By Curtis M. Loftis Jr.
“In all 50 states hard-working public employees and taxpayers supply the money for theseinvestments. They should not be riding in the back of the bus, and in fact they should be driving the bus.”
It’s no secret that public pension plans and their investment boards nationwide are underperforming. Blame is often assigned to the economy, over-promising politicians, unrealistic assumed rates of investment returns, and workers that retire earlier and live longer. But, is there more to the story?
My research and experience shows that many pension investment boards lack vital transparency and accountability. The absence of these key principles of good governance leaves the plans vulnerable to increased risk. The inner workings of these investment boards are mysterious to outsiders; in fact these investment boards are places where enormous sums of public dollars are entrusted to a select few, but coveted by many.
These boards seem built upon the belief that massive sums of money invested by professionals are prudently managed and secure. However, I see these boards as an opaque amalgam filled with onerous confidentiality agreements, legal and financial mumbo-jumbo, over-lawyered contracts and under-explained fee schemes, self-interest, weak ethics disclosure requirements, and little meaningful oversight. The glue that binds all of this together is $2.5 trillion in public money.
All investment boards are not created equally, but in speaking with investment officers and commission members across the country, I am amazed at the substandard attention all of these pension funds receive. Questions are asked and neatly answered, but as the in the Land of Oz, peering behind the curtain is enlightening, troubling, and unfortunately, necessary.
Would the average taxpayer or public employee believe that tens of millions of dollars in fees could be paid with little or no explanation of services rendered? These “netted fee” transactions are simply electronic transactions that remove funds from the pension plan’s assets to pay the money manager. One nondescript impulse may include performance fees, incentive fees, back and middle office expenses, platform fees and organizational expenses; all in one tidy payment with no detail as to what was just paid. No business person would ever remit huge sums of money without detailed justification of the expenses and fees, yet investment boards across the country do that every day.
Many confidentiality agreements exist between the investment plans and their managers. While confidentiality is needed, strict interpretations of these agreements allows them to evade meaningful oversight. For example, I can see investment documents, contracts, and due diligence on investments, but my attorney can’t. The governor may inspect these complicated and voluminous files, but not her chief legal counsel. Even the attorney general is exempt. That’s right; South Carolina’s elected chief legal officer is prohibited from examining these documents!
This opaqueness destroys any notion of accountability as a means of effective oversight of these funds as only the Investment Commission’s staff and their chosen few have access to contracts worth billions in public dollars.
Wall Street is not to blame for the structural inadequacies of these plans — though they certainly benefit from them. America needs a thriving financial services industry, complete with its innovative alternative investments, as an integral component of the country’s future. However, Wall Street needs aggressive “encouragement” to be more transparent, and as its largest consumers, the pension plans should demand it. Informed consumers are needed to balance the might of Wall Street. Unfortunately, due to the lack of transparency by the plans, informed stakeholders are effectively whittled down from millions of people, to a handful of insiders.
In all 50 states hard-working public employees and taxpayers supply the money for these investments. They should not be riding in the back of the bus, and in fact they should be driving the bus. To do so, the taxpayers must demand a meaningful public conversation concerning the lack of transparency in how their money is managed and invested. It is imperative that we ask important and difficult questions and that the answers be candid and truthful.
To be clear, I am not asking for public disclosure of proprietary information or excessive rules and regulations that would hinder these investment boards. As a fiduciary and trustee of the South Carolina retirement system, a statewide elected official, and the statutory custodian of the state’s funds, I need every tool at my disposal to safeguard your money. I swore an oath to protect the taxpayers and I will fulfill that promise.
Mr. Loftis is the state treasurer and one of five members of the Budget and Control Board. This opinion editorial originally appeared in The State Newspaper.