As detailed in the September 28, 2005 letter below to Bradley Belt of the Pension Benefit Guarantee Corporation, we met with Mr. Belt and senior staff of the PBGC on September 7, 2005 and offered to conduct forensic reviews for the PBGC of failed pensions for which the PBGC has assumed responsibility. Our reviews would focus upon conflicts of interest, hidden financial arrangements and malfeasance, involving firms that have provided investment services to failed pensions. As we learned during our meeting, while the PBGC has taken over more than 3,500 plans, the agency has never undertaken a forensic review of any of these plans. Indeed, Belt has publicly stated that while there are similarities between the federal savings and loan bailout and the pension bailout, one notable difference is the lack of fraud or mismanagement in the pension arena.
As we have previously written, we believe, based upon hundreds of investigations, that pension fraud and mismanagement is pervasive; the PBGC simply lacks an understanding of what constitutes fraud and mismanagement in the pension context and is not looking for it. We offered to conduct these forensic reviews for free, i.e., on a contingency basis.
As reported below in a Pensions & Investments article dated September 29, 2005, the PBGC rejected our free investigations offer, claiming that the agency could not afford the expense. This response is, of course, preposterous. With thousands of corporations abandoning their obligations to provide for the retirement security of millions of American, one would think the PBGC would be motivated to investigate whether wrongdoing by investment firms contributed to the demise of some of these failed pensions. Further, any recoveries related to wrongdoing would not only potentially inure to the benefit of participants in failed plans and reduce the premiums PBGC charges healthy corporate sponsors, such recoveries would also discourage investment firms from failing to adhere to the highest fiduciary standards in their dealings with pensions.
Two members of the House of Representatives found the PBGC’s response to forensic audits unacceptable and asked the Government Accountability Office to investigate whether the federal agencies (such as the PBGC) that enforce pension law have failed to police the consultants and money managers to pensions. The letter by Representatives Miller and Markey dated November 30, 2005 is presented below.
Why can’t the PBGC afford free forensic audits? The answer is simple. While the PBGC publicly states its mission is to ensure that corporations sponsoring defined benefit pensions are prepared to honor their obligations to workers, its private agenda is to assist corporations in abandoning their pension obligations. The Administration’s belief is that if American corporations are to compete globally in the future, they must be freed from the promises they have made to their employees over the past 50 years or so. Unfortunately, several generations of America workers will be largely stripped of their retirement security if this effort is successful. Furthermore, the past 50 years of prosperity American businesses have enjoyed would have been impossible without the hard work of millions who are relying upon these corporate pensions.
Mandatory forensic audits of failed pensions will not expedite the wholesale abandonment of the nation’s defined benefit pensions. Uncovering malfeasance, assigning blame and recovering from wrongdoers is an ugly business and takes time.
Based upon our experience, we can assure you we will uncover wrongdoing by corporate sponsors and firms providing services to many failed pensions. That is what the PBGC cannot afford.
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Bradley Belt Executive Director Pension Benefit Guaranty Corporation 1200 K Street, N.W. Washington, D.C. 20005
September 28, 2005
Re: Forensic Reviews of Failed Pensions
Dear Mr. Belt,
Thank you for the invitation to meet with you and the senior staff of the PBGC, including James Gerber, Judith Starr, Jeffrey Cohen, Vince Snowbarger and Terrence Deneen, on September 7, 2005.
As I mentioned at the outset of our meeting, I have been writing and speaking about, as well as investigating, conflicts of interest, hidden financial arrangements and wrongdoing involving investment consultants, money managers and other vendors providing investment services to pensions since the early 1980s. As a leading authority on pension investment management issues, I have repeatedly demonstrated through investigations I have undertaken that wrongdoing by vendors to pensions is commonplace; assets are indeed being skimmed from the nation’s pensions.
As a result of the above investigative initiatives, in 2003 I was asked to testify before the Banking Committee of the U.S. Senate on the mutual fund scandals and in 2005 before the Retirement Committee of the Louisiana House of Representatives regarding the nation’s first pension consultant disclosure law.
Also in 2003, the staff of the Securities and Exchange Commission asked me to provide information and guidance in connection with a staff investigation into the pension consulting industry. My firm provided the staff with a road map for its inquiry, as well as the findings of certain specific investigations of investment consultants we had undertaken.
As you know, the Commission staff gathered significant information regarding the divergent (and conflicting) sources of revenues these gatekeepers to the nation’s pensions derive from the money managers they are charged with vetting, as well as from pensions. At this point in time, the staff of the Commission has more information regarding the underlying economic realities of the pension consulting business than anyone, including any pension client.
