San Diego: A Tale of Two Pension Funds

San Diego County’s pension funds have been the subject of scrutiny for the last year. Dan McSwain at the San Diego Union-Tribune reported how the county’s retirement fund outside manager, Salient, was dramatically increasing the use of leverage. According to Wurts Associates, “the San Diego County pension fund ranked in the lowest quintile of returns (84 out of 100) during the past three- and five- year periods.” Salient was hired by the county to boost returns. Salient’s strategy can be described at best, as “high-risk.” The company “increased leverage threefold to 100% of the assets in the fund.” San Diego County agreed to pay Salient $10 million a year for their efforts, making it one of, “the highest-cost pension funds in the country as a percentage of assets.”

Meanwhile, the City of San Diego provides a sharp contrast to the county’s strategy. Nearly ten years ago, the city had its own problems with pension funds: fraud, conspiracy, and Securities and Exchange Commission charges. However, the city has since been rehabilitated. Instead of using leverage a lá Salient, the city favors low-risk, asset-allocation methodology. The City of San Diego, “has outperformed the county, earning 13.6 percent a year versus Salient Partners returns of 9.7 a year. That’s before fees; the city’s net returns with its much lower cost-basis, look even better after fees.”

Thankfully, San Diego County just decided to terminate their contract with Salient due to the high costs and high risks of their strategy. The Union-Tribute reported late on July 16th that: “Salient had been collecting more than $8 million a year to manage the county portfolio…[The firm’s] fondness for so-called alternative investments like credit default swaps and derivatives at one point exposed the fund to potential losses of more than double the portfolio value. A worst-case event could have lead the county to lose its entire fund and owe billions more.”

Failure to appropriately manage pension funds is risking the future of employees and retirees. San Diego County was fortunate that their decision to leave Salient’s risky strategy came before a catastrophic loss of funds. Our team at Apex agrees that there is no need to reinvent investing—risky behavior and additional leverage was an irresponsible decision by San Diego County. How your pension is managed could affect your long-term financial plans and family’s wealth. Understanding how it is managed, and what to do with the funds, is an important step in the retirement planning process. Let an advisor at Apex help guide you through the process today!