(Bloomberg) -- A group of retirees says the $80 billion Ohio state teachers’ pension fund is paying high fees to private equity firms for underwhelming returns.

A report commissioned by the 18,400-member Ohio Retired Teachers Association says “billions have been have squandered” by the State Teachers Retirement System of Ohio on fees and under-performance in the pension fund’s $14.3 billion alternative-investment portfolio, according to a draft seen by Bloomberg.

Edward Siedle, the report’s author, says the state should set higher standards for returns from its alternative investments, which are managed by Blackstone Group Inc. and Apollo Global Management Inc., among others. He said the portfolio had under-performed relative to a previously recommended metric.

Robin Rayfield, a former school superintendent who serves as executive director of the association, said he hopes the report will help guide an upcoming audit of the pension fund’s operations. He said the group, which was angered by the 2017 elimination of cost-of-living adjustments for retirees, also wants to engage the fund’s board, Governor Mike DeWine and legislators in a debate about whether the state should move away from pricey managed investments to cheaper passive strategies like indexing.

Longtime Critic

Siedle, who is being paid $75,000 to write the report, is a longtime critic of the investment industry who shared in two of the largest-ever whistle-blower awards for helping alert federal regulators to undisclosed conflicts of interest in JPMorgan Chase & Co.’s wealth management business.

Nick Treneff, a spokesman for the pension fund, said he had not seen Siedle’s report and couldn’t comment specifically on it. But Treneff said the fund had turned to private equity and other alternative investments in part because of the demographic challenge of rising retirements within a shrinking system. He said the fund pays $7.4 billion a year in benefits while only collecting $3.4 billion a year in contributions.

“We rely on investments to help make up that $4 billion in annual negative cash flow,” Treneff said. He said the fund determined that continuing with a 2% cost-of-living adjustment would add $13 billion in liabilities to the system.

But Siedle claims the fees private equity firms typically charge on uninvested capital would cover that cost.

“Assuming STRS pays fees of 2 percent on total unfunded commitments, this amounts to an annual waste of approximately $143 million -- enough to restore the COLA to 2 percent,” wrote Siedle.

‘Dramatically Underperformed’

Siedle said the fund should hold private equity firms accountable with much more aggressive performance targets than its current benchmark of the Russell 3000 index plus 1%. Though that benchmark and others are set to be replaced next month with targets linked to commonly used alternative-investment indexes, Siedle notes that a 2006 audit by the Ohio Retirement Study Council, an oversight body, suggested using a benchmark of Russell 3000 plus 5%.

By that metric, “the Alternatives have dramatically underperformed, 8.26 percent versus 11.91 percent” since 2006, Siedle wrote. “The underperformance losses for the period amount to $8.6 billion or $2.5 million per trading day for 14 years.”

Richard Ennis, retired chairman of EnnisKnupp, an investment consulting firm, said a benchmark of Russell 3000 plus 5% was probably too aggressive but agreed with Siedle that the Ohio fund should have set higher performance targets.

Emily Schillinger, a spokeswoman for the American Investment Council, a group representing private equity firms, said the industry has a proven track record of delivering for pension funds for teachers in Ohio, New York, Texas and California. She pointed to a July 2020 AIC study of 176 public pension funds that found their median return on private equity investments was 13.7%, higher than any other asset class over a 10-year period.

“Teachers -- along with firefighters and other dedicated public servants -- are able to have more confidence about their retirement due to the returns of private equity.” she said.

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Blackstone spokesman Matthew Anderson said, “We’re proud of the significant investment outperformance we’ve generated to help secure the retirements of millions of public pensioners. This includes 15% annual returns net of all fees since inception through our flagship private equity and real estate strategies -- substantially outperforming public equities.”

An Apollo spokeswoman pointed to a May 4 earnings call in which co-founder Marc Rowan said the firm had delivered 24% net annual returns for the past 31 years.

Siedle said the costs of the Ohio fund’s alternative investments have likely been understated in public statements, possibly excluding carried interest or performance. The fund reported paying $175 million in fees to alternative asset managers in its last fiscal year.

Treneff said certain fee information “isn’t readily available.” But he said the fund’s alternative investments have consistently outperformed its total returns, even after deducting all fees, carried interest and other expenses. According to Treneff, the alternatives portfolio returned an average of 10.99% over the past 10 years, compared to 9.4% for the fund overall.

(Updates with AIC study and comment from Blackstone. A previous version of this story corrected the spelling of Marc Rowan’s name.)

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