Friday Letter LPs, GPs and the defined benefit plan debate

Public pensions face ever-mounting liabilities from their ever-aging retirees. And as such, debate is raging in the US over whether they should continue to be structured as defined benefit schemes, where employers guarantee beneficiaries a stream of income until their death, or defined contribution plans, where employees take charge of their own investments.

Getting people even more riled up, is the question of whether state worker benefits are in fact overly generous packages that cities and states simply can’t afford to pay, and thus should be restructured.

But private equity fund managers, it seems, are being discouraged from participating in that discourse.

Officials from several large institutions have taken a hard line with GPs, essentially letting them know that if they have anything disparaging to say about public workers' benefits, they better keep it to themselves if they want to keep the capital faucet running.

Earlier this year, we reported that New York City police pension board member Joseph Alejandro felt the board should be able to dismiss managers who make disapproving comments. His proposal was aimed squarely at The Blackstone Group over a remark made last year by one of the firm’s senior advisors and economic gurus, who reportedly said states couldn’t afford to continue funding defined benefit plans for public workers and that benefits for public workers were “too generous”. 

“The intent isn’t to chill analysts who provide legitimate information,” Alejandro told Bloomberg at the time. “We are trying to prevent money managers from taking positions that are essentially opinions based on political viewpoints.”

Blackstone was forced to issue a statement saying it believed workers were entitled to the pensions they’ve been promised and shouldn’t be scapegoated, by “blaming them for the structural budget deficits that cities and states face. We at Blackstone are committed to helping public employees retire with confidence in the strength and reliability of their pensions.”

But the issue of how and when a GPs should weigh in on this national issue of debate is not likely to go away, nor is it likely to plague just one fund manager.

JJ Jelincic, a board member of the California Public Employees’ Retirement System and the former head of a large state worker union in California, last week proposed making investment managers report contributions they make to organisations that advocate scaling back public worker benefits.

“We obviously have an interest in defending defined benefits, and we have an interest in defending public employees,” Jelincic told Pensions and Investments. “If the people we are paying a lot of money to are working against us, we ought to at least be aware of it and have a conversation about it.”

It is not exactly a straightforward issue, for even if a GP were to personally disagree with defined benefit plans, the firm to which they are tied would be likely to support the system. The alternative – defined contribution plans – usually gives individual employees much greater control over how and where to invest their retirement pot. And that typically means DC plans have a penchant for equities, fixed income and cash with little, if any, money flowing to alternatives.

We wonder therefore, how much good it does for any of the parties involved to monitor GPs’ personal donations or remarks. It’s true that private equity managers derive much of their life blood from US public pensions, and thus are accountable to the officials – sometimes elected, sometimes not – who run those institutions on behalf of teachers, police, firefighters and other city and state employees. But equally true, and to which Blackstone’s statement alluded, is that those pensions need the returns from alternative asset classes to fund their liabilities. They have, to use the magic words, an alignment of interests.