Kentucky's underperforming retirement system for state employees keeps secret details of its so-called "alternative investments," and critics are calling for more transparency so the risks and potential pratfalls can be fully assessed.
In its latest story, the Kentucky Center for Investigative Reporting looks at the secrecy behind where the Kentucky Retirement Systems makes its alternative investments—and the concerns it raises.
The KyCIR's James McNair reports that KRS "only has enough assets to cover about 45 percent of its obligations to its current and future retirees." That's a $17.6-billion shortfall as of mid-2013.
Kendrick Mills, a former city of Louisville firefighter, relies on a 26-year pension for two-thirds of his household income. He's also a retired investment adviser.
“I want to know what’s in the funds. I want to know the cooking,” Mills told the KyCIR. “It amazes me that the secrecy doesn’t cause an uproar.”
The KyCIR adds:
Citing the secrecy agreements with fund managers, KRS interim chief investment officer Peden -- himself a former Prisma employee until 2005 -- refused to discuss the contents of its alternative funds.
By agreeing to terms of confidentiality, Peden said, KRS gets a better deal on fees, saving at least $17 million a year on its entire pension portfolio.
“I’m not sure how the average retiree or taxpayer is going to be better off knowing the individual names of the managers underlying the hedge funds when all they need to be worried about is the performance of that fund of funds manager,” Peden said.
But the KRS' tactic has high-profile critics.
Coincidentally, hedge funds as public pension fodder were recently panned by the man considered the world’s most successful investor -- Berkshire Hathaway CEO Warren Buffett. His opinion came in response to a question from a board member of the San Francisco Employees’ Retirement System in May. Buffett’s answer: “I would not go with hedge funds -- would prefer index funds.”
Aside from under-performing, the fees the retirees' pension fund pays to have these hedge-funds is a raising calls for more openess from KRS.
One of the reasons why hedge funds are controversial is their cost. Fund managers typically charge a 2 percent annual management fee and rake in 20 percent of any profit on its investment portfolio. Because working-class investors never go near hedge funds, they have no gripe with those fees. As stakeholders in hedge fund-smitten KRS, however, they might. KRS says it paid $53.6 million in fees in the year ended June 30, 2013, or 0.37 percent of its assets. That would be low, but it appears to be understated.
The entire KyCIR story is here. Also, McNair spoke with WFPL's Gabe Bullard about this story. You can listen below: