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Docs show how a Wall Street giant is guaranteed huge fees from taxpayers on risky pension investments
DAVID SIROTA
pando.com
When you think of the term “public pension fund,” you probably imagine hyper-cautious investment strategies kept in check by no-nonsense fiduciary laws.
But you probably shouldn’t.
An increasing number of those pension funds are being stealthily diverted into high-fee, high-risk “alternative investments” that deliver spectacular rewards for the Wall Street firms paid to manage them – but not such great returns for pensioners and taxpayers.
Citing data from the National Association of State Retirement Administrators, Al Jazeera America recently reported that “the average portion of pension dollars devoted to real estate and alternative investments has more than tripled over the last 12 years, growing from 7 percent to around 22 percent today.” With public pensions now reporting $3 trillion in total assets, that’s up to $660 billion of public money in these high-fee, high-risk investments.
And yet… despite the fact that they deal with the expenditure of taxpayer money, the agreements between public pension systems and alternative investment firms are almost entirely secret.
Until now.
Thanks to confidential documents exclusively obtained by Pando, we can now see some of the language and fee structures in the agreements between the “alternative investment” industry and major public pension funds. Taken together, the documents raise serious questions about whether the government employees, trustees and politicians overseeing major public pension funds are shirking their fiduciary responsibilities under the law when they are cementing “alternative” investment deals.
The documents, which were involved in a recent SEC inquiry into the $14.5 billion Kentucky Retirement Systems (KRS), were handed to us by SEC whistleblower Chris Tobe, an investment consultant and former trustee of the KRS. Tobe has also written a book — “Kentucky Fried Pensions” — about the scandalous state of the Kentucky public pensions system.
The documents provided by Tobe (embedded below) specifically detail Kentucky’s dealings with Blackstone – a giant Wall Street investment firm which has deployed a platoon of registered lobbyists in Kentucky and whose employees are major financial backers of Kentucky U.S. Sen. Mitch McConnell (R).
The Blackstone-related documents, though, don’t just tell a story about public pensions in Kentucky. The firm, which just reported record earnings, does business with states and localities across the country. The Wall Street Journal reports that “about $37 of every $100 of Blackstone’s $111 billion investment pool comes from state and local pension plans.”
In one set of documents provided by Tobe, Blackstone’s payment structure is outlined, with language guaranteeing that Blackstone will receive its hefty annual management fees from the taxpayer – regardless of the fund’s performance.
In other documents, public pension money is exempted from some of the most basic protections usually guaranteed under federal law. Other contract language appears to license Blackstone to engage in financial conflicts of interests that could harm investors.
Despite the documents involving government agencies, and taxpayer money, they are all marked confidential. The public is not allowed to see them.
Tobe says the sheer size of Blackstone – and its attendant ability to set industry standards - means that the documents he obtained represent a story that goes way beyond one state.
“These agreements aren’t unique to Kentucky – they are everywhere,” Tobe told Pando. “They include exactly the kind of risk and boilerplate heads-I-win-tales-you-lose language that is almost certainly standard in the contracts that so many other pension funds have been signing… This is a national problem.”
to read more: pando.com
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