In a recent speech to private equity investors, Securities and Exchange Commission (SEC) Chairman Gary Gensler said that hedge funds and private equity firms should provide far more transparency about what they charge their clients.
“Greater competition and transparency could potentially bring more efficiencies to this important part of our capital markets,” said Gensler, who works on Wall Street. “This could increase returns for pensions and endowments behind limited partner investors. It could ultimately help workers preparing for retirement and families paying for their college education.”
Efforts to increase transparency and expose widespread abuse by high-flying Wall Street players of pension funds of teachers, firefighters, police and bus drivers could soon come to a head in Ohio.
Led by an active group of retirees and the assistance of a former Ohio attorney general, both the Ohio State Auditor and the Ohio Department of Securities have launched inquiries into the Ohio State Teachers Retirement System (STRS), a $100 billion pension. Dollar investing in riskier corners of the market, namely private equity and hedge funds.
Former SEC attorney and longtime pension whistleblower Ted Siddle said, “Ohio may be the first place to look critically at the secrecy surrounding public pensions and their investments in risky, speculative and high-fee investment vehicles.” Is.”
Pointing out that pension funds across the country have routinely invoked “trade secret” exemptions to deny public information about investment performance and fees, Siddle said the recommendations by the state auditor and securities commissioner The action taken could be the “beginning of the end”. Privacy – Not only in Ohio, but across the country.
$8.6 billion deficit
Dean Dennis, a former Ohio public school teacher, didn’t pay much attention to what was going on under the hood of the Ohio STRS, who retired in 2008 to pay off his modest pension after teaching for 35 years. That changed in 2013, when the fund began deducting the cost of life adjustment (COLA) he was promised as part of his pension when he retired.
“First they eliminated our cola for a year, and then reduced it from 3 percent to 2 percent, and then by 2017, they removed the cola and it was never reinstated,” Dennis said.
Enraged, Dennis started two Facebook pages—one public, one private—that now have a combined 24,000 members, all united to hold Ohio STRS accountable. Along with two other retirees, Dennis began petitions to have his lost cola reinstated, and he now has over 50,000 signatures. And with the help of the 19,000-member Ohio Retired Teachers Association, Dennis raised $75,000 to hire Siddle to conduct a fiduciary review of the pension fund.
While Seidl told the daily poster He has yet to receive the necessary information about the operation of the Ohio STRs, saying his review so far has revealed structural problems within the pension fund.
in its report issued to June 7, Seidl found that, relative to the benchmark recommended in the fund’s last comprehensive performance audit, the $27 billion in investments in Ohio STRs private equity, real estate and hedge funds cost pensions “$8.6 billion, or $2.5 million per trading over 14 years. for the day.” On the other hand, according to the report, “restoring COLA benefits would cost less than $1 million ($890,000) per day.”
The alternative investment industry may have a “2 and 20” fee mode (2 percent of assets and 20 percent of performance, usually over a threshold). 10,000 percent more Compared to fees paid to low-cost index fund managers, who may charge less 0.035 percent of invested properties. Also, alternative investment funds typically provide performance that fails to beat the market.
Rudy Fichtenbaum, a board member at STRS with a PhD in economics, agreed with Siddle’s concerns about the state pension fund. “Pension is going to private equity and other options where they are paying huge fees and taking huge risks,” he said. He was also troubled by the liquidity of private equity and options, which make it difficult for pension funds to recover their investments quickly. process can take years, if it happens at all.
Fichtenbaum said, “The agenda and narrative at large [of pension fund board meetings] is actually fairly tightly controlled in my observation [STRS] Employees.” According to Fichtenbaum, this arrangement has prompted pension workers to “delay any consideration” to restore the cost-of-life adjustment, while at the same time receiving $10 million in total bonuses. .
It’s clear that STRS employees are “very out of touch with retired members,” Fichtenbaum said.
“It’s mind boggling”
The alternative investment industry always operates under a tight veil of secrecy. Unlike publicly traded companies, which have the scope of publicly available information with the SEC, alternative investments only file a limited set of information. This means that unlike stocks, bonds and mutual funds, there is no publicly verifiable information about the performance of these investments.
Important investment questions, such as how much risk and debt a specific fund is carrying, are often hidden in closely guarded contracts, which offer documents and prospectus. Business contracts of alternative investment managers are generally not available through public records requests, due to alternative investment managers’ claims of trade secret privileges and public records exemptions maintained by state governments.
But such investment knowledge is essential as some alternative investment funds break the habit. NS dayton daily news The cautionary tale of Panda Power Funds, quoting an STRS spokesperson, was investigated earlier this year saying: “From 2011 to 2013, Ohio’s State Teachers Retirement System invested $525 million with PANDAS, but now the value of the investment is zero.”
Seidl is working to obtain additional documentation from STRS to shed light on its alternative investments – but so far, the process has proven difficult.
“We’ve asked for the documents using industry standard terms, and they’re fighting with us about what these terms mean,” said former Ohio Attorney General Mark Dann, who is assisting Siddle with his records requests. are. “It’s mind-boggling for all of us.”
Dan hopes that Seidl will eventually prevail in his search for the documents.
Dan’s conduct of StRS and the infamous Coingate . made a connection between Scandal, which revealed that Ohio Republican leaders were rewarding campaign contributors through investments made by the Ohio Workers’ Compensation Fund, including a highly speculative market for rare coins.
“In Coingette’s case, the investment they chose to make was based on political decisions and rewarded campaign contributors,” Dan said. “We think there’s a really good chance that the same thing is happening here.”
Thanks to the efforts of Siddle and Dan, as well as pressure campaigns from active Ohio retirees, state leaders are finally starting to act. Ohio State Auditor’s Office Confirmed the daily poster That the STRS investigation is active and ongoing, although a spokesperson declined to comment further on the matter.
Soon these efforts may pay off. As Seidl said, “Ohio may be the first place where this secrecy is removed.”
Robin Rayfield, executive director of the Ohio Retired Teachers Association, agrees that it is high time to address the issues facing STRS investing.
“Everybody gets rich who has a relationship with STRS,” Rayfield said, “except for those who put the money in.