In this special report, David Sirota focuses on the Rhode Island pension system. Many of its features probably apply to more than a few public pension fund arrangements in other states. However, due to critical underfunding, and a 2015 court decision in their disfavor, RI retirees recently started receiving smaller checks than promised. They are asking a lot of questions, esp. about alternative investment fees, and have retained a former SEC investigator to get them answered. So far, the answers are disturbing. Rhode Island’s retiree association appears to be the first to request a criminal probe of whether the preferences are harming taxpayers and government workers. In all, municipal and state pension funds now have roughly $660 billion in alternative investments.
http://www.ibtimes.com/wall-street-fine-print-retirees-want-fbi-probe-pension-investment-deals-2250476?utm_content=bufferecd74&utm_medium=social&utm_source=twitter.com&utm_campaign=bufferAccording to financial experts who were asked about special investor rights in general (not specifically the Rhode Island deals), financial firms sometimes use side letters to court deep-pocketed investors with access to non-public information, lower fees or special rights to withdraw their money — potentially leaving other investors with losses. The letters are also used to comply with certain clients' special needs — say, a public institution's bylaws requiring it to collect customized data about its investments. Some financial firms say they do not have to notify investors of their side letters with others.
Over the last decade, SEC officials have repeatedly warned that such preferences could improperly shield favored investors from expenses that should be shared by all investors. In 2013, the agency brought successful cases against hedge funds over their decision to give certain investors special privileges. [...] Fears about such schemes are acute for pension funds, which are often controlled not by the retirees, but by public officials. The worry is that with no skin in the game — and with campaign contributions and junkets working to influence their behavior — pension officials may not always prioritize the best interests of retirees. Some analysts use the term “dumb pension money” to describe the issue of pension officials potentially being less rigorous in their decision making — which could make retirees susceptible to being harmed by special privileges given to other investors.
Michael Flaherman, a former private equity investor now at the University of California, Berkeley's Goldman School of Public Policy, said such preferences are pervasive in the alternative investment world. “If you look at many of these investment agreements, they have similar provisions giving the financial managers carte blanche to do what they want,” Flaherman said. “Each of the individual investors wants to believe they took something out of the pocket of another institution or investor — and they are encouraged to think that they are on the taker end of these deals and not on the taken end of the deals. But that’s the classic setup for a con — to convince the mark that they are in on the con, even though that may not be the case.”
