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Maryland’s Pension Performance a “Minor Disaster”

According to the Maryland Reporter, Maryland’s state pension system earned a blistering 0.36 percent over the past year. The numbers came in just a wee bit off their target of 7.75 percent:

The results “look like a minor disaster for fiscal 2011,” said Jeff Hooke, an investment banker who is chairman of the Maryland Tax Education Foundation and a persistent critic of the pension system.

These are numbers that make even California’s 1 percent return look good.

Meanwhile, in other, completely and totally unrelated news, last month the Maryland pension board rejected a proposal to lower its expected rate of return from 7.75 percent to 7.5 percent, a figure which is still well above one ratings agency’s suggestion for a more realistic rate of return: 7 percent.

Clearly, Maryland politicians and public union leaders would rather lie to their constituents than face difficult truths. We understand the state hopes to contract with the Easter Bunny in case returns continue to lag expectations; Maryland’s financial future appears to rest on the assumption that mysterious baskets stuffed with cash will turn up in the state treasury, allowing the promised pensions to be paid.

Good luck with that, folks, but prudent state employees should act on the assumption that they will need extra resources to meet their retirement expenses. Their pension funds are in the hands of irresponsible political hacks.

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  • Kenny

    Failing public pension systems is just one more reason the FED will try to juice the market with QEs to infinity.

    Watch & see.

  • thibaud

    Repeat after me: one year’s investment returns are meaningless. The greatest hedge fund managers, almost without exception, have had dreadful one year returns.

    Again, the percentage returns that are lost to the public pension fund managers due to the payout structure on their investments in private equity and hedge funds alone amount to at least 100 basis points (1%).

    Anyone who’s serious about reforming US public pension fund management needs to take aim at the absurd “2 and 20” and non-clawback, “heads-I-win, tails-you-lose” payout structure that redirects the vast majority of the gains to the PE/hedgefund managers and the vast majority of the losses to the public pension fund managers.

    Analyzing finance is complicated. Drive-by shootings are not helpful.

  • thibaud

    #1 – yes, QE’s a coming. Yet another reason that Obama is the overwhelming (Nate Silver has him at 67%) favorite to win this fall.

  • dearieme

    “one ratings agency’s suggestion for a more realistic rate of return: 7 percent”: realistic to Alice anyway. In wonderland.

  • Andrew Allison

    Essentially zero return is a minor disaster??

    WRT @2: For obvious reasons, the Maryland State Pension plan doesn’t report historical annualized returns, but does report (p99), that 2012 marks the 11th straight year that liabilities have increased more than assets.

    The failure of the State government to do anything about this verges on the criminal, and Prof. Mead’s advice to those expecting to receive their promises is sound.

  • Beauceron

    “Analyzing finance is complicated. Drive-by shootings are not helpful.”

    Well, just complicated enough to have confused you at least– or rather you’re like many and your politics has so warped your view you can’t make an honest appraisal of facts anymore.

    As bad as the “2 and 20” may be, if pension funds are investing in hedge funds the pension funds and those in charge of them are partially, even primarily, to blame for making the decision to invest with them in the first place. They are the guardians of state employee retirements, not the hedge funds.

    You seem to be one of those who simplistic approach looks to blame every problem on a baddie from central casting– and if it’s a baddie that happens to be a long-time target of the Left, all the better.

    It’s not as simple as that. Politicians and state functionaries should be called out on poor performance as much as those wicked bankers.

  • Jim.


    If QE comes in the form of buying up our existing debts, it might do some earthly good.

    However, all Romney has to do to counteract it is point to rising food prices as proof that inflation is real and hitting people where they live. If Obama’s answer to failing pensions is to gut people’s savings and render their fixed income increasingly worthless, I wouldn’t let anything Nate Silver read in his tea leaves convince me to bet on Obama’s continuing employment.

  • Jim.

    Seriously… bringing up a drastically inflationary monetary strategy in reply to a post about people living on fixed income and savings?

