Unions Sue Puerto Rico, Bank Over Mismanagement of Retirement Funds

Two Puerto Rico-based unions representing teachers and state workers on the island have filed suit against the Puerto Rican government and local bank over the mismanagement of their retirement accounts. The American Federation of Teachers (AFT) and the American Federation of State, County and Municipal Employees in Puerto Rico claim that their trust has been betrayed.

Here is an excerpt from report in Caribbean Business:

“By the commonwealth’s own admission, it—along with the Retirement Board of the Government of Puerto Rico, the Puerto Rico Fiscal Agency and Financial Advisory Authority (AAFAF), and their responsible officials—has failed to create and administer Law 106’s promised defined-contribution accounts, and instead has taken hundreds of millions of dollars of employee pension contributions and stashed more than $300 million in government accounts at Banco Popular that earn virtually zero interest,” the release reads.

Puerto Rico’s government, the AFT said, “has been aided and abetted in this violation of statutory and fiduciary duties” by the Financial Oversight and Management Board and Banco Popular. “As a result, thousands of public servants have been deprived of untold millions of dollars in interest and investment income that they should have been earning over the past year.”

Defendants include the commonwealth; its governor; its chief financial officer and secretary of the treasury; the retirement system and its voting members; AAFAF and its executive director; the oversight board; and Banco Popular.

Public Pension Plans Return Assumptions Fall To Record Low

From a median average of 8% in 2010, the return assumptions of public pension plans have fallen to record low of 7.45% as of November this year, according to a report from the National Association of State Retirement Administrators (NASRA). The trend has placed even more pressure on the finances of state governments.

Here is an excerpt from a report filed in Chief Investment Officer:

Since 1987, public pension funds have accrued approximately $7 trillion in revenue, said NASRA, of which $4.3 trillion, or 61%, is from investment earnings, with 27%, or $1.9 trillion, coming from employer contributions, and the remaining 12%, or $844 billion, coming from employee contributions. Because public pensions rely on investment returns for a majority of their revenue, the lower the investment returns are, the more governments will have to spend to cover the shortfall.

Of the 128 public pension plans tracked by NASRA, only six still have investment return assumptions at the 2010 median of 8.0%, which is the highest assumed rate of return among the plans, and only 22 have assumed rates of returns of 7.5% or higher. A majority of the plans (69) have assumed rates of return that range between 7.0% and 7.5%, and 37 plans have assumed rates that are 7.0% or lower. Kentucky’s Non-Hazardous Employee Retirement System pension registered the lowest assumed rate of return at 5.25%, and was the only plan among the 128 with an investment return assumption below 6.25%.

Mismatched Incentives: Are Trustees to Blame for Pension Underfunding?

Public pension boards are tasked with supervising the investment of the funds raised from the contributions from state employers and employees. But the way the pension boards are staffed discourages a focus on the long term health of public pension plans.

Manhattan Institute Fellow Daniel DiSalvo elaborates on the Pension Board Problem in this excerpt from Governing:

The problem is that both the political appointees and the elected representatives have incentives to ignore the long-term health of the funds. Political appointees are responsive to constituencies, such as the governor who appointed them or local businesses, (which) distract them from managing the fund strictly in its beneficiaries’ long-term interest. Meanwhile, public employees and their union representatives are tempted to trade pension savings tomorrow for higher salaries today.

How do these incentives play out? To hold down short-run costs, political appointees are likely to favor high assumed rates of investment returns, which keep employer contributions lower and avoid throwing a wrench in the governor’s budget. Political appointees also tend to favor investing in local industries — whether or not they are actually profitable. Two Texas funds were heavily invested in Enron before it went bankrupt, for instance. And in 1990, Connecticut’s state-employee fund lost $25 million investing in Colt’s, the firearms manufacturer, to preserve local jobs.

