Private Influence over Public Plans
I recently came across an article titled “Wall Street is Taking Over America’s Pension Plans” by Murtaza Hussain.
In the article it stated that Wall Street spent around $300 million to influence the November elections, with their agenda being that they want to see more of the $300 trillion in government pensions invested into private equity, hedge funds, venture capital and other so-called “alternative investments”. There seems to be a shift with states investing more of the government pensions into private funds. A study done by the National Association of Retirement Administrators estimates that pension systems have tripled such holdings in the last dozen years, with the average system now having nearly a quarter of its funds in alternatives. Those investments are managed by private financial firms, which charge special fees that pension systems do not pay when they invest in stock index funds and bonds. The idea is that paying those fees, which can cost hundreds of millions of dollars a year, will be worth it, because the alternative investments will deliver higher returns than low-fee stock index funds like the S&P 500. Data from across the country shows that the shift has often been accompanied by below-average returns.
Another article I read relating to the same topic, “Looting the Pension Funds: How Wall Street Robs Public Workers” by Matt Taibbi, was published in Rolling Stone. The article tells the story of Warren Buffet placing a million dollar bet in 2008 with the head of a New York hedge fund called Protégé Partners. He bet them that the S&P 500 index fund would outperform a portfolio of five hedge funds that were hand-picked by Protégé. Five years later, Buffet’s portfolio was up 8.69 percent total, and Protégé came up with a 0.13 percent increase over five long years, meaning Buffett is winning his bet by nearly nine points.
Should the government continue to invest more and more of the government pension money into the private sector or continue to invest in the low-fee public funds? Should we be concerned that Wall Street is starting to endorse and donate to more political campaigns or that 3 of the recently elected governors were once executives and directors of firms which manage investments on behalf of state pension funds? Our recent financial crisis demonstrated just how risky and potentially destructive these types of assets can be. Will we be talking about the government pensions movement into the private sector as the cause of our next recession?
Author: Rheanna Walsh