Ted Siedle has a bleak outlook about U.S. retirement security. That's the case particularly with public pensions, which Mr. Siedle suggests are essentially hotbeds for fraud and theft.
Mr. Siedle is a bit of an authority on the subject — he collected the largest whistle-blower awards in the history of the Securities and Exchange Commission and the Commodity Futures Trading Commission, for $48 million and $30 million, respectively. The former SEC attorney, who also previously served as compliance director at Putnam Investments, currently does forensic pension-fund investigations for his firm Benchmark Financial Services Inc.
InvestmentNews sat down with Mr. Siedle to get his take on the U.S. retirement system and why stealing from pensions is the perfect crime.
Greg Iacurci: You've said the U.S. is "on the precipice of the largest retirement crisis in the history of the world." Why do you believe that?
Ted Siedle: It's not what I believe, it's a fact. The U.S. is going through a demographic historical moment, where we have the largest elderly population in the history of this country. Because of the confluence of the decline of defined-benefit plans, the rise of defined-contribution plans, the systemic failure of defined-contribution plans and the underfunding of defined-benefit plans, the elderly baby boomers aren't prepared. I believe the new normal will be "too frail to work, too poor to retire."
GI: Cumulatively, state pensions have a $1.4 trillion deficit, according to The Pew Charitable Trusts. Some states are severely underfunded — Kentucky and New Jersey about 30%, for example. You suggest investment management plays a big but largely overlooked role.
TS: There are three components to the health of pensions: how much money goes in, what happens to the money while it's in the pot, and how much money goes out. If any of those things are askew, the pension is in trouble. The one thing no one wants to talk about is how the money is managed. We find all over the place that, more often than not, had the pension been properly managed consistent with fiduciary standards, it may not be 100% funded but a 20% funded pension would be 70% funded.
GI: How does this mismanagement play itself out on the investment side?
TS: The value of hard-to-value assets in public funds is clearly inflated. It will always be, in my experience, due to conflicts of interest. The manager has an incentive to inflate. A public pension that has hard-to-value or illiquid assets — real estate, venture capital, private equity — when you say it's 50% funded, it probably isn't. That's the best-case valuation.
The last 15 years, fees paid by public funds have gone up dramatically — by 10 times. When I first went into Rhode Island, the pension was disclosing fees of $7 million a year. I told them they were wrong, and within a year they started disclosing fees of $70 million a year. Private-equity and alternative investment managers got greedy and went around the country and systematically eviscerated the public records laws in every state, every county, every city. There's now legal precedent for alternative investments to not have to disclose to the public their contracts, their investments, their fees, their performance.
GI: You've said stealing from public pensions is the "perfect crime." Can you explain that? What's the scope of this theft?
TS: Public pensions are unique in that they're subject to public records laws. Because of that, public pensions have gotten very defensive and very reluctant to comply with public records laws. Public pensions hide a tremendous amount of what they do. They also resist reporting crimes. One of the reasons public pensions are the perfect place to steal is because they won't report.
You will generally find political consensus within a state to not investigate or tear into what's going on at the local public pension. It's a perfect place for high-level theft. And the growing secrecy of alternative investments also make it a perfect place to steal, because no one can see what's really going on.
Both the victim (the public fund) and the perpetrator (the manager or intermediary) agree to a secrecy scheme and are complicit in it. You actually have, in many cases, the victim agreeing not to report any criminal behavior and that the [investment] manager need not report any criminal behavior. There are managers who say in their Form ADV, "If you are a public pension and we were to disclose criminality on our part to you, which you would then have to disclose to the public, we will not disclose criminal activity to you and you agree that's OK." Why would anybody agree to that?
Right now, in Kentucky, the trustee has been convicted and is in jail and the pension fund is paying his legal bills.
GI: What do you think the chances are of a federal bailout of these pensions?
TS: I think it's a certainty. If Illinois goes bankrupt, what do you think will happen? Armageddon. Garbage is not going to be picked up, water's not going to be filtered and clean, snow is not going to be plowed, toilets are not going to flush. Everything is going to completely fall apart. If a state goes into bankruptcy it will have to be bailed out by the federal government.