Likewise, public employee representatives respond to workers’ demand for higher salaries today by keeping the assumed rate of investment returns high. In a recent study, political scientists Sarah Anzia and Terry Moe found that elected representatives of public employees did not seek to impose more realistic — that is, lower — assumed rates of investment returns. Rather, they found, more worker representation on boards and stronger public unions led to more fiscally irresponsible decisions.

The larger consequence of the misaligned incentives of pension boards is that they don’t protect employees and taxpayers from major financial risks. Poorly managed pension systems are now consuming the politics – and much of the budgets — of Connecticut, Illinois, New Jersey and other states.

Public Pension Group Sets Investment Guidelines For Firearms Companies

Some of the biggest state retirement systems from states such as California, Florida, Maryland, Oregon, and Connecticut have joined other institutional and private investors in coming up with a guide to the touchy subject of investments in the civilian firearms industry.

Given the massive potential for backlash over investments in gun makers amid growing mass shootings in the United States, the coalitions has arrived at five principles that will be applied to investments in companies that manufacture, sell, and distribute firearms to civilians.

Here is excerpt from a report in PlanAdviser:

According to an announcement from Connecticut State Treasurer Denise L. Nappier, the five principles include:

Principle 1: Manufacturers should support, advance and integrate the development of technology designed to make civilian firearms safer, more secure, and easier to trace.

Principle 2: Manufacturers should adopt and follow responsible business practices that establish and enforce responsible dealer standards and promote training and education programs for owners designed around firearms safety.

Principle 3: Civilian firearms distributors, dealers, and retailers should establish, promote and follow best practices to ensure that no firearm is sold without a completed background check in order to prevent sales to persons prohibited from buying firearms or those too dangerous to possess firearms.

Principle 4: Civilian firearms distributors, dealers, and retailers should educate and train their employees to better recognize and effectively monitor irregularities at the point of sale, to record all firearm sales, to audit firearms inventory on a regular basis, and to proactively assist law enforcement.

Principle 5: Participants in the civilian firearms industry should work collaboratively, communicate, and engage with the signatories of these principles to design, adopt, and disclose measures and metrics demonstrating both best practices and their commitment to promoting these principles.

CalSTRS To Divest From Firms Operating Private Prisons

CalSTRS took its time deciding but in the end the pension fund chose to follow the steps taken by other state pension funds to pull their investment out of companies that operate private prisons.

Mary Childs filed this report in Barrons:

New York state’s pension plan became the first to withdraw fully from the industry when Comptroller Tom DiNapoli sold the last of the pension’s shares in private prison companies in July. The next month brought divestment, or votes to divest, from the New Jersey Pension Fund, Trenton, and the Chicago Teachers Pension Fund. New York City and Philadelphia have divested, and Cincinnati may be on its way.

CalSTRS worked to engage with CoreCivic (ticker: CXW) and the GEO Group (GEO) about their business practices, visiting detention facilities and meeting with senior management. CalSTRS staff confirmed that facilities run by those two companies are not separating children from their parents or families, and are not housing unaccompanied minors, the pension said.

“Based on all the information and advice we were provided, the board decided to divest,” Investment Committee Chair Harry Keiley said in a press release on Wednesday.

The process of divesting starts immediately, and should be completed in six months. The decision affects about $12 million in assets held between CalSTRS’s equities and fixed-income portfolios.

Illinois TRS Wants $400M Budget Hike

The Illinois Teachers Retirement Systems will ask the state for more money, an additional 10.6% more in state contributions for 2019 fiscal year which starts July 1, even though its investments yielded more than 8.45% this year.

Here is an excerpt from the report filed in Chief Investment Officer:

The $51.7 billion Teachers’ Retirement System wants about $400 million to be added to the budget, which would see total contributions rise to more than $4.8 billion. The pension fund’s executive director, Dick Ingram, said the organization “had a good year.” And it did, returning 8.45%. But, he added, it simply cannot “invest our way out of this problem.”

