WASHINGTON – Puerto Rico's retirement system plans to join an ongoing lawsuit filed against UBS over the alleged mishandling of pension obligation bond proceeds.
The announcement of the forthcoming suit was made by the Puerto Rico Government Employees and Judiciary Retirement Systems Administration (PRGERS).
The initial lawsuit that is to be joined was filed in 2011 in Puerto Rico's Superior Court in San Juan by six beneficiaries of PRGERS against UBS and two smaller brokerage firms in Puerto Rico that underwrote $3 billion of POBs issued by the PRGERS in 2008.
At that time, UBS was PRGERS investment consultant as well as lead underwriter. It sold the bonds to its own closed-end funds and charged a total of over $100 million in asset management fees to its customers, according to PRGERS.
The goal was to generate arbitrage earnings between the cost of capital and investment returns. But that strategy was never deployed because of the financial crisis. A significant portion of the bond proceeds were instead placed in low-yielding accounts of Puerto Rico's Government Development Bank. Those accounts have suffered losses since then, according to PRGERS.
PRGERS administration Pedro R. Ortiz described the importance of joining the five-year old lawsuit in a release. "Today's actions reflect a significant policy change for PRGERS," he said. "Rather than await our funds' insolvency, our [bond of trustees] is addressing the systems' past ills and aims to obtain a significant recover on behalf of our participants and pensioners."
If the pension system is successful in its suit against UBS, this "would serve as a catalyst for the recovery of the PRGERS," Ortiz said.
The POBs are an obligation of PRGERS, not the commonwealth and has "comprised its liquidity," the release stated. PRGERS pays about $167 million per year to bondholders.
PRGERS currently has more pensioners than active participants and has about $2 billion in gross assets remaining, with a negative-funded ratio, according to the release.
UBS declined to comment on PRGERS' announcement on joining the ongoing lawsuit.
