
How a Gang of Hedge Funders Strip-Mined Kentucky’s Public Pensions - simonpure
https://theintercept.com/2018/10/21/kentucky-pensions-crisis-hedge-funds/
======
leetrout
My mom is retired and part of the Kentucky Retirement System.

Fun fact most people don't know about some of these- you forfeit your social
security benefits when you participate. Because of this my mom cannot draw my
dead fathers benefits.

[https://www.courier-
journal.com/story/news/education/2018/03...](https://www.courier-
journal.com/story/news/education/2018/03/20/kentucky-teachers-pension-reform-
social-security/438031002/)

~~~
refurb
_The reason Kentucky teachers don 't get Social Security dates back to 1935
when the Social Security law was enacted, leaving out state and municipal
employees, said Beau Barnes, deputy executive director of the Kentucky
Teachers' Retirement System, or KTRS...Teachers do not pay into Social
Security but pay into their state retirement systems._

It sounds like that was a conscious choice. It's not like it was taken away
from them.

~~~
toomuchtodo
With the implied understanding that the pension would remain solvent, and not
strip mined by financial predators.

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bedhead
Kentucky's pension is screwed for all of the same reasons many other public
pensions are (in order of importance):

\- Overpromising of benefits

\- Underfunding mechanisms that allow deferral of contributions

\- General mismanagement (I can assure you the best and brightest investors
and fiduciaries don't work at public pensions)

\- Corruption (ie related party deals)

The idea that "evil hedge funds" are responsible is silly. This might make for
more clicks but the investment committee made the decisions to invest, so
blame them. This isn't about hedge funds.

I've long argued that public pensions should be illegal. There are too many
areas of interest misalignment. Things that can be abused, will, and public
pensions are perfectly designed to facilitate these kinds of shenanigans.
Anyone looking for what the next great crisis will be, this is it.

~~~
ciamac
Well the direct mechanism in this case is hedge funds paying "placement
agents" which fund the corruption, so they do have responsibility, even if
they are not solely responsible.

~~~
bedhead
The placement agent would be powerless if not for the pension board's
incompetence and corruption, otherwise it wouldn't matter if the pension was
being pitched by the marketer or the fund manager itself. Don't get me wrong,
it's a game that hedge funds are playing and I despise it, but the disease is
what goes on in the board room of the pension.

All of this is a sideshow to the egregious overpromising of benefits and
underfunding mechanisms.

~~~
ip26
This sounds like the same debate we have about security. _But sir_ , said the
fox. _I am innocent! For the hen coop was left unlocked!_

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NTDF9
Why do American politicians allow their people to be conned into thinking that
there will be some "automatic" growth somewhere in their state/country that
will automatically yield benefits in their pensions?

That lie, that something in the US will ALWAYS lead to gdp growth is the root
of all yield chasing fiascos of American pension underfunding. There is no way
that gdp will increase without a rise in working age population (especially
with no immigrants) or a dramatic increase in automation which can be taxed.

FYI for any youngsters who don't realize what a con job this is: The recent
tax cuts have created massive deficits which will collapse debt availability
and thus economic growth and thus tax revenues and thus social security
payments when you get unemployed (or old).

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kylnew
When it comes to pension funds, investing in anything volatile like hedge
funds is an incredibly irresponsible thing to do. I’m kind of flabbergasted
it’s even allowed in the first place. Pension funds should have steady, modest
gains year over year and minimize risk of dips as much as possible.

~~~
zimablue
That's cool, so US bonds only then?

~~~
dopamean
Don't BR ridiculous. There are lots of mutual funds that don't experience the
swings that many hedge funds do.

~~~
iflint
There are many hedge funds with much lower volatility than the average mutual
fund. Hedge funds are not inherently more or less risky than mutual funds,
they are just actively managed instead of passively managed.

~~~
w1nst0nsm1th
It reminds me a story in rare no-nonsense books on stock trading about 90%
people losing money or doing less than stock index because of trading fees
while activelly managing it. The ability to make good money in stock markets
is a rare talent and hedge funds only make hedge fund managers rich, most of
the time.

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tareqak
This article was a sad, and infuriating read. The knee-jerk-response part of
me would want these pension funds to be set up as an allocation of
'dumb'/passive index funds based on an individual's retirement date to not
have to deal with greed on the part of human decision-makers, but there might
be catastrophic issues with that too.

Edit/Follow-up: I guess there are two more sane alternatives:

1) Let public-sector workers manage their retirements privately e.g.
401k-style .

2) Let state and municipal public-sector workers opt-in to the federal pension
system for federal public sector workers.