It should be abundantly clear from the data that the Commission has gathered (which should be available to your agency) that the revenues the consulting industry derives from money managers are exponentially greater than those derived from providing objective advice regarding these same money managers to pensions. Our investigations have revealed that a corrupt consultant can earn ten times more in kick-backs from money managers than he earns from advising pensions. These economic realities explain the current state of corruption of the consulting industry.
The Commission staff concluded in a May 16, 2005 report it issued to the public that conflicts of interest were pervasive and disclosure was abysmal in the pension consulting industry. Specifically, the Commission staff found that “[P]ension consultants may steer clients to hire certain money managers and other vendors based on the pension consultant’s (or affiliate’s) other business relationships and receipt of fees from these firms, rather than because the money manager is best-suited to the clients’ needs. Such a conflict can compromise the fiduciary duty that investment advisers owe their clients.” (emphasis added) (SEC Staff Report Concerning Examinations of Select Pension Consultants, May 16, 2005, Page 3).
On June 1, 2005 the Commission staff and the Department of Labor issued a “checklist” of questions for plan sponsors to ask of their investment consultants. The questions on the checklist related to disclosure of conflicts.
What the Commission’s report did not say in its report was whether pensions are actually harmed by these hidden conflicts. In our investigations (which are the only such investigations that have been undertaken) we have found that consultant conflicts can cost a fund 10-15% over time. The harm to pensions is substantial and quantifiable.
During my meeting with you and your staff, the following question was asked of me several times: “What do we care if there are hidden financial dealings between investment consultants and money managers to pensions, i.e.,“kick-backs,” if fund performance does not suffer?” In response I stated that in my professional experience there are no harmless kick-backs. Performance always suffers whenever “pay-to-play” determines which managers are hired. However, unless an investigation aimed at ferreting out all hidden financial arrangements is undertaken, we cannot connect the dots to establish harm to the fund. Belief that hidden financial arrangements have no impact upon performance without an adequate factual inquiry is, in my opinion, irresponsible.
Further, even if there were harmless kick-backs, the law is quite clear that they belong to the fund, not the corrupt advisers. But a thorough investigation is required to identify and quantify even the kick-backs.
As I opined during our meeting, in response to your question concerning the advisability of conducting forensic reviews of all 3,500 funds taken over by the PBGC, I believe a review of every failed fund is merited for several reasons. Uncovering wrongdoing will improve the morality of the marketplace and aid regulators and law enforcement in recovering from, as well as punishing, the wrongdoers. Finally, fiscal responsibility demands that a review be undertaken prior to a bailout. If you disagree with these conclusions, I encourage you to share with me a justification for refusing to investigate possible pension wrongdoing.
I would welcome the opportunity to provide an analysis of which of the 3,500 plans should be examined immediately, based upon my knowledge of the business practices of the vendors to these funds and other factors. I believe we could identify approximately 500 plans that merit immediate attention. Given the widespread use of investment consultants by pensions and the pervasiveness of conflicts in the industry, I believe that the majority of the plans the PBGC has taken over may be entitled to recoveries.
In response to your concern that such forensic investigations may amount to “fishing expeditions,” let me remind you that both the Commission staff and the Department of Labor have determined that conflicts of interest are pervasive in the consulting industry and not adequately disclosed. These agencies recently advised all plan sponsors to investigate these conflicts. Thus, forensic investigations aimed at ferreting out conflicts of interest, hidden financial arrangements and wrongdoing, are not fishing expeditions; rather, they are required “good housekeeping” for all pensions.
Furthermore, with respect to certain failed pensions, such as those sponsored by United Airlines, we already know that the investment consultant of all the funds also served as an investment manager to at least one of the funds. In other words, an obvious conflict of interest is apparent before we even begin our inquiry.
I believe you already know or can easily determine whether the consultant to that failed plan fully disclosed, i.e., specifically identified and quantified, all the conflicting sources of its revenues. Unless the consultant, at a minimum, fully disclosed the nature and amounts of the conflicts related to its advice, a forensic review is mandatory. In my experience, no conflicted consultant ever fully discloses all the monies he derives from serving as a gatekeeper to pensions because, if he did so, clients would bolt.
The investigations or audits that your staff indicated it undertakes in connection with terminated plans, I believe we agreed are not forensic audits focused upon conflicts of interest, hidden financial arrangements and wrongdoing. However, if your staff is confident (based upon its review) that the consultant to the United Airlines plans fully disclosed its conflicts and no harm to the funds resulted related to these conflicts, please so advise me.
