In April there was a dust-up in the finance and education worlds when the American Federation of Teachers called out Dan Loeb, founder and CEO of a hedge fund, for simultaneously investing teacher pension fund assets while serving on the board of StudentsFirst’s chapter in New York, which advocates for pension reform, and advocating reform of teacher pensions himself. The whole episode was part of an enemies list exercise (pdf) by the AFT to put money mangers on notice if they deviated from the union’s line on pension reform. And it was, of course, easy fodder for one dimensional takes.
But as is often the case the reality was more complicated. For starters, because of multiple issues including irresponsible decisions by state legislators and unsustainable benefit schemes demanded by public employee unions (yes there is plenty of blame to go around) there is an enormous problem with financing pensions (pdf). But, for the most part, so far reforms have come at the expense of teachers, generally new teachers, rather than comprehensive efforts to reform how we finance retirement for educators. We need a richer conversation about how to simultaneously address the fiscal problems and modernize teacher retirement for today’s more mobile labor market. The choice facing policymakers is less a binary one between defined benefit pensions (those that pay participants a pre-defined benefit) and defined contribution plans (401k-style plans that provide benefits based on contributions and investment choices/performance) than it is about a subset of choices about employer and employee contributions, risk allocation, vesting rules, and issues like portability for participants. In some states Social Security participation is also an issue.
A second wrinkle illustrates how motivations and views on what good public policy looks like are about more than raw self-interest. While you don’t want to overstate it because there are many sources of aggregated risk capital besides teacher pensions, for a hedge fund manager like Loeb to argue for a shift toward retirement systems where individuals control their retirement investments is to some extent arguing against their own self-interest as professional investors dependent on institutional funds for risk capital.
That’s because hedge funds and private equity are closely tied to large institutional investors like pensions. Pension funds are frequently limited partners on various deals and chase profit like any other investor – it’s why we episodically get embarrassing stories about how a teacher pension fund invested in for-profit school management or more recently gun manufacturers. “Pension fund allocations have been major source of growth in assets to hedge funds and private equity over the last 10 years. Used to be primarily high net worth and endowments” one longtime investment manager told me. In other words, pension funds are a significant part of the fuel for private equity and hedge funds.
“Conceptually, at least, [investment managers who call for reform of teacher pensions] are putting their education reform agenda ahead of business interests. Teacher pension funds are a significant source of funding,” said an industry insider who advises private equity firms on deals. He, and others, however, were quick to point out that private equity and hedge funds will continue to make money even if pensions were to vanish tomorrow. And in practice there will be plenty of pension money for a long time even if if all states were to put all new teachers in defined contribution plans this year (meanwhile 401K plans could change rules about allowable investments to include illiquid investments like private equity or hedge funds).
But the bottom line remains: Pension funds are an available source of revenue and risk capital and a popular one for hedge funds and private equity. They’re joined at the hip. That’s why rather than a story of simple motivations it’s a good reminder that while education issues are usually presented in black and white and heroes and villains, they’re rarely that simple.
Update: One long time money manger writes to say, “I think the point that is the most interesting here, but has not been well articulated publicly is that the unions are pretending like this is their money to do with as they please to meet their social engineering when in fact it is taxpayer money, not theirs. If unions are willing to risk lower benefits to their members by accepting the harms of lower plan performance that could result from neglecting their fiduciary duty obligations, then fine they could do what they want. But when instead they are saying we want our pension benefits guaranteed, we want to use the pension capital to pursue our social/political goals, and then we want to raise taxes to make up for any shortfall there is something really wrong.”