~~~
lotsofpulp
There’s no reason government employees should get taxpayer guaranteed
annuities. If the government employee unions want annuities upon retirement,
they should be purchased from insurance companies. That way taxpayers can be
certain there were no shenanigans in underfunding or mispricing or
malinvesting. It would also create more transparency in how much people should
be paid in government vs non government jobs.

It would also make government budgets a lot easier to understand and harder to
fool taxpayers.

~~~
lmm
A long time horizon is supposed to be what governments are good at. No
reasonable employee would trust a private insurance company to still be in
business by the time they come to require, absent a governmental guarantee -
and if something is both paid for by the government-as-employer and guaranteed
by the government-as-regulator, what is bringing in a private company supposed
to add to the mix other than taking profits?

~~~
lotsofpulp
It adds transparency and accountability. And it’s up to the government
employees if they want to bring in a private company. As a taxpayer, and
employer of government employees, I would like a clear accounting of how much
payroll is.

I don’t want politicians buying union votes with unsustainable promises that
get kicked down the road 20 years later, and I don’t want to hear “my
predecessors didn’t properly fund the pensions”. You create a system loopholes
and bad incentives, of course they are going to be used.

The solution is simple, time saving, and efficient. If a private entity can’t
afford to offer annuities without the power to increase taxes, then they are
obviously a very, very expensive benefit, so why should only government
employees get them?

~~~
lmm
> If a private entity can’t afford to offer annuities without the power to
> increase taxes, then they are obviously a very, very expensive benefit, so
> why should only government employees get them?

Because the government can provide them more cheaply than a private entity by
its very nature - shouldn't it make use of that competitive advantage? Better
pension schemes are one of the ways government are able to offer a competitive
employee compensation package despite substantially below-market headline
salaries; if you replaced the guaranteed annuities with their market dollar
value that would mean costing the government more to be able to hire the same
people, offering government employees less value overall and so getting lower-
quality employees, or both.

~~~
dsfyu404ed
>Because the government can provide them more cheaply than a private entity by
its very nature

Please justify this. Public sector is not known for it's low overhead of
efficiency.

~~~
lmm
> Please justify this.

The point is the government is already "too important to fail" and already
bearing the costs of having to still exist in hundreds of years' time (in
terms of plans, processes, backstops and all that).

> Public sector is not known for it's low overhead of efficiency.

True enough, but neither are large private financial institutions.

~~~
pc86
None of what you've said explains how a government can offer an annuity more
cheaply than a private company.

~~~
lmm
For a private company to offer an annuity _that an employee can have the same
level of confidence in_ , the private company would have to do those too-
important-to-fail things, and would have to include the costs of them in the
cost of the annuity, which the government does not.

~~~
pc86
I'm not intentionally being dense, but I legitimately do not understand why
the government would not need to wrap those costs into the annuity. They still
need to get paid for, no?

~~~
lmm
They're costs that the government already has because it already has to
continue to exist, have failovers to the failovers and so on. Whereas the
defining characteristic of a private company is that it can, ultimately, go
bankrupt and be wound up with little recourse.

~~~
dsfyu404ed
Please provide an example of these "continues existence" costs that the
government is immune to.

>Whereas the defining characteristic of a private company is that it can,
ultimately, go bankrupt and be wound up with little recourse.

Wall street already has countless mechanisms for pricing risk into things.

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ChrisBland
If any private company wanted to sell a financial product akin to public
sector pensions they would be arrested and charged with fraud. Come to IL --
plenty of pension games to play here

~~~
Shivetya
the big story in Illinois is that even with proper management the Chicago
pension system will be broke in about two years. however we cannot just vilify
Illinois as many public employee pension systems have been built upon promises
that are not sustainable and will leave millions with no real retirement as
each fund implodes

~~~
notfromhere
the big story in illinois is that the state, across both parties and multiple
governors, underfunded the pension to a tragic degree and now its at crisis
proportions.