As I also stated at our meeting (in response to a statement made by a member of your staff), it is virtually inconceivable to me that none of the money managers the PBGC has hired to manage assets have engaged in conduct that resulted in harm to a failed pension, given the degree of collusion between that exists today between money managers and investment consultants.
I recall that in connection with the savings and loan bailout in the 1980s, firms that had caused a loss to a failed institution were prohibited from contracting with the Resolution Trust Corporation. I believe it is appropriate that the PBGC consider whether the firms with which it contracts for asset management services have engaged in pension wrongdoing. If they have contributed to the demise of a failed pension, these firms should be precluded from contracting with the PBGC. Of course, without forensic investigations focused upon such wrongdoing, you cannot be certain which firms have integrity and which should not be trusted.
As to the question asked aloud by your staff at the meeting regarding how any recovery we obtain might be allocated, I do not believe consideration of this issue should delay action regarding wrongdoing. Clearly any sums recovered will inure to the benefit of either plan participants or plan sponsors or the PBGC itself or some combination of the aforementioned.
With respect to the “cost-benefit analysis” you referred to at our meeting, let me restate that we would be prepared to undertake these forensic investigations under the appropriate circumstances at no cost, i.e., on a contingency basis. Thus, there is no cost absent a benefit.
Finally, while the Department of Labor should have investigated and taken enforcement action against investment consultants that engaged in wrongdoing, the agency has clearly missed its opportunity to do so at least with respect to the 3,500 plans your agency has already taken over. Since your agency is now responsible for these plans, at this time it seems that only the PBGC can initiate forensic reviews of these plans.
I look forward to hearing from you regarding our proposal to conduct forensic reviews of failed pensions. Please call me at (561) 202-0919 if you have any questions or comments.
Very Truly Yours,
Edward Siedle
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Via Email Bradley Belt Executive Director Pension Benefit Guaranty Corporation 1200 K Street, N.W. Washington, D.C. 20005
October 17, 2005
Re: Forensic Review of the PBGC’s Investment Consultants and Managers
Dear Mr. Belt,
At my September 7, 2005 meeting with you and the senior staff of the PBGC, including James Gerber, Judith Starr, Jeffrey Cohen, Vince Snowbarger and Terrence Deneen, we discussed the issue of whether any of the investment consulting or money management firms contracting with the PBGC may be subject to conflicts of interest that should be investigated.
According to Nelson Information’s Directory of Plan Sponsors, Wilshire Associates serves as a full retainer consultant to the PBGC. As you may recall, Wilshire is also the investment consultant to the Northwest Airlines pension that we discussed.
Recently a Wilshire spokeswoman was widely quoted as stating Wilshire was part of the SEC’s investigation into the investment consulting industry and that the SEC recommended changes to Wilshire’s disclosure policies.
Since your agency serves as the trustee for the assets of 3500 terminated plans, you may wish to consider a thorough review of the conflicts of interest to which Wilshire may be subject; financial arrangements Wilshire may have with money managers; the firm’s disclosure practices and related matters. We would welcome the opportunity to conduct such a forensic review on the behalf of the PBGC.
As always, I look forward to hearing from you.
Ted Siedle
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PBGC declines offer on forensic audits Pensions & Investments September 29, 2005
Benchmark Financial Services today offered to perform forensic audits of pension plans taken over by the PBGC to look for any undisclosed conflicts of interests or other improper activity by consultants and money managers and to help seek potential recovery of any losses or fees stemming from any uncovered misdeeds.
In a letter sent today to Bradley Belt, PBGC executive director, Edward A.H. Siedle, Benchmark president, said: “I would welcome the opportunity to provide an analysis of which of the 3,500 plans should be examined immediately, based upon my knowledge of the business practices of the vendors to these funds and other factors. I believe we could identify approximately 500 plans that merit immediate attention. Given the widespread use of investment consultants by pensions and the pervasiveness of conflicts in the industry, I believe that the majority of the plans the PBGC has taken over may be entitled to recoveries. …Unless the consultant, at a minimum, fully disclosed the nature and amounts of the conflicts related to its advice, a forensic review is mandatory.”
