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Illinois

* Lynne Marek in Crain’s…

Illinois Teachers’ Retirement System, the state’s biggest pension fund, is relying heavily on risky, expensive investments as it tries to claw its way out of a quicksand of unfunded pension liabilities.

The pension fund, which has only enough money to cover 40 percent of its future obligations, has steadily increased allocations to private-equity funds and only recently reversed course on investing with hedge funds despite lackluster results for both.

That TRS investment strategy poses a threat to pensioners’ retirement income and stands to exacerbate the burden for taxpayers already on the hook for $138 billion in unfunded liabilities across all Illinois pensions. The state’s pension crisis is the second-worst in the country, behind New Jersey, due mainly to a lack of state government contributions in past decades. The TRS reliance on private-equity and hedge funds doesn’t appear to have helped matters—and might worsen them if the investments backfire.

“The allocations are huge, the returns are terrible, and the costs are enormous,” says former TRS board member Marc Levine regarding hedge fund investments. […]

As of June, TRS had nearly a quarter of its money invested in private-equity and hedge funds, which generally charge fees of between 1 and 2 percent of assets, in addition to a portion of gains. That compares with less than 1 percent in more standard stock and bond strategies.

posted by Rich Miller
Monday, Aug 13, 18 @ 12:09 pm

Comments

Does anyone have to say “follow the money?”

Comment by Jibba Monday, Aug 13, 18 @ 12:16 pm
Considering the cycle is due for a downturn any time now, it doesn’t bode well. Sounds like a ticking time bomb.

And just because I’m a pedant and a rude nitpicker, this sentence from the article was a bit clunky and hard to unpack, “…spokesman Dave Urbanek in a statement defends as being above its 7 percent target the pension’s overall performance of 8.4 percent over the past 30 years through March”

I think “as being above its 7 percent target” should be at the end, I had to read the sentence twice to figure out what was being said.

Comment by Perrid Monday, Aug 13, 18 @ 12:18 pm
Sending more, many more, tax dollars to fund the various pension plans seems to me to be a fool proof and much more prudent option. It should have been done years ago.

Comment by Hit or Miss Monday, Aug 13, 18 @ 12:24 pm
What are they thinking? Very few investors can beat a Standard and Poor index fund. Maybe Bernie Madoff did, for a while.

Comment by Da Big Bad Wolf Monday, Aug 13, 18 @ 12:24 pm
At least they haven’t placed it all on red. That’s not a suggestion fellas.

Comment by Chris P. Bacon Monday, Aug 13, 18 @ 12:25 pm
Stop saying these investments are “more risky”, Crains!! Investment 101 tells us that hedge funds private equity and other alternative investments are not “higher risk” than stocks! Generally, they are actually much less “risky” and do not lose as much as stocks do in a downturn or crash. This basic misunderstanding makes one wonder if Crain’s is trying to make its story bigger than it is.

Comment by Molly Maguire Monday, Aug 13, 18 @ 12:30 pm
–What are they thinking? Very few investors can beat a Standard and Poor index fund.–

Good question. TRS is in for the long haul. Why are they going for quick scores? Some “friends” getting a taste, managing the money?

Warren Buffett famously clobbered five different hedge funds over 10 years just going with the S+P 500 index.

https://money.cnn.com/2018/02/24/investing/warren-buffett-annual-letter-hedge-fund-bet/index.html

Comment by wordslinger Monday, Aug 13, 18 @ 12:31 pm
How are these people being allowed to gamble with our retirement money? These funds should mostly be invested in safer ways.

Comment by Me Again Monday, Aug 13, 18 @ 12:34 pm
Article is half accurate. TRS returns on PrivateEquity have helped overall returns over 1, 3, 5 and 10 years. The Hedge Fund returns have been awful and the investment department has favored Hedge Funds for what is like 15 years for reasons which are difficult to comprehend given both the cost and performance

Comment by Sue Monday, Aug 13, 18 @ 12:34 pm
==These funds should mostly be invested in safer ways.==

Agreed, but that would mean a lower rate of return which leads to increased normal costs today. Much easier to hide the true pension cost when it’s hiding behind a high assumed rate of return.

Comment by City Zen Monday, Aug 13, 18 @ 12:40 pm
“Have you tried 22?”

Comment by VerySmallRocks Monday, Aug 13, 18 @ 12:54 pm
TRS has a very good investment track record for investment returns. I have to wonder why the change in approach which is recent. Hmmmm, what is the connection.

40% funded. Almost the same as when the state constitution was passed I. 1970. For all of the underfunding TRS has been able to maintain a funding level, they should change the approach that allowed this.

Comment by JS Mill Monday, Aug 13, 18 @ 12:58 pm
Hedge Funds do just that, they hedge, or seek to minimize their losses, against a bad day. Assuming it’s balanced right, when one stock in their fund goes down, there should be a negatively correlated stock that does well.

Conversely, hedge funds shouldn’t do as well on a good day. They don’t justify their fees in a good market, they earn it when the market turns to crap.

Whether or not they deserve their charged rates is a whole different conversation. I personally think (and the academic lit agrees) that no one is consistently going to beat the market, and therefore no one can justify high fees. But that’s just like, my opinion, man.

