From May 3 to May 7 of this year, hundreds of pension trustees from around the nation gathered at the National Conference of Public Employee Retirement Systems’ annual conference in New Orleans. The gathering, billed as educational, also featured representatives of dozens of financial firms eager to expand their business.
Of the 66 speakers at the conference, 52 were representatives of for-profit interests seeking to influence the trustees there to invest public money in their products. The sponsorship form for NCPERS encourages money managers to “expand [their] marketing reach.”
Sponsoring NCPERS was not the only expenditure made by asset managers at the conference: Pension experts say financial firms use conferences to court pension fund trustees with expensive meals and day trips -- with the goal of gaining influence over the trustees who have wide authority to determine how retirees’ money is invested.
“The conferences create highly perverse incentives,” said a private equity executive who requested anonymity so as to speak freely. “They are all glitz and glamour — giving the firefighters, teachers, cops and bus drivers who sit on pension fund boards a taste of the high life.” “Unfortunately,” he concluded, “that taste comes too often at the expense of both their own and their fellow workers’ retirement security.”
Fiduciary management is a complex matter that often takes an extraordinary amount of time, effort and know-how. But some of the most powerful fiduciaries in the country -- pension fund trustees overseeing more than $3 trillion in capital -- work entirely unpaid. While many states bar gifts to elected officials who oversee pension policy, the appointed trustees of many pension systems are allowed to attend subsidized conferences where they are wined and dined by asset managers seeking to gain business.
Pension and ethics experts say that's a problem.
Craig Holman, the ethics in government lobbyist for Public Citizen, has found that there is a strong correlation in state legislatures between low pay and poor ethical standards. “While all legislatures have their problems, it is an indisputable fact that Texas — which pays their legislators next to nothing — and California — which pays their legislators a high-level civil service salary — have vastly different standards when it comes to government ethics, with California the winner,” said Holman. “Passing strong ethics laws is far easier in states where legislators make enough to maintain a good standard of living.”
“Gift bans are good policy that save taxpayers money,” added Holman. “Pension trustees have oversight over huge sums of taxpayer money. The capacity for corruption is reduced if trustees are paid and a gift ban enacted.”
Ted Siedle, a former attorney with the Securities and Exchange Commission and a leading expert on public pensions, agrees. “Paying public pension trustees has been consistently proposed as a solution for the perennially poor governance of public pension funds,” he said. “Gift bans need teeth. Gift-giving by asset managers to trustees is effectively bribery. It should be treated as such, with criminal consequences for both Wall Street managers and trustees.”
Jeff Hooke, an investment banker with Focus Securities who authored a widely cited report showing that higher fees paid by public pension funds do not lead to higher returns, takes the same view.
“Why are pension funds actively managed — allowing external managers to pick stocks and bonds at will --- when all available evidence shows that index funds tied to the stock and bond markets are lower-risk and perform better?” asked Hooke. “One central reason is that pension trustees like being wined and dined by Wall Street firms, so they feel like big shots, and forget that their first responsibility is to pensioners.”
One of the biggest problems, experts say, are pension fund “conferences.” Asset managers like Goldman Sachs and the Carlyle Group sponsor these conferences and woo the pension trustees there. The result, they say, is that conferences that are ostensibly about investor education ultimately become pitches for asset managers based on how well their sales professionals perform, not how well the investments they manage have performed.
“Pension fund conferences have never been citadels of ethical behavior,” said Siedle, the former SEC attorney.
Free conference attendance is often the only tangible benefit trustees get for the thousand-plus hours of fiduciary work they effectively must do annually.
In November, a former unpaid trustee of the Detroit Police and Fire Retirement System and retired police officer was convicted for accepting gifts, including a $5,000 casino chip, from an asset manager seeking to gain business before the pension fund.
Jay Youngdahl, a fellow at Harvard’s Initiative for Responsible Investment and a leading legal expert on fiduciary issues, pointed out the wide distinction between unpaid trustees and asset managers who make hundreds of millions annually. “Trustees are expected to do an enormous amount of fiduciary work and take on difficult responsibilities for little or no pay, yet the service providers and investment managers for their funds earn some of the highest salaries paid in this country. The comparison is startling and makes no sense. The system is in need of reform.”