That problem is the Teachers’ Retirement System’s 40.7% funding ratio. “The unfunded liability is too large and grows every year,” Ingram said. The plan has more than $75 billion in liabilities, the highest of the $130 billion total among the state’s five systems. The other four are the State Universities Retirement System, the State Employees Retirement System, the General Assembly Retirement System, and the Judges Retirement System.

According to Ingram, the principal and interest on the debt accounts for 76% of the state’s annual contribution to the fund. Absent the debt service, the state would only need to pay $1.2 billion the following budget year.

Michigan Installs New Board to Oversee $70 Billion Public Retirement Fund

A newly-created State of Michigan Investment Board will now exercise supervisory functions over the state’s $70 billion investment fund. The Board will hold open meetings four times a year to make investment decisions, evaluate the fund’s performance ,and set funding goals.

Here is part of the AP report in Crain’s Detroit Business:

State Treasurer Nick Khouri was previously the sole fiduciary of the investment, with the help of an advisory committee, but he told the Lansing State Journal that such arrangements are increasing a thing of the past. “This idea of having a single person responsible for the investments has really gone out the window in the last few decades,” Khouri said.

He will be the chair of the new five-member investment board, which also includes the state budget director and three gubernatorial appointees. The executive order that created the board specifies that the unpaid board members will serve four-year terms.

(Michigan Governor Rick )Snyder recently announced that the appointees are Dina Richard, senior vice president of treasury and chief investment officer for Trinity Health; James Nicholson of Detroit, chairman of PVS Chemicals Inc.; and Reginald Sanders of Portage, director of investments for the W.K. Kellogg Foundation.

How a Former NY Pension Director Hid His Pay-to-Play Scheme

Back in 2016, an investment director at the New York State Common Retirement Fund was indicted on charges of steering pension money towards certain brokers in exchange for monetary bribes and drugs, among other things.

But how did Navnoor Kang, 37, hide his funneling of millions of dollars in business to two brokers?

A report, released by the New York Comptroller’s Office, reveals how he kept his scheme under wraps.

From the Wall Street Journal:

A move from paper tickets to electronic trade confirmations allowed Mr. Kang to avoid listing the broker who executed the trades, according to the report. Under Mr. Kang’s watch, the pension fund also stopped producing weekly trade reports that identified the brokers involved.

Unlike his predecessor or his counterpart who managed the pension fund’s stock investments, Mr. Kang traded himself rather than direct his staff to do so, according to the report. This meant that no one approved his transactions.

Mr. Kang would instruct his brokers to send the electronic confirmations to his subordinates—creating “the false impression that most of these transactions were conducted by the investment staff and then approved by him,” the report said.

“Kang’s manipulation of the electronic trade process had ripple effects that he capitalized on to further conceal his alleged criminal activity,” the comptroller’s office wrote in the report.

Additionally, the report points the finger at top headhunting firm Korn Ferry for finding Kang in the first place. Ferry and pension fund officials both ignored several red flags from his previous employer.

Kang had been previously fired from Guggenheim for unclear reasons; but when Korn Ferry followed his references, they didn’t uncover anything too fishy.

From the Journal:

In December, a pension employee wrote to colleagues noting Korn Ferry officials said they reviewed Mr. Kang’s references and contacted his former employer. One of Mr. Kang’s references, according to the report, was Deborah Kelley, a saleswoman eventually indicted by federal prosecutors for bribing Mr. Kang. Ms. Kelley has pleaded not guilty and her lawyer didn’t respond to a request for comment.

In July 2015, Mr. Kang and the pension’s chief investment officer traveled to California and met with Guggenheim executives, among others, according to the report. The Guggenheim executives greeted Mr. Kang warmly, and a top executive with the firm told the CIO that his firm “may have been too harsh” to Mr. Kang, who had “made a mistake,” the report said.

