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NEW YORK: Canada selects directors to oversee its public pension funds for their financial expertise and pays some six-figure salaries. In the Netherlands, board members must obtain approval from the central bank.
In the United States, a lineup of unpaid union-backed reps, retirees and political appointees are the vanguards of a US$4 trillion (RM17.6 trillion) slice of the economy that looks after the nation’s retired public servants. They’re proving to be no match for a system that’s exploded in size and complexity.
The disparity is dragging on state and local finances and – together with headwinds that include a growing ratio of retirees to workers and lenient accounting standards – gobbling up an increasing share of government budgets.
Precisely how much it’s costing Americans is hard to say. But a Bloomberg News analysis of data from CEM Benchmarking, which tracks industry performance, indicates that the price tag over the past decade could run into the hundreds of billions of dollars.
In the 10 years through 2015, a group of large Canadian funds delivered excess returns that beat a passive portfolio designed to match their liabilities by 2.2% a year.
That return was 0.7% more than US counterparts earned for taking greater risk above a similar index – equivalent to US$280bil (RM1.2 trillion) in missed opportunities over a decade.,
Multiple other studies have found that funds managed by boards stacked with government officials and elected representatives of public employees underperform.
As inflation and interest rates have jumped, a funding crunch is looming for America’s public pension plans. For years, the system has teetered on the edge of a crisis that’s left plans more than US$1 trillion (RM4.4 trillion) short of what they need to pay out in benefits – a gap that widened considerably during the downturn in financial markets.
Underfunded and under pressure, they’ve turned to riskier investments to boost returns, piling into private equity, hedge funds and other alternative assets. Where boards’ own expertise has fallen short, they’ve relied on investment staff and outside advisers, whose appetites for complexity add to costs and eat into returns.
“It’s the worst of all possible worlds,” said Mike Reid of CEM Benchmarking. “The United States would do well to reconsider its approach.”
The disconnect was on display at a 2021 investment committee meeting of the California Public Employees’ Retirement System (CalPERS), which provides benefits to more than 750,000 individuals. An external adviser warned board members that the boom in blank-cheque companies was a sign of froth in financial markets.,