Wednesday, December 9, 2015

Another High Cost of Public Pensions

Another moral hazard of defined benefit pension plans are a lack of incentives to control costs.


US Pensions Squander Retirees' Cash On Fees For Underperforming Hedge Funds

Underscoring just how poorly these investments have performed especially considering the fee structure, Jeff Hooke, a managing director with Focus Investment Banking in Washington conducted a study with five state pension funds over five years which showed that the median return on hedge-fund investments a full 6 percentage points lower than a 60/40 equity-fixed income index fund managed by Vanguard. The expense ratio on the Vanguard fund: 0.23%. That’s a hell of a long way away from 2 and 20. 
Hooke’s conclusion: “Hedge funds have cost the states tens of billions in opportunity costs the last five years.” 
So amusingly, public pension funds probably could have closed their funding gap by just buying the S&P and watching the Bernanke/Yellen put work its magic, but instead, they went out and plowed retirees’ money into hedge funds that ended up massively underperforming and now, it’s too late to take advantage of the equity gravy train because the FOMC is about the yank the punchbowl. 
We hope someone has learned a lesson here, but we seriously doubt it, because as Donald Boyd, senior fellow at the Nelson A. Rockefeller Institute of Government told Bloomberg, the longer pension fund managers cling to unrealistic return assumptions in a ZIRP and NIRP world, the more they’ll reach and the more they’ll likely lose which means “taxpayers and those who count on government services and investments will pay the price.”


The real take away is that absent significant performance differences( that are missing here), conventional wisdom is go with the lower expense ratio.


  1. Or if it crashes enough there might not be enough tax payer money to even pay the pensioners. Personally I can't wait.

    1. I'm still not to keen on rhetorical Peric victories, but you're probably right.