Kentucky vs. Blackstone & KKR: A Revived Lawsuit & Ongoing Pension Woes

Kentucky’s revived lawsuit against Blackstone and KKR and how it reflects upon the dire circumstances pension funds face

On Monday, the state of Kentucky, seeking “compensatory and punitive damages,” sued hedge funds Blackstone and KKR & Co. Inc. They claim that the returns these funds have generated for the Kentucky Employee Retirement System’s pension plans (or KRS) have had disappointing results while simultaneously generating “excessive fees.”  

The plaintiffs’ allegation is that these firms have “targeted underfunded public pension funds like KRS. To them, KRS was a potential buyer of the exotic, high-fee and high-profit hedge fund vehicles they sold.” They described the nature of these funds as “extremely high-risk, secretive, opaque, high-fee and illiquid vehicles.” The legal complaint also says that, “The Hedge Fund Sellers and their top executives…[have collected] hundreds of millions in fees for their entities, a meaningful portion of the profits from which flowed to the top executives personally.” 

This legal complaint is a revival of one that was brought against Blackstone and KKR a couple years prior by eight retired beneficiaries. According to that original complaint, in late 2011, KRS had invested around $1.5 billion with KKR and Blackstone. The lawyers had alleged that, “These unsuitable ‘investments’ did not lower risk, reduce illiquidity, or generate sufficient returns to enable KRS to even approach, let alone exceed, the assumed rate of 7.75 per cent on an ongoing basis.” As a result, the hedge funds had ultimately lost the funds and “damag[ed] KRS and Kentucky taxpayers.” Kentucky’s public pension is one of the most underfunded pensions in the US.   

At this point, we have to wait and see where this lawsuit goes as they investigate these allegations against Blackstone and KKR and their predatory practices. However, it highlights the ongoing predicaments pensions find themselves in globally – chasing yield and attempting to achieve their fund’s return goals in a low rate environment. Let’s consider how these problems have been exacerbated through the coronavirus crisis. 

With central banks’ vast and unprecedented support since the beginning of the crisis, interest rates have been historically low, which hurts pensions, specifically “defined benefit” plans. Prior to the pandemic, low rates have already forced pension fund managers to seek yield in other, riskier asset classes in order to meet their fund’s return rate. This crisis and the central banks’ global response now only makes the chokehold on pensions tighter. High level of volatility in stock markets have also placed pension funds between a rock and a hard place. 

Additionally, withdrawing from retirement accounts has become easier during the pandemic in several different countries, including the US and Australia, and millions have not hesitated to jump at the chance to secure some extra cash for present and urgent expenses. For example, in Australia, close to $16 billion was paid out by Australian superannuation funds between April 20 and June 14 to about 2.1 million Australians. 

Real Vision Financial & Business Blog - Chart: Australian Pension Withdrawals 2020
Source: The Financial Times

The systemic issues with pension funds globally have only been brought to the forefront during this pandemic, and it’ll continue to have a lasting impact on people’s ability to adequately save for retirement and on the pensions industry’s ability to generate adequate returns.