Transparency and Public Pension Plans
In principle, most people agree that transparency is good thing when it comes to public pension plans. The public should have a decent idea about the performance and risks of the plans and the sources of return and risk. There also has to be a limit, because too much disclosure would be damaging. Regrettably, there’s little agreement about the appropriate level of transparency. Yesterday I discussed the attempts by two public officials to get information about the pension plans in their respective states (“Opacity: The Investment Performance of the Utah Retirement Systems”). In my view, Treasurer Loftus in South Carolina and Auditor Dougall should be able to see every scrap of information. Their access to information about their states’ pension plans isn’t a matter of public transparency. Rather, they have to have unfettered access as a matter of checks and balances.
When it comes to the public, pension trustees and staff often fight to limit the amount of information available to the public and the press by arguing that the data’s release would damage the plan. This argument would be perfectly reasonable if it were applied to information that would actually hurt the plan. However, some states use the “hurt the plan” exception to hide all sorts of stuff you should know.
Public pension plans should release, at least, annually performance, benchmark, and fee information for every one of their managers for various time periods. There shouldn’t be any exceptions. Many pension officials insist that alternative managers (real estate, private equity and hedge funds) should be exempt from disclosure. They argue pension plans would lose access to alternative managers, or that the release of the data would hurt some undisclosed proprietary interest.
This argument doesn’t hold any water. First, numerous public pension plans disclose the investment performance of all their managers without any harm. CALPERS is the most notable example, but Oregon, Washington State, and all the big Canadian pension plans provide this level of detail. Second, all the publicly traded alternative managers reveal the performance of their funds on a quarterly basis. Do you really think Blackstone, KKR, Carlyle, Fortress, or Och-Ziff would publish this data if it were harmful to their investors or business? Hardly.
Transparency has to have some limits. For example, I don’t think the underlying positions of alternative managers should be released to the public. While it is okay to let the public know how much IBM or Apple is owned by a pension plan, I think it would be harmful if a pension plan released the value of private holdings or short positions held by hedge funds. The release of this data might allow competitors of the money manager to undermine these values.
The lack of appropriate disclosure is helping to fuel the attack on public pension plans. Many of these plans face serious fiscal problems because of a combination of insufficient funding, overly generous benefit plans, and/or inadequate investment performance. Frankly, poor investment results are the least of the problems. Conversely, great investment performance does relatively little to close funding gaps if legislatures haven’t been contributing sufficiently to pensions or have been sweetening benefit formulas without financing them.
The lack of adequate investment transparency creates suspicions that poorly managed investments are the culprit behind funding deficiencies, and therefore distracts us from fixing, and hopefully, saving public pension plans.