Add lefty NPR to the list of voices raising the alarm on the soundness of some public pensions. It’s all part of a familiar story: the benefits promised to retirees assume a level of annual growth which is hard to hit with a prudent investment strategy during a time when interest rates are low. Thus, pension managers are pushed to consider higher return vehicles, such as hedge funds:
Most public pension funds are not investing heavily in hedge funds, according to data from Wilshire. But some of the funds definitely are.The Teacher Retirement System of Texas is investing 10 percent of its money in hedge funds. The state of New Jersey’s pension system is investing around 12 percent. For the Ohio school’s pension fund, it’s 15 percent.Farouki Majeed is the chief investment officer of the School Employees Retirement System of Ohio. By last year, the fund had nearly $2 billion invested in hedge funds. That means the pension fund was paying about $35 million a year in fees to those hedge funds. That’s money that could have been used to pay retired school employees’ pensions. […]So why is he investing so much money in hedge funds? To be fair, Majeed took the top job after these decisions were made. He’s now reducing hedge fund investments — and pushing back on the high fees.But he says it’s tough right now to make a good return. Supersafe securities such as long-term Treasury bonds offer very low returns. And so, he says, he has to “try to be more creative.”
If we were teachers in Ohio, this is not necessarily the kind of creativity we would welcome. At the same time, fund managers are not doing this for sport: Promises made to future retirees demand a certain level of return, and public sector unions across the country have been fighting tooth-and-nail to prevent the kinds of corrections that would put pension funds on a firmer footing.And so this unpleasant game of musical chairs goes on.