In response to the letter, a PBGC spokesman, said: “The PBGC invited Mr. Siedle to share with the agency whether he had any specific evidence that terminated pension plans were the victim of wrongdoing. Mr. Siedle was unable to furnish such evidence but did offer his services to the agency on a contingency-fee basis. The PBGC's principal concern is whether plan participants or the insurance fund have suffered financial losses as a result of illegal activity. The PBGC must have a reasonable basis for believing such activity has occurred before it can consider the expenditure of premium dollars."
The spokesman said PBGC officials would have no further comment on the letter.
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Lawmakers Seek Inquiry on Pensions
By MARY WILLIAMS WALSH The New York Times Published: December 1, 2005 Correction Appended
Two members of the House of Representatives asked the research arm of Congress yesterday to investigate whether the federal agencies that enforce pension law have failed to police a crucial part of the pension business: the consultants and money managers who help decide how money is invested.
The request by Representatives George Miller, a California Democrat, and Edward J. Markey, Democrat of Massachusetts, underscores a flaw in the pension law.
The law divides the authority for pension plans among three federal agencies, which look at such issues as whether companies are putting enough money into pension funds and whether they are keeping employees informed about the plans. But the money managers are regulated by a fourth agency, the Securities and Exchange Commission, which has no authority over pension law.
This regulatory problem is as old as the pension law, 31 years. But it has become apparent only recently, as a series of record-size corporate pension failures has put new burdens on the federal agency that insures pensions. Even now, with Congress trying to close loopholes in the pension law, the focus has been on how to make sure companies put enough money into their pension funds, not how the money is invested after that.
In a letter to David M. Walker, the head of the Government Accountability Office, Congress's investigative arm, the congressmen pointed to the collapse this year of the employee pension plans at United Airlines.
They noted that a union that represents some United employees, the Aircraft Mechanics Fraternal Association, had specifically asked federal regulators to look into whether United's pension consultant had been acting solely in the interests of the plan participants, as the law requires, or had been steering blocks of pension money to certain money managers for business reasons.
The union put its request last summer to the Pension Benefit Guaranty Corporation, which guarantees company pensions, and to the labor secretary, Elaine L. Chao, who is chairwoman of the guaranty corporation.
"We understand that the P.B.G.C. has to date declined to undertake a forensic audit of United's plan to ascertain whether there were, in fact, conflicts of interest, hidden financial arrangements and unlawful activities," the representatives wrote.
They said this was particularly disturbing because United's pension failure came at about the same time as the S.E.C. issued a critical report on the pension consulting business.
The report, based on an 18-month review, found that more than half the pension consultants in the S.E.C.'s sample were being paid by money management firms, even as they claimed to be screening and selecting money managers objectively on behalf of their pension fund clients.
The S.E.C. referred about a dozen of the consultants to its enforcement division for further action, but it did not name them.
The two representatives said the S.E.C. report raised questions about whether conflicts of interest among United's consultants and its money managers had contributed to the failure of its pension fund. That failure caused record losses of about $10 billion, which will be borne by the Pension Benefit Guaranty Corporation and the employees of United.
Not only had the guaranty corporation not made a review of United's consultants and money managers, they wrote, but "we are not aware of any plans by the P.B.G.C. to systematically assess whether pension consultant conflicts of interest or undisclosed financial relationships existed at any of the terminated plans now under its control."
The representatives said they had been asking the S.E.C. whether any of the pension consultants referred to the commission's enforcement division were used by United's pension fund, but so far they had not received an answer. They also asked the Government Accountability Office to determine whether the pension agency had used any of those consultants.
A spokesman for the accountability office confirmed that it had received the request for an investigation and would work with the lawmakers on defining the scope and timing of an investigation.
The pension guaranty corporation has taken over nearly 4,000 defunct pension plans in the last three years, digging itself into a $23 billion hole. The guarantor is not at risk of running out of money anytime soon, but Congress has been working on legislation that would improve its finances as well as close the loopholes in the rules that govern how much money companies set aside for their pension plans. But progress has been slow.
The pension law requires the officials of company pension plans to make sure the money is invested with "care, skill, prudence and diligence." In practice, many plan sponsors work with outside consultants, who help them devise an asset-allocation strategy and pick outside money managers to carry it out.
This division of labor appears to be causing confusion about which regulatory agency should monitor the investment of pension money.
Correction: Dec. 2, 2005, Friday:
An article in Business Day yesterday about a request by two members of the House of Representatives for an investigation into the way pension fund investments are regulated misstated the number of pension plans taken over by the Pension Benefit Guaranty Corporation in the last three years. It is 413 plans, not nearly 4,000.
Setting Standards For The Investment Management Industry