But the executive wouldn’t expand on what Mr. Kang did wrong and, when confronted by the CIO, Mr. Kang said he had rebuffed the advances of another employee and had lost his job for failing to report a dinner, according to the report. Guggenheim used that infraction, he told the CIO, to “get rid of him.”

The Common Retirement Fund will be changing several policies in the wake of the scandal, including re-instating the weekly and monthly trade reports that list the brokers involved in each transaction. These reports are reviewed by higher-ups, and would have certainly prevented this scandal had Kang not circumvented them.

View the full report here.

 

Photo by Martin Raab via Flickr CC License

It’s All In The Fine Print: Will Your Fiduciary Insurance Cover You When You Need It?

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Carol Buckmann is an attorney who has practiced in the employee benefits field for over 30 years. This post was originally published at Pensions & Benefits Law.

Will that insurer your company has been paying premiums to for all of these years stand behind you if you are sued for ERISA violations?  Have you just been relying on a broker to give you the coverage you need?

I previously wrote about a decision in which CIGNA’s insurer was permitted to deny coverage for fiduciary breach due to a fraud exclusion in its policy.   We have since had another decision from an appeals court in Louisiana in which fiduciaries being sued by the U.S. Department of Labor were denied coverage under each of three separate policies they thought would provide them with legal defense costs and cover any awards assessed against them.  Again, the reason was buried in the policy fine print, which even the brokers didn’t seem to understand, if the facts set out in the decision are any indication.

The facts boil down to the following:  Plaintiffs had three policies: a D&O policy, fiduciary liability insurance and excess fiduciary coverage.  They were sued by the DOL following a formal investigation for selling stock to an ESOP at an inflated price, but the court ruled that the policies didn’t cover the plaintiffs for the following reasons:

  • The policies didn’t cover actions taken before the effective date.
  • The D&O policy didn’t cover ERISA claims at all.
  • Plaintiffs failed to give notice of the claims during the policy period, where the claim was specifically defined as including an investigation by the Department of Labor or the Pension Benefit Guaranty Corporation.
  • The excess coverage didn’t kick in until the policy limits in the basic policies had been reached (which was not possible given the court’s other rulings.)

The plaintiffs were also told that they couldn’t amend their complaint to include the brokers who they claimed were supposed to be providing them with specific coverage, but failed to do so.

No one wants to wade through the details of these policies, but those who fail to have them reviewed by legal counsel may be in for rude surprises later on.  We regularly speak with very competent  employee benefits professionals who confuse the required ERISA bonding coverage (which provides recovery to the plan, not the fiduciaries) with fiduciary liability insurance, or who think D&O policies cover their ERISA plan committee actions (many such policies either don’t cover ERISA claims at all, or don’t cover lower level committee members).  We frequently are told that a plan sponsor maintains fiduciary liability insurance, only to be sent the ERISA bond when we ask to see a copy of the policy.  In many of those cases, we have to deliver the bad news that the fiduciaries have no personal coverage at all.

Clearly, the time to review coverage and obtain any required endorsements is not when the accusations of fiduciary breach are raised.  Just a few among the points to be considered in a thorough review of coverage are the following:

  • Your broker is not a lawyer.  Don’t rely on her to interpret legal clauses in your policy. Get a qualified independent review.
  • Don’t assume that employer indemnification obligations are a substitute for coverage or will cover any gaps in coverage.  There will be legal constraints (for example, under state corporate law) on the company’s ability to provide full indemnification and the commitment may become worthless in the event of bankruptcy or other financial distress.
  • Understand the exclusions in your policy and find out whether endorsements are available to eliminate some of them.
  • Consider whether your policy limits should be increased.  Courts seem to be awarding ever increasing damages in fiduciary breach cases.
  • Understand and follow the notice requirements in your policies.

 

Photo by Juli via Flickr CC License

All Teachers Deserve Adequate Retirement Benefits. It’s Harder Than You Think To Get Them

Chad Aldeman is an associate partner at Bellwether Education Partners and a former policy advisor at the U.S. Department of Education. This post was originally published on TeacherPensions.org.

