Report slams Okla.’s PE allocation

A draft report prepared by the Oklahoma Pension Oversight Commission paints a portrait of state pension funds in crisis, grossly under-funded with lopsided investment allocations.

The pensions collectively have more than $10 billion in unfunded liabilities. The report says that the state’s biggest pension system, the Oklahoma Teachers’ Retirement System, is the third worst funded pension system in the United States. This lack of funding, the report claims, has caused state pensions to make “unwise choices with their investment portfolios” and indulge in “hyper-aggressive, high-risk investment” in an effort to boost funding levels.

The report’s chapter on the impact of under-funding pertaining to wayward asset allocations singles out the Oklahoma Teachers’ Retirement System’s allocation to domestic and international equities and OPPRS’s allocation to alternative investments and private equity.

The commission’s report says that the Teachers’ pension has above-average allocations in domestic and international equities, resulting in an allocation to equities 11.6% higher than the average public pension of the same size.

The report says that the Teachers’ system risks are mild compared to the high risk gamble in alternative assets being undertaken by the Police pension system. “[Oklahoma] Police [Pension & Retirement System] is significantly overweighted in its allocation to alternative investments,” the report says, noting the several classes of alternative investments and singling out one of them. “The greatest concern, however, is the private equity investments.”

OPPRS has about 20% of its portfolio in alternative investments. It has invested about $92 million, or almost 7% of its total portfolio, in private equity. Most pension funds allocate a significantly smaller percentage of their portfolio to alternative investments and private equity. For example, the Teachers’ Retirement System of the State of Illinois (TRS) has 3.2% of its assets in private equity. The California State Employees’ Retirement System (CalPERS) has about 4.3% of its portfolio in alternative investments.

OPPRS has served as a limited partner to funds managed by Arsenal Capital Partners, Accel Europe, Hicks Muse Tate & Furst, Oaktree Capital Management and Pequot General Partners, according to Thomson Financial (publisher of Buyouts). The report says that while returns on such investments can be great, the risks of private equity are too great for a pension fund to bank a significant level of cpaital on the asset class. The report even compares private equity investing to betting on a trifecta at a horse race, “if you bet on the winning horses, you can score a huge win; but if you pick the wrong horses, you stand to lose big too.”

“While this asset class may have added return to the portfolio over time, it is unlikely that the extra return has been worth the extreme risk accompanying the portfolio allocation,” the report concludes.

The Oklahoma Pension Oversight Commission, which is chaired by Treasurer Meacham, calls for full funding of the state’s pension systems, saying that not acting now may create a situation where reforming the systems in the future is prohibitively expensive. The draft report’s recommendations include increasing state revenue to its pension systems, dedicating a portion of surplus tax revenues to public pensions and looking at other mechanisms such as bonds to boost pension funding.

Robert Wallace, executive director of OPPRS, publicly disagreed with the findings. He told The Daily Oklahoman that the OPPRS portfolio was prudent and well thought out and had the returns to show for it, with an 18.8% return on its private equity investments.

A spokesman for the Treasurer’s office said that the office had no comment as the draft report would not be officially released until March 24. Calls to Wallace were not returned.