Does your public pension fund have risky crypto-related investments? It can take a struggle to figure out.
By Eleanor Laise
In wake of FTX collapse, many questions, fewer answers about public plans’ private holdings and who benefits from them. Crypto exposure is “a canary in a coal mine.”
Robin Rayfield had three minutes. There wasn’t much time for the 66-year-old Delta, Ohio, retired teacher to address his long list of concerns about the defined benefit pension plan he relies on for his retirement income.
It was December 2022, about a month after the collapse of the FTX cryptocurrency exchange, and the roughly $90 billion State Teachers Retirement System of Ohio, one of the largest U.S. public pension funds, held a board meeting at its offices in Columbus. The shockwaves coursing through the digital asset ecosystem raised new concerns for retirees like Rayfield, who had long worried they were not getting enough detail about the fees and performance of the pension fund’s external investment managers. A private equity trade publication, Buyouts Insider, had reported in early December that the Ohio teachers’ pension plan had some FTX exposure within a private equity fund — whose holdings are not publicly available — and STRS had not responded to questions about it, according to the publication.
“We are still awaiting information on alternative investments,” Rayfield told the pension fund’s board. “How much was invested, what are the fees and costs, and what is the value of that investment? Now we’re concerned about crypto,” said Rayfield, who is also executive director of the Ohio Retirement for Teachers Association, which has approx. 18,000 members. “At this point, stop trying to beat the market,” he added. “Take what the market gives.” Some other retirees who attended the meeting echoed Rayfield’s remarks, raising questions about potential losses associated with FTX and advocating for index funds over crypto-related holdings.
The board did not answer the pensioners’ questions at the meeting. But in fact, STRS had nearly $9.5 million in exposure to FTX, including about $6.6 million within a private-equity fund called the Thoma Bravo Growth Fund and the rest “spread across various funds,” STRS told MarketWatch. As for the pension fund’s total exposure to crypto-related holdings, STRS had to do some research to come up with a figure. Throughout November and December, the pension system worked with its outside money managers to count its total exposure to tokens, blockchain technology and other holdings that would feel the pain if crypto imploded, reaching a total of nearly $125 million, STRS said. Thoma Bravo, who was also a source of FTX exposure for the $240 billion New York State Common Retirement Fund, declined to comment.
Bitcoin, the most popular cryptocurrency, has plunged 67% from its all-time high in late 2021, and since the collapse of FTX, research groups, taxpayers and retirees have dug for details on how the crypto contagion could affect public pension funds — with spotty results. Although public pension funds’ crypto-related allocations are generally a small fraction of their total assets and stem in part from publicly traded holdings such as Riot Platforms (RIOT) and Marathon Digital Holdings (MARA), much of it comes through private equity and venture capital funds that disclose little to the public. Researchers have struggled to create a comprehensive list of public plans with FTX exposure. And some public plans that have been questioned about their FTX or broader crypto-related exposures have provided only carefully curated details about those holdings — or none at all, MarketWatch found in interviews with taxpayers, plan participants and pension officials and a review of plan communications.
The fog surrounding these holdings is fueling broader concerns, pension experts say. State and local pension funds work on behalf of the public, are responsible for paying fixed pension benefits to approximately 12 million former teachers, police officers, firefighters and other retirees, and rely on taxpayer-funded contributions when their returns fall short. That means they should be held to higher transparency standards, from disclosing fees to listings of all the private equity funds they own and their portfolio companies — but “that level of transparency doesn’t exist in every state,” said Anthony Randazzo, CEO. director of the Equable Institute, a non-profit organization focused on public pension systems. Despite their market heft, managing about $5.6 trillion in assets, public plans don’t always drive a hard bargain when negotiating investment terms with private funds, researchers say, instead signing nondisclosure agreements that keep the fund’s fees and performance under wraps wraps.