Comment by ChrisB Monday, Aug 13, 18 @ 12:59 pm
===Assuming it’s balanced right===

And there’s the rub.

Comment by Rich Miller Monday, Aug 13, 18 @ 1:00 pm
Hedge funds have been doing poorly as of late.

The ultimate question is whether any fiduciary would invest client money that way. I’m thinking not. When speaking with my advisors, the funds that withstand a fiduciary review are limited.

I’d start asking if the investment accounts of those committing money in that way to see if their own investments mirror what they are doing with their own funds, not to mention looking for sweetheart deals.

Of course the have the world’s biggest backstop to rely on…..

Comment by plutocrat03 Monday, Aug 13, 18 @ 1:21 pm
While I have no doubt TRS could pare down their allocations and squeeze out better terms from their private equity and hedge fund partners, imagine the fees that the 654 local pension plans are paying their investment advisers just to administer and invest in funds that charge further fees.

Comment by Chicagonk Monday, Aug 13, 18 @ 1:34 pm
One of the great mysteries is why the State pension funds still have such low funding ratios. As of the end of FY 2017, the funding ratio of SURS stood at about 44.4%, SERS at 36.1%, and TRS at 40.2%.

These ratios have almost not budged since the Great Recession Years of 2008-2009, even though general stock market averages have more than doubled over this period. During the Great Recession years, the funding ratios for each of these funds dropped by more than 20%. In other words, the funding ratios are capable of sinking like a stone in hard economic times, but seem unable to rise when stocks are booming.

How are investment decisions being made by these funds? Who is making the decisions? These questions urgently need to be investigated by the GA.

Comment by Quiet Sage Monday, Aug 13, 18 @ 2:13 pm
Another corrupt bargain of Bruce Rauner?

Comment by Precinct Captain Monday, Aug 13, 18 @ 2:22 pm
Would it be possible to statutorily require these investments be in an S&P 500 index?

Comment by LXB Monday, Aug 13, 18 @ 2:55 pm
Precinct Captain- your comment is so off base it’s laughable. The allocations TRS made to alternatives predate Rauner by at least 10 years. But then why would you ever bother to post something that is factual

Comment by Sue Monday, Aug 13, 18 @ 3:06 pm
These ratios have almost not budged since the Great Recession Years of 2008-2009, even though general stock market averages have more than doubled over this period. During the Great —–Recession years, the funding ratios for each of these funds dropped by more than 20%. In other words, the funding ratios are capable of sinking like a stone in hard economic times, but seem unable to rise when stocks are booming.–

pension funds usually invest in lower risk bonds… which have yielded very low rates. I mean look at how cheap IL got its bonds, and were almost junk.

Comment by anon 123123 Monday, Aug 13, 18 @ 3:08 pm
Hi Quiet Sage

One reason is the asset allocation. A 401 can be 90% in equities as the money won’t be needed for years, if not decades. TRS and other pensions have to make payments last month, this month, and so on. In short, they can probably only safely put 60% in equities.

Comment by Downstater Monday, Aug 13, 18 @ 3:24 pm
==But then why would you ever bother to post something that is factual==

Pot, meet kettle.

Comment by Anonymous Monday, Aug 13, 18 @ 3:31 pm
Is it just me, or did this article belong on the editorial page? Lot of opinion thrown in there with the facts, as I see it.

Lynne is usually more straight-up than this.

This may be a first, but Sue is right about TRS’ Private Equity. The performance has been very good, even after fees. Hedge funds, no. May be time to wind down that science project.

TRS or any other large pension fund doesn’t put all their dough in an index fund for the same reason we don’t put all ours in a single stock. It’s too risky. Better for risk and return, and proven time and again, to buy bonds, buildings, foreign stocks, and private equity along with the index funds to fully diversify.

Comment by Arthur Andersen Monday, Aug 13, 18 @ 5:04 pm
Well with underperforming hedge funds in the portfolio one can make the unfunded Liability larger and then argue for reduced pensions. Hedge funds get richer, pensioners to the poor house.

Comment by lost in the weeds Monday, Aug 13, 18 @ 5:48 pm
Lost in the Weeds, indeed you are. Who, exactly, would go for that strategery?

Comment by Arthur Andersen Monday, Aug 13, 18 @ 5:54 pm
Downstater- actually the Plans retain adequate cash for payroll with most annual outflows being paid in by the State. Equities are as liquid as cash- it’s the Hedge Funds and PE with the lockup restrictions. Bottom line is the investment staff sold the Board on Hedge funds and the performance results are so bad but that hasn’t seemed to gotten anyone’s attention since the overall return has hit the minimal targets set by overpaid consultants

Comment by Sue Monday, Aug 13, 18 @ 6:37 pm
-actually the plans retain adequate cash for payroll with most annual outflows being paid in by the State-

Actually, no. TRS collected about $5.2 billion in cash last year from the State, members, employers, etc. They paid out $6.2 billion in benefits, refunds, and expenses. (Source:CAFR) The difference is made up by selling index funds.

This cash flow deficit has been occurring for over a decade and is present in all three large State pensions.

Comment by Arthur Andersen Monday, Aug 13, 18 @ 9:26 pm