Heard off the street: Pensions, politics and consultants make for unsavory bedfellows
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Mixing business with politics produces a volatile cocktail leading invariably to a hangover of doubt. Whether it's awarding a government contract to build a stadium or to supply toilet paper, there are troubling questions about how such decisions are reached.
To put it most indelicately: Are they based strictly on merit or theoretically superfluous considerations such as who contributed how much to the campaign of whom? Seldom are such questions answered with undisputable clarity, as a recent decision by the Retirement Board of Allegheny County illustrates.
In April, board members voted 5-2 to extend the contract of Yanni Partners, a Downtown pension consultant that advises the $714 million pension fund on investment strategy and selecting investment managers. Yanni's clients, including several union pension funds for workers at the Pittsburgh Post-Gazette, have assets of about $37 billion.
The board vote, which took some local observers of the public pension industry by surprise, comes as the Securities and Exchange Commission casts a sharper eye on the potential conflicts Yanni and other pension consultants face.
Several board members say the SEC is investigating Yanni and that the agency last fall asked the retirement board for information regarding the firm. County Treasurer John Weinstein and Recorder of Wills Eileen Wagner say the SEC's inquiry was one reason they voted against extending Yanni's contract.
The SEC never identifies who it is investigating nor the nature of its inquiry. Theresa A. Scotti, one of Yanni's managing principals, declined comment.
Ted Puzak, a retired probation officer who is one of two employee-elected members on the retirement board, says he supported Yanni despite the SEC's apparent involvement.
"I still believe in them," he says. "They've always been upfront and transparent."
Mr. Puzak believes the agency's interest in Yanni is part of a broader probe of the pension consulting business. The SEC's last official pronouncement on the industry came in May 2005, several months prior to the SEC contacting the county retirement board.
The report was based on the SEC's examination of 24 unidentified pension consultants that had registered with the agency as investment advisers. In addition to advising pension funds, 13 of the consultants provided products and services to investment management firms. For some of the consultants, "the compensation received from money managers comprised a significant part of their annual revenue," the SEC staff stated.
The agency also found that a majority of the consultants had affiliates that provide other services to pension funds, such as investment management or brokerage services. Yanni's SEC disclosure states that it has broker-dealer and investment adviser affiliates.
The SEC concluded that such relationships "create disclosure and conflict of interest issues that have not been addressed by pension consultants."
Most pension plan participants don't understand why the SEC finds these relationships so troubling, but the reasons are readily apparent.
For example, consultants may be tempted to recommend that a pension fund hire an investment manager based on that manager's willingness to share management fees collected from the pension fund. The same consideration could be the basis for recommending a broker to execute a pension fund's stock and bond trades.
This "soft dollar" compensation for consultants can be considerably greater than the "hard dollar" fees they collect directly from pension funds for their work. That means the consultant who submits the lowest bid is not necessarily the lowest-cost provider and does not automatically recommend the best money managers. Moreover, soft dollar arrangements make it difficult for pension funds to determine their overall costs.
Consultants violate their legal obligation to provide disinterested advice if recommendations are based on soft dollar compensation rather than on merit. As serious an issue as that is, critics say it is not the primordial issue with government pension plans. That, they say, would be politics.
It goes without saying that most firms doing business with public pensions funds are politically connected. Yanni is no exception.
For consultants, investment managers and brokers, campaign contributions are part of the cost of doing business with public pension funds. So are costs that aren't publicly disclosed, such as buying a few foursomes at Democratic Party golf outings. You have got to pay to play, the saying goes.
"Anybody that's surprised by the politics involved has to be green," says one investment adviser.
There's no percentage in decrying the practice. Sources who declined to be interviewed for this story or who asked that their names not be used cited a lack of interest in political suicide.
As with other matters involving business and politics, the county's rationale for retaining Yanni is open to interpretation. And it's impossible to say what the SEC's review of the firm may lead to, if it leads to anything at all. Similar charges can be made against some of its competitors, either for legitimate or political reasons.
This much is known: After considering bids from five other consultants, the county retirement board voted to extend Yanni's contract through the end of the year. That's not a resounding vote of confidence -- not that there are many resounding votes of confidence these days for anything involving pensions and politics.
First Published August 13, 2006 12:00 am