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mruts
The problem isn't with hedge funds, it's with dumb money (or corrupt money).
I'm not sure why people are laying the blame on the funds, I'm sure they
wanted to produce good returns as much as anyone else.

The blame solely lies on the incompetent pension fund managers. There are
plenty good choices for alternatives in the market that are accepting new
money (AQR or 2 Sigma or Bridgewater come to mind).

It's 100% on the pension fund managers that they squandered the money on some
no-name fund with no track record.

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yosefzeev
As a resident of Kentucky, I can state that it has many issues. Of course,
nationally, there are also many issues. Most of these issues boil down to "How
do we put money in our pockets" at the expense of someone else. Until that
stops, the issues won't stop.

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Mvandenbergh
So there's a lot going wrong here, pay-to-play, investment in hedge funds that
no-one had ever heard of, investment in funds that ended up performing poorly,
etc. However that isn't the real problem here - the real issue is decades of
under-contribution to these funds by the state government.

~~~
matthewdgreen
This article isn't really about under-contribution. It's about corruption. If
your response to an article about corruption is to change the subject, then
it's unlikely that we'll see improvements.

~~~
Mvandenbergh
The corruption is appalling but also easy to fix. The threat to people's
retirement is not happening because of the corruption though - if this was a
fully funded scheme and the board was taking kick-backs to steer business from
one fund to another one it would still be appalling but it wouldn't risk tens
of thousands of people spending their old age in dire poverty.

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IshKebab
TL;DR: dodgy hedge funds bribe politicians to invest public pension pots with
them.

I don't know why they don't just switch to private pensions. In theory public
pensions should be less risky because the investment risk is spread between
lots of people, but in practice it seems that the risk of management looting
the fund is a much bigger concern, and one that you don't have with private
pensions.

~~~
kasey_junk
Colloquially in the US pension fund == defined benefit plan managed by your
employer. A public pension would be managed by the government for governmental
employees & a private pension would be managed by a private company for its
employees.

Defined benefit pensions largely only exist in the public sector in the US
because they are phenomenally expensive. The reason public employees don’t
want to switch is that these are _huge_ perks.

~~~
IshKebab
By private pension I mean a self-invested one. Essentially a trading account
that you control.

In the UK they're called Self Invested Private Pensions.

~~~
kasey_junk
401k, IRA, 403b etc in the states

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candiodari
TLDR: politically appointed trustees of a pension fund systematically invest
in somewhat-fraudulent investment schemes, which _shock horror_ had some
questionable financial returns (they were in fact quite large, but with a
minus in front). This is, obviously, the fault of all bankers on Wall Street,
not of the appointed trustees or of the politicians appointing them.

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pliny
Desktop version: [https://theintercept.com/2018/10/21/kentucky-pensions-
crisis...](https://theintercept.com/2018/10/21/kentucky-pensions-crisis-hedge-
funds/)

------
apo
Pensions are Ponzi schemes, plain and simple, with government playing the role
of Ponzi.

Buried deep inside the idea of a government pension is the idea that
individuals are incapable of saving for their own retirement. That government
needs to care for its people in old age because they won't take the necessary
steps themselves.

Questionable assumptions aside, this article and many, many more like it
demonstrate that _government_ is incapable of caring for people in their old
age, making many of the same mistakes with "investing" that individuals will.
From the federal government down, officials have shown no reluctance to raid
pensions to fund pet project, resulting in chronic underfunding.

Inflation supplies the energy to keep this toxic cauldron bubbling along. It's
not enough to simply "put money aside for retirement." Instead, you need
"investments" that will at least keep up with inflation. Savings accounts are
out.

Enter investment "advisors," all too willing to tell an individual (or
government) what to do - for a fee.

Edit: the downvotes are amusing, but a comment explaining why would be more
interesting.

~~~
siberianbear
Well, you're not wrong. You're just pointing some inconvenient truths.

1\. Most people _are_ incapable of saving for their own retirement, because
they either lack the discipline or the skill set to do so.

2\. Because of (1), people want the government to take care of it. But
government does a mediocre job of most things.

3\. Elected politicians have an incentive to get in bed with unions of
government employees and screw taxpayers by cleverly mis-evaluating the
present cost of future retirement payout streams.

4\. Bad actors in the world pray on everyone involved: the employees, the
pension funds, the government, individuals, etc, to get management fees from
the corpus of retirement programs.