Some pension officials and investment managers say there is a trade-off between transparency and access to the best private funds. “Transparency is great,” said Mark Yusko, CEO of Morgan Creek Capital Management, which manages blockchain-focused funds held by some public pension systems. Yusko’s fund has made investments directly in crypto and related assets, including one that exploded spectacularly. “But we all want to be on the best team,” he said. “There are definitely public pension schemes that have zero chance of ever getting into certain funds because they can’t sign the non-disclosure agreement.”
The increased scrutiny of public plans’ private holdings coincides with a proposal by the Securities and Exchange Commission that would require private funds to provide their investors with details of the full cost and performance of the funds. The SEC “has a critical role in improving the inefficient and dysfunctional way investors currently negotiate investment terms in private funds, a process that often leaves them without the basic information necessary to evaluate their investments,” a group of more than two dozen consumer advocacy, labor and research groups wrote to the SEC last month. “Such an antiquated process has unfairly allowed the transfer of billions of dollars in wealth from public pensions” and other institutional investors to private fund advisers, the groups wrote.
Public pensions’ crypto-related holdings are also “a canary in a coal mine,” Randazzo said. “They’re an example of the kind of efforts public pension funds are taking to try to meet some pretty unrealistic investment return targets.” Between 2001 and 2022, virtually all public plans have fallen short of their return assumptions, according to the Center for Retirement Research at Boston College. Currently, the plans’ average return assumption is close to 7%. They maintain high yield targets because “it costs less,” said Jean-Pierre Aubry, the center’s associate director for state and local research. “Pension fund contributions are based on the expected return, regardless of how much risk is baked into the return.”
The pension funds’ public meetings leave some key questions unanswered
The well-heeled taxpayers of McLean, Va., had questions — about five single pages of questions — about crypto-related holdings in two of the county’s public pension plans. Over the past few years, officials at the Fairfax County Police Officers’ Retirement System and Employees’ Retirement System have spoken on podcasts, industry panels and in the media about their pioneering move into blockchain and other crypto-related holdings — but since the collapse of FTX, they had spoken much less. The pension system posted a note on its website early this year that explained the rationale behind the blockchain investments and showed that the police officers’ fund had a 7.2% weighting in blockchain funds at the end of 2022, while the Employees’ fund had a 4.% weighting. But it did not list specific fund holdings, saying the state Public Information Act exempts public pensions from disclosing details that could adversely affect the value of their investments.
McLean, known for its sprawling mansions and views of the Potomac River, has a more than century-old, politically well-connected residents association. Through connections on the county board of supervisors, the McLean Citizens Association was able to arrange a meeting in mid-January with the two pension funds’ investment managers to talk about their crypto-related holdings. The virtual meeting, which the residents’ group posted on its Facebook page, lasted two hours. Some of the group’s questions received little response.
“We’re under a number of different constraints on some of the things we can discuss,” Fairfax Employees’ Retirement System Chief Investment Officer Andrew Spellar said near the start of the meeting. But the trustees disclosed specific fund holdings that had not been listed in the pension system’s online blockchain record.
It wasn’t until a month later, in February, that the pension system hosted a blockchain-focused public meeting that was announced to members on its website. During the 90-minute meeting, the pension officials, who declined to comment for this article, emphasized that they had never invested in FTX, directly or indirectly, and had generally profited from their blockchain-related holdings.
After all that talk, much remained unsaid. The EJF Silvergate Ventures Fund, which chief investment officer Katherine Molnar of the Fairfax Police Officers Retirement System cited as a stake during the January meeting, is a joint investment vehicle of EJF Capital and Silvergate Capital Corp., which runs a crypto-friendly bank in California and has been questioned. by members of Congress about its potential role in the loss of FTX customer funds. In early February, Bloomberg and Reuters reported that US Justice Department prosecutors were investigating Silvergate’s relationship with FTX and Alameda Research. On March 1, Silvergate said in a regulatory filing that it would delay the filing of its annual report, saying it is “currently analyzing certain pending regulatory and other inquiries and investigations with respect to the company” and evaluating its ability to continue as a continuing operation. Silvergate and EJF declined to comment.
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