California Pension Sues Wilshire Associates‎

(June 6, 2011) — The $2.7 billion Kern County Employees’ Retirement Association (KCERA) has sued Wilshire Associates for a loss of about $4 million from investing with Westridge Capital Management.

The California-based consultant firm has been accused of breach of fiduciary duty, as well as negligence and for offering misappropriate investment consulting advice to KCERA, according to Wilshire. In a statement, the consultancy claimed it was not responsible for the loss. “Wilshire Associates did everything it was retained to do and did it well.”

In an emailed statement, Wilshire continued: “As KCERA’s complaint correctly states, Westridge’s management committed a massive fraud on KCERA and other fund investors, and deceived regulators, having ‘created and distributed false account statements…materially overstated their rates of return and capital positions and commingled and improperly transferred funds between the various entitles they operated.’”

The case echoes an earlier suit filed in 2007 by the Alaska Retirement Management Board. Seeking as much as $2.8 billion for unfunded liabilities, the fund alleged that consultancy Mercer’s lack of oversight dampened the ability of the retirement system to fulfill its obligations to former public employees. As the state’s actuarial consultant, the fund claimed Mercer made a series of errors when it estimated the amounts that two of the state’s retirement plans needed to set aside for health care and pension benefits. Furthermore, Alaska’s board claimed Mercer executives were aware of the actuaries’ errors and concealed them. In a statement, Mercer admitted that its lack of transparency and its failure to disclose errors in its calculation was “a mistake in judgment.” In early June 2010, investment consultant Mercer paid $500 million to settle the lawsuit, which raised a red flag for other large advisory firms looking to do business with American public pension funds.

In an effort to shield itself from risk, Mercer’s investment consulting division ceased advising US public defined benefit plans as of last year.

“After a comprehensive review of our business and in light of changes in the public fund marketplace, Mercer has made a decision to adjust the focus of our public fund investment consulting advisory work. Mercer will no longer provide investment consulting advisory services to public sector defined benefit pension plans,” the consulting giant said in a statement. “We stand behind the professionalism and integrity of our investment consulting work for the public sector. Having said that, we are always evaluating our business and making prudent business decisions, and risk is certainly one factor that we consider in these decisions.”

Mercer specified that its plan to refocus its investment consulting services only impacts public sector defined benefit plans, and does not affect other services that Mercer may be providing to these plans. “Essentially, what’s governing this is a push to establish limits of liability, and a lot of Mercer’s competitors are doing this as well,” commented one industry observer to aiCIO in October 2010.