Friday, January 17, 2014

One Step Forward, Two Steps Back: Two Studies of North Carolina’s Pension Plan

One Step Forward, Two Steps Back:  Two Studies of North Carolina’s Pension Plan

As one useless examination of North Carolina’s pension plan begins, a very useful study is about to begin.  In addition to SEANC’s forensic analysis to be conducted by Benchmark Financial Services (see, “Looking for Fire Where There’s No Smoke: SEANC Commissions a Pension Study” January 14, 2014), Treasurer Cowell has announced the formation of the Independent Investment Fiduciary Governance Commission.[1]  The Treasurer’s Commission is going to look into an important matter, while Benchmark is just going to stir up a lot of unnecessary conflict. 

Investment Meeting (1996)

Let’s begin by looking at the central mandate of the newly appointed commission.  Treasurer Cowell has asked the Commission to examine the role of the sole fiduciary versus other potential oversight models for overseeing the investments of the pension plan.  They’ve also been asked to review the interplay between North Carolina’s laws on procurement, personnel, and budgeting and the fiduciary’s role in managing the investments.  During my tenure we had many conversations about these questions but never conducted a thorough evaluation of them. 

Every fiduciary model has positive attributes as well as drawbacks.  The perfect governance structure doesn’t exist.  While a sole fiduciary may be an overly powerful steward of a pension plan, a board of trustees appointed by politicians isn’t a panacea.  I laud the Treasurer for empowering the commission to take a serious look at these issues.

Meanwhile, SEANC has sent a public records request to the State Treasurer as part of Benchmark’s examination,[2] and the President of Benchmark talked about the report with the Triangle Business Journal.[3]  While the State Treasurer has indicated that she will cooperate with Benchmark’s report, the records request will test her patience.  SEANC has asked for virtually every legal document concerning every investment mandate since 2003.  Based on the number of relationships listed in last year’s annual report, the Treasurer would have to produce documents for 250 to 300 mandates, which would probably come to 50,000 to 100,000 pages of material.  The request also asks for all documents relating to placement agents or other intermediaries who may have received payments.  The Treasurer just issued a study of this matter (see, “When Lawyers Manage Investments” December 19, 2013), but Benchmark intends to look at more recent relationships than those covered in the report.  SEANC is also requesting a complete accounting of the pension plans investment fees for the past decade.  I’m looking forward to seeing this data, although I doubt it’s going to reveal anything improper or nefarious.

Mr. Seidel told the TBJ that he would complete his report in about 90 days.  There is no way someone can do a proper job of examining the materials requested in the public records request in 90 days.  He also indicated that he would turn over his results to the Securities and Exchange Commission.  It’s odd that an independent analyst would presume that there is anything worth sharing with the SEC before he’s conducted his analysis.  If the Benchmark study were a serious examination, Mr. Seidel would be interested in sharing his findings with Treasurer Cowell and her chief investment officer.  Mr. Seidel revealed what his study is really all about when he told the TBJ:

“Forensic investigations of pensions are like 'CSI Miami.  We go into a room, there’s a dead body, and the question is, did it die of natural causes, or was there foul play? Only the dead body we’re looking at is dead investments or investments that are faltering.”

The State Treasurer is taking one big step forward with the formation of the Fiduciary Commission, and SEANC and Benchmark are taking two big steps backward into the political mud.


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