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Analysis: More than Covid-19 in Arkansas teachers fund’s Allianz lawsuit

By Paul Mackintosh   
July 29, 2020

At first blush, news of the Arkansas Teacher Retirement System (ATRS) suing Allianz owing to losses in the pension fund’s investments looked like a sign of coronavirus-related panic in the US retirement system. On closer examination, there does look to be plenty of panic – and bad judgement – in the system, but not especially coronavirus-related.

ATRS is seeking to recover losses on Allianz Structured Alpha funds which were supposedly “designed to provide stable returns and protection during a market downturn”. ATRS alleges that Allianz’s funds did not fulfil this claim, and furthermore that Allianz took actions that worsened the losses when they began in February. The total losses reportedly amounted to US$774 million, or almost 5% of the total ATRS portfolio. According to local news in Arkansas, the ATRS portfolio began the year with $18.3 billion and by early April, it had dropped to roughly $16.5 billion.

There’s more bad news for ATRS. According to the financial year-end update from its executive director, ATRS invests to earn a 7.5% actuarial assumed rate of return over a long-term horizon, but the current estimated rate of return for the year ended June 30, 2020 is minus 3%.

You can appreciate the pickle that ATRS is in. What’s more, there are signs that this has been long brewing. An April 2020 solvency analysis on the pension fund from the Reason Foundation – an admittedly right-wing free market research group – points to over $4.3 billion of unfunded liabilities, with only 80% of the assets needed to fund the programme in the long term. It cites “unrealistic expectations” as one of the key drivers for the underperformance. Also, according to reports, ATRS allocated almost 10% of its entire portfolio to just three Allianz funds, which is a rather surprising concentration.

It’s worth noting how litigious the ATRS has become. In February this year, the pension fund sued State Street, claiming the firm overcharged it on foreign currency transactions. In April, it won court approval to continue to carry on a class action lawsuit against Goldman Sachs, originally launched in 2011, alleging misrepresentation of collateralised debt obligation products sold during the subprime mortgage boom.

Of course, Allianz and the other defendants in these cases may be guilty of the allegations against them. But an allocation of almost 10% of a pension portfolio to just three investment vehicles makes me wonder about the judgement of the organisation involved. Perhaps the ATRS has calculated that a nice fat lawsuit win is an easy way out of its underfunding and performance problems.

I hope the ATRS lawyers are charging on a success-only fee basis, because I’d hate to think of Arkansas teachers being on the hook for any more deficits and liabilities.