounting for time served and final salary. The pension managers invest the money with an 8 percent target. Someone more qualified than I can say whether they've repeatedly hit that target in the past 10 years; I've only cared for the last year.

I already have an IRA independent of my employer; and as KPERS is for public employees, there will be no "employer match" in a 403(b). Defined benefit is nice because it turns out I decided to be an expert at my day job, not investment.
posted by pwnguin at 10:49 AM on October 2

pwnguin, fair enough, there are still active defined benefit plans out there of course, I only meant that they have been dwindling in prominence for a long time.
posted by Falconetti at 11:03 AM on October 2

pwnguin - the fund hitting its acutarial goal in any single years as a measure of performance is meaningless and counterproductive. All that matters is that over the life of the fund you average something approximating that 8%. 8% every year is really really hard. Impossible. In fact one of the arguments for why people should have identified Madoff as a fraud was because his returns were so consistent.
posted by JPD at 11:21 AM on October 2 [1 favorite]

"This Pension Fund was created by state law, but who actually puts the package together-- writes the guidelines, hires the staff? Does Joe "Bigass" Blow say, "I've started a Pension Fund. Give me some money."? Are they started by the State? By Banks? It seems like the failure here is this Pension Fund was set up very loosely with plenty of loopholes to be exploited by the executives. How many businesses today would say, "Keep your expense account 'reasonable'"? "Stay at 'moderate' hotels" without defining 'moderate'?"

The State/Union starts the fund, takes money from the paychecks of the employees and/or members, and it goes into a pool to be invested. Fund managers are hired to oversee this pool of money and decide with whom/in what it should be invested. State pension funds are gargantuan --- in the interests of diversification, usually the state fund managers break off chunks and hand it off to several subsidiary investment management firms for them to run. The state fund managers then keep tabs on the subsidiaries, shifting money around to whichever one seems to have the best investment strategy. The subsidiaries charge a set fee for managing the money, usually measure in basis points (100 basis points=1%) For a mutual fund, fees are generally between 275 and 25 basis points, with the low end being funds set up to passively mimic the market as a whole (index funds) and the high end being fancy schmancy funds that require propritary mathemeatical formula and lots of trading, etc. With hedge funds it's a lot more --- usually 2 and 20, that is, 2% of the total amount invested plus 20% of the profit generated from the strategy. You can also send the money to private equity firms; mutual and hede funds usualy invest in stocks and bonds and variations thereof. Private equity, on the other hand, may out and out buy a company or piece of land, selling it off later at a profit.

Now you see the temptation: The State pension fund managers have the ability to dole out billions to be managed to the various investment firms (meaning millions in fees for them). And so the investment management firms have all kinds of incentives to woo the pension fund managers, and millions of dollars to do it with.

So the failure here is that there should have been an ethics policy in place that said 1) don't let investment managers jet you off Hawaii for golf and suchlike, or you may be biased when you're deciding which firm should handle the pension fund's money, and 2) don't you yourself splurge on fancy-schmancy hotels and so forth, because even though you're running with millionairs, every dime in your expense report is ultimately coming out of some fourth grade teacher's pocket.

Overall, howver, this article is a little dim, and doesn't really give a sense of scale. When you're dealing with the kind of money in a state pension fund, an variation in the returns of .0003% is going to affect the fund more than 100 nights at the Waldorm, $600 a pop or no.
posted by Diablevert at 1:15 PM on October 2

Right - that's what makes this "Expose" so pathetic - they is evidence that they were overly lavish with their own expenses (stupid, not evil) but no evidence they were letting themselves get bought by their money managers and consultants (evil and stupid)

Also just to quibble - an institution the size of this one would not be investing in mutual funds, and probably would not be paying more the 100bps for even their most unique non-alternative investments. In most cases dramatically less.
posted by JPD at 2:13 PM on October 2

I'm not trying to cite a single year's performance here. If you got that impression, then I failed to convey myself properly. I've only cared about KPERS since I took a job that participated a year ago. The comment about the repeatedly hitting the target was wrong. Obviously there are up and down markets and even years.

I should have asked whether the past ten years as a whole has lived up to that 8 percent annual goal on average; the impression I got from reading the actual academic publication on KPERS suggested multiple years of fail (though you rightly point out it didn't account for recent market gains).

My own investment strategy is to look for a low cost index fund with a record of performing relatively well in a down market, with steady management. I thought that was sane criteria for performance in late 2006, but it appears that my pick went from a 5 star to 1 star fund since then. Too little, too late, Morningstar.

Certainly this Missouri flap isn't as epic as the MP expenses across the pond. That scandal just had flair. Sure, anyone with a company credit card can expense a pool cleaning, but how many people can say they had their moat cleaned?
posted by pwnguin at 7:07 PM on October 2

Compulsory superannuation is an absolute rort
Just to respond to this. In Australia, we have a government funded old age pension that is a safety net to give those with no other income enough to live on (or not). It is only available to people that have no, or modest, other income from private pensions etc.
In the early 1990s, the federal government mandated all employers pay 9% of their employees income into a "superannuation" fund. By making it an across the board law, the outcome was basically everyone got this for nothing, but pay rises were smaller for the next few years. Yeah, it hurt business a bit, but if you look at the results for that year it actually didn't put much of a dent in corporate profits, and from that day on, every employee had 9% savings put away that they couldn't touch until they were about 60yro.
It will make my generation a lot richer when we retire, and it makes it all very transparent. Each year we get a report from our fund telling us our funds performance, and I don't have to worry about some unfunded social security program.
It isn't as simplistic as I make out, there is lots of nuance and complexity but at heart the idea of a forced investment program for retirement is a tremendous boon for the ordinary person, and a tremendous benefit for future tax payers.
posted by bystander at 7:19 AM on October 3