    Alluding to the Fed, whose free-money policies are causing interest rates (and thus borrowing costs, and thus return on safe investments) to crater?

    Are you trying to lose this argument? Think things through a bit better before you post.

  • thibaud

    Jim – I take no position on the wisdom of QE vs targeted/timely/temporary stimulus.

    Not sure the likelihood of another QE is as high as the likelihood of Obama’s re-election, but I’m well-positioned for both outcomes and will welcome them when they occur. Hedged in the very unlikely event Romney wins as well.

  • thibaud

    Beau – read the links. Listen to Simon Lack of JP Morgan.

    Nothing wrong with superior pay for superior performance, but most funds’ performance is dreadful, and we could start to close the funding gap if we were to tax “carried interest” as capital gains + increase public scrutiny of the funds’ payout terms.

  • thibaud

    #6 Beau – “Politicians and state functionaries should be called out on poor performance as much as those wicked bankers”

    Agree 100%.

    As I say, the issue here is one of governance. America, esp at the state and local level, is extremely badly governed. That the banksters have our political in their pocket is just another side-effect of our clownishly bad governance.

    To that point, here’s a comparison of America’s hack-ridden, cronyist public pensions and Canada’s extremely professional, well-regulated pension management:

    From Mercer, the pensions and benefits experts, a deep dive analysis of the quality of pension fund management and pension funds’ solvency and sustainability.

    Note that the nations with the best governance – Holland especially, which mandates that pensions be funded appropriately with broad-based taxes – come out far ahead of the likes of US and France.

  • Eurydice

    In the fiscal year they’re talking about the stock market returned over 20% – so, whatever their intentions or asset mix, clearly there was some opportunity loss going on in Maryland.

    But there’s a difference between annual return and annualized return and pensions target annualized return, an average over a multi-year time period. At the same time, there should be a limit to how many years one can cram into the denominator before one has to admit underperformance. CALPERS says they’ve returned over 8% in the past 20 years, but as soon as the time period goes under 20 years, the return drops quite a bit.

    For a couple of nanoseconds I sat on an investment advisory board for my state’s pension fund. I had never before (or since) encountered such a combination of incompetence, willful ignorance and cronyism – I ran far and ran fast. And although I agree with thibaud about the overcharging of management fees, a part of thinks people should get paid extra for having to deal with such idiocy.

  • Otis McWrong

    Thibaud – which PE funds does Maryland invest with that do not have clawbacks? You have made repeated references to “non-clawback” fee structures. I’m unaware of any “brand name” PE firms that do not have clawbacks. Be specific and please cite your sources.

    In a different thread you made specific reference to Romney and “non-clawback” fee structures. Bain Capital funds all have clawbacks. What are you referring to?

    Are you just parroting something you read on a bumper sticker or do you actually have a any idea what you are writing about?

  • thibaud

    Eurydice – the Economist notes that one reason the Canadian pension funds are on average so much better run is that they refuse to pay the Romney crowd’s exorbitant, ridiculous fees:

    “Unlike those in charge of public pension funds elsewhere, the Canadians prefer to run their portfolios internally and invest directly.

    They put more of their money into buy-outs, infrastructure and property, believing that these produce higher returns than publicly traded stocks and bonds.

    … as public pensions around the world cope with painfully low yields on their assets, many see them as a template. Michael Bloomberg, New York City’s mayor, is among the model’s admirers.

    Ontario Teachers pioneered this style of investing in the 1990s when it brought more of its investments in-house. Other large funds soon followed suit, building up teams to handle deals on their own. The Ontario Municipal Employees Retirement System (OMERS) wants to have 90% of its assets managed internally by the end of 2012, leaving some room for allocations to external managers in specific areas.

    The funds will do smaller deals alone but often act as “co-sponsors” with leading private-equity firms on bigger transactions. This allows them to have more control over the investment and to save on fees….

    The main draw of the Canadian model is cost savings.

    Running operations directly helps plug “the incredible leakage that goes out through fees” to pricey external managers, says Gordon Fyfe, the boss of PSP Investments, a large fund.

