Chris Tobe wrote an editorial in Pensions & Investments on December 10 about vendors who complain about having to bother with requests for proposals when it comes to pension funds. He pointed out that RFPs are standard in government contracts and should be standard with public pensions. Primarily because they help limit corruption by generating competitive bids and lowering fees.
A bit of Tobe’s editorial:
Without RFPs the process can break down for public plans like I saw in Kentucky. All of the managers that secretly promised to pay nearly $15 million to placement agents for KRS were not selected by an RFP process and many were not even selected by the consultant but by staff.
According to the “Report of Independent Counsel to SEC: Placement Agent Abuses at Kentucky Retirement System,” “contrary to prudent investment practices for public pensions, KRS does not utilize RFPs seeking competitive bids from prospective money managers. Failure to solicit bids undermines the integrity of public pension contracting. RFPs ensure that contracts for investment management services are competitively bid and that requirements related to such contracts are clearly and publicly stated.” KRS pays 66 money managers over $56 million a year in fees and not one has ever filled out an RFP (see pages 98 to 100 of the KRS comprehensive annual financial report for 2011). While there were a few questionable hires such as seeding a hedge fund and a currency fund, the main damage I believe of bypassing the RFP process was higher fees, which provided a larger potential for problematic behavior like placement agents.
Which, of course, caused Kentucky Retirement Systems to go into meltdown mode. KRS responded with the typical “I am not a crook” schtick:
Corruption is not prevented by using RFPs. Higher fees are not the outcome of not using a traditional RFP process. The reality is that public pension plans hire the most talented investment professionals they can afford given their particular situational constraints. These investment professionals oversee and implement the various programs given a set of rules established by their governing entity, including the construction of appropriate search processes. Databases are used and consultants are hired to supplement the skills sets of those hired to help increase the bandwidth and efficiency of the required investment research.
While traditional RFPs may serve a legitimate purpose in the search for some investment service providers, they should only be deployed in those instances where professional judgment determines it is the most effective and efficient tool for achieving an outcome. In addition to traditional RFPs,Kentucky Retirement Systems utilizes other appropriate options such as RFIs, invitation-only searches, and single opportunity evaluation systems which are of equal merit. These methods are all used by public pension boards and staff where appropriate.
Quality investment/vendor outcomes are achieved at public pension plans by hiring experienced, principled investment professionals and providing them with a flexible governance structure, guided by fiduciary duty, under which they can make intelligent, research-based decisions.
Chief Investment Officer
Kentucky Retirement Systems
Trust them – they’re smarter than you, they don’t need anyone looking over their shoulders, yadda yadda yadda.
It would be comical if there weren’t billions of dollars at stake and hundreds of thousands of people depending upon the disaster that is Kentucky Retirement Systems.