Coronavirus Side Effect: Feverish Pension Lying - Ted Siedle

Tuesday, April 07, 2020

Ted Siedle, Guest MINDSETTER™

 

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Ted Siedle

In the best of times, pensions exaggerate or outright lie about their investment performance results. In the worst of times, fuggedaboutit!

Over the course of my 35-year career examining thousands of pensions, I have never seen a pension openly acknowledge that its investment performance is poor. Obviously, there have to be some pension laggards but you’d never guess it from reading the glowing performance reports they provide to participants and the public.

So, how can every pension claim to have superior investment results?

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As I explain in my new book, Who Stole My Pension?, they outright lie —or to put it more kindly, don’t tell the complete truth. In the best of times, pensions manipulate their investment performance results. In the worst of times, fuggedaboutit!

Given the severe impact, the coronavirus has had on the markets to date and the likelihood that performance of at least state and local government pensions will not improve by fiscal year-end, get set for a season of feverish pension lying about investment performance results.

Since your pension can be counted upon to continue to lie to you about its investment performance, you need to know how to look beyond the performance puffery and get to the truth about how it’s really doing.  

For example, the overseers of the Employee Retirement System of Rhode Island claim to “deliver strong long-term returns and reduced risk for the state’s investments.” The fund’s website indicates that for 5-year and 10-year periods it has beaten the Total Plan Benchmark which supposedly represents the hypothetical performance of an average fund with the same asset allocation as Rhode Island and a 60/40 Blend hypothetical portfolio benchmark that consists of 60% US stocks and 40% US fixed income.

Beware of meaningless or misleading benchmarks selected by pensions themselves to gauge their performance against!

The Rhode Island pension may have beaten a convoluted “Total Plan Benchmark” it created for itself (to easily beat), but that’s irrelevant. If it hadn’t beaten its Total Plan Benchmark long enough, the pension would have simply changed it—which is exactly what it did a few years ago. Further, the pension is not remotely invested 60% in publicly traded stocks and 40% in bonds—its portfolio is far, far riskier. Thus, whether it beat a 60/40 hypothetical portfolio benchmark is equally irrelevant.   

So, you need to dive deeper. The performance of the pension should be compared against a relevant benchmark which you can readily determine—like the S&P 500 or Russell 3000.

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Seth Magaziner, RI General Treasurer

Suddenly, Rhode Island’s performance doesn’t look good at all.  

For the 10-year period ended June 30, 2019, gambling at the Rhode Island state pension resulted in a mere 8.75% return, massively underperforming the 14.41% return of the far less costly, far less risky Russell 3000 Index. For all other periods—1, 3 and 5-year, the pension significantly underperformed the index. In other words, the pension took on greater risk for which it was not rewarded but punished severely.  

There have been volumes written regarding the best ways to evaluate investment performance. You probably do not wish to spend years becoming an expert on the subject. So, keep these simple points in mind.  

Whenever presented with investment performance results for your pension, you should be suspicious. Due to what I refer to as “gross malpractice generally practiced,” almost all pensions will consistently perform poorly compared to an appropriate benchmark index. Thus, pensions are always searching for ways to make their bad or mediocre performance look stellar. Pensions are assisted in this effort by investment consulting firms that have mastered the art of investment performance chicanery.

Trust me, the people running your pension will never, ever admit to participants or the public that they’ve done a bad job.

Think about it: If they did, they’d lose their jobs.     

Make sure performance is shown for all time periods—1, 3, 5 and ten years. Short-term performance is less important than long-term because you’re going to be in the pension for decades.

The choice of benchmarks and the changing of benchmarks are both telling. It’s safe to assume that whenever a benchmark changes, it means performance against the benchmark looks bad. Also, “custom” benchmarks, like Rhode Island’s Total Plan Benchmark are always designed to be confusing, easy to manipulate, easy to beat and make the pension’s performance look good.

Here’s the current composition of the Rhode Island state pension’s Total Plan Benchmark:

GROWTH

Total Public Growth

40% MSCI MSCI ACWI Net

Total Private Growth

11% ILPA All Funds Index

 2.5% ODCE + 2.5%

1.5% ILPA/Cambridge Distressed Securities Index

 

INCOME

1.5% Alerian MLP Total Return

3.5% Liquid Credit Custom (50% BoA HY/50% CS LL)

3% S&P LSTA Lev Loans + 3%

 

STABILITY

Crisis Protection Class

4% CS Managed Futures 18% Vol Index

4% Barclays Long Duration US Treasury Index

 

Inflation Protection

 2% CPI + 4%

4% NFI-ODCE Index

1% Barclays 1-10 Year TIPs Index

1% BB Commodity Index

 

Volatility Protection

11.5% Barclays Agg

6.5% HFRI FOF Composite

3.0% BofA Merrill Lynch US T-Notes 0-1 Yr

It’s complex, with lots of movable parts to tweak to produce a favorable comparison.

Confused? Of course you are! So am I! That’s exactly the intended result.

So, when attempting to evaluate the performance of your pension, stick with simple, straightforward benchmarks like the S&P 500 for American pensions and the MSCI World Index for foreign pensions.

Finally, as pensions increasingly gamble in alternative funds with hard-to-value portfolios, investment performance claims become all-the-more suspect. Alternative managers can be counted on to overstate the value of assets they manage to boost their performance-based compensation. Pension performance will, likewise, be inflated when they do so. The managers of alternative investments and pension overseers are complicit in the performance puffery.

Given the profound impact the coronavirus has had on the economy and financial markets to date, be especially suspicious when your pension next published its investment performance results.  

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Siedle's Bio: I have been called "the Sam Spade of Money Management," “the Financial Watchdog” and "the Pension Detective." Born Edward Ahmed Hamilton Siedle, I grew up in Trinidad, Venezuela, Panama, Peru, England, Uganda, Egypt and the U.S. I am a former SEC attorney, former Legal Counsel and Director of Compliance to Putnam Investments. For over 20 years, I owned securities trading and investment banking firms. My firm, Benchmark Financial Services, Inc. and I have pioneered over $1 trillion in forensic investigations of the money management industry. I am nationally recognized as an authority on pensions and investment management matters, having testified before the Senate Banking Committee regarding the mutual fund scandals and as an expert in various Madoff and other litigations. I am an active member of the Florida Bar. In 2017, I secured the largest SEC whistleblower award in history ($48 million) and in 2018, the largest CFTC award in history ($30 million).

This column was first published in Forbes.

 

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