    In private equity, for example, many managers charge a fee equal to 2% of assets and 20% of profits. Hiring staff and building up internal capabilities costs far less.

    Keith Ambachtsheer of KPA Advisory Services, a pensions consultancy, says running assets internally costs a tenth of what it would if they were outsourced.

  • Jim.


    No opinion on the wisdom of QE?

    So you’re saying that people who vote for Obama will do so for foolish reasons?

    Also, you’re saying that America is badly governed?

    The search for common ground between us continues, sometimes with success. 🙂

    Alas, that our conclusions from that common ground should have so little in common.

    Thibaud, the solution to bad governance is not MORE governance, and the solution to foolish decisions by a president is not re-election.

  • James

    Seems we all want socialist pensions and healthcare, but we just dont want to pay for it. Low taxes will always equal low benefits. Sweden has some of the highest taxes in the world, but the happiest people, the best pensions, healthcare and one of the best education systems. Their people register as the most contented in the world. Not a coincidence.

  • thibaud

    Jim – QE’s necessary but not sufficient. The stim was badly designed, too little, too late.

    Oh, re, our “natalism” discussion, a nice article for you from today’s WSJ on Sweden’s wonderful pro-family paternity policy. The guy they highlight is an AMERICAN exec at a hot internet company, Spotify, that’s HQ’d in the same place that Skype was, Stockholm:

  • thibaud

    Otis – #13 – apologies, I agree the term “non-clawback” was clumsy shorthand for the crucial fact that clawback provisions usually are triggered only after the fund is wound up, at the end of its life.

    So investors have to wait forever and a day to get their money back, as the Economist article I linked to notes in its discussion of John Paulson’s spectacular losses in 2011.

    In other words, Bain Capital like most funds _has_ a clawback provision in its articles, but in practice, it’s close to meaningless, because so long as the fund exists, the investors will not see a dime in clawbacks.

    GPs in Bain Capital like any other PE or hedge fund “will have to wait ages,” as the Economist puts it re Paulson’s sad-sack investors, to get their money from the claw back provision.

    Anyway, thanks for the catch – glad I could clarify it for you,


  • Jim.


    Government programs aren’t enough to sustain replacement fertility rates. Sweden’s slipped back to 1.74 last year.

    Eurosocialism is a dead end.

  • Eurydice

    @thibaud – Ontario isn’t the first entity to manage its money in-house or work in tandem with outside managers – for one, Harvard started doing that back in 1974. The thing to understand (which the Economist and Bloomberg should know) is that a management fee isn’t some giant check paid out to a single fat-cat – it covers all areas of money management, from investment professionals to the back office and everything necessary to support that. A single line item expands to salaries, benefits, office space, computers, banking services – the entire infrastructure of an outside manager. And it’s all very well to believe that one asset class will outperform another, but you also have to be good at managing that asset class, which means you have to hire people who know what they’re doing and pay them accordingly.

    And, at the end of the day, there wouldn’t be a lot of talk about saving money on fees if the portfolios were performing according to expectations – that should happen wherever the money is managed – inside, outside, US or Canada. If that’s not happening, either the management is poor or the expectations are unrealistic, or both.

  • thibaud

    Eurydice – we’re talking about public pensions here. Very familiar with Jack Meyer, David Swensen et al, but Harvard and Yale are private institutions.

    Also, you imply that it’s very difficult to “hire people who know what they’re doing and pay them accordingly.” Actually, it’s not as difficult as you imply, given that so many marquee banks have gone belly-up since 2008. Plenty of very experienced talent available now.

    As to your other point, the management fee is only a small part of the problem. The bigger problem is the carried interest and the fact that clawback is basically a dead letter: it usually doesn’t kick in unless and until the fund is dissolved.

    That’s ultimately the cause of the leakage that, per fund-of-funds expert Simon Lack of JP Morgan, about 84% of the returns go to the Romney/Paulson crowd and only 16% are left for the GPs/investors.

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