How many teachers should be eligible for adequate retirement benefits?

My answer is all of them: For every year they work, teachers should accumulate benefits toward a secure retirement.

A reasonable person might say only those who stay for at least three or five years. That would require teachers to show some amount of commitment to the profession, and it would reward teachers for getting through the most challenging early years.

But that’s not the way current teacher retirement systems are designed. Most states require teachers to stay 20, 25, or even 30 years before they qualify for adequate retirement benefits. (The Urban Institute’s Rich Johnson and I calculated these “break-even” points across the country. Find info on your particular state here.)

In other words, today’s teacher pension systems only provide adequate benefits to teachers with extreme longevity. You don’t have to take my word for it. The California State Teachers’ Retirement System (CalSTRS) hired Nari Rhee and William B. Fornia to study whether California teachers were better off under the existing pension system or alternative retirement plans.

The chart below comes directly from their paper. It shows how benefits accumulate for newly hired, 25-year-old females under the current pension system (blue line), a defined contribution plan (red line), a defined contribution plan with no employer contributions (dotted blue line), and a cash balance plan (dotted green line). There are legitimate questions about whether these are perfectly fair comparisons—Rhee and Fornia ignore the large debts accumulated under traditional pension plans—but even in this analysis, it’s clear that the pension system is the most back-loaded benefit structure. Some teachers do better under this arrangement, but most don’t. Depending on the comparison, this group of teachers must stay two or three decades before the pension system offers a better deal.

Rhee and Fornia make a valid point that not all teachers enter the profession at age 25, and their paper also includes the graph below showing the actual distribution of California teachers by the age at which they began teaching. The most common entry ages are 23 and 24, just after candidates complete college (California requires most new teachers to go through a Master’s program before earning a license). The median entry age for current teachers is 29 (meaning half of all teachers enter at age 29 or younger), and the average is 33.

Rhee and Fornia’s point here is that people who begin teaching at older ages have shorter break-even points, and that teachers with shorter break-even points are more likely to benefit. This has a kernel of truth but obscures some key points.

First, it is true pension plans are better for workers who begin their careers at later ages. Pensions are based on a worker’s salary when she leaves the profession, and they don’t adjust for inflation during the interim. If a 35-year-old leaves teaching this year, she may qualify for a pension, but it will be based on her current salary right now. By the time she finally becomes eligible to begin drawing her pension, say in the year 2046, every $1 in pension wealth will be worth far less than it is today. Teachers who go straight from teaching into retirement don’t have this problem.

Consequently, it’s also true that teachers who begin their careers at later ages are comparatively better off than teachers who began at younger ages. They don’t have to wait as long, so the break-even points fall from 31 years for a 25-year-old entrant to just 7 years for a 45-year-old entrant.

But their argument starts to suffer when compared to teacher mobility patterns. Like other states, California sees much higher turnover in early-career teachers than mid- or late-career teachers. The result is that, even for a 45-year-old teacher with a relatively short break-even period of 7 years, only about half will actually reach that point.

The table below pulls together these two data points for teachers of various ages. The middle row illustrates how long the teacher would be required to stay until her pension would finally be worth more than a cash balance plan (Rhee and Fornia calculate slightly shorter break-even points for their defined contribution plans). The last column uses the state’s turnover assumptions to estimate how many California teachers will remain long enough to break even. Remember, the median teacher in California began teaching at age 29. The table below suggests this typical teacher would have had a break-even point of more than 25 years, and the state assumes that only 40.6 percent of this group of teachers will make it that far. Across the entire workforce, the majority of California teachers would be better off in a cash balance plan than the state’s current pension plan.

Age at which the teacher begins teaching How many years does it take for the teacher to break even on her pension plan? What percentage of teachers like her will break even?

25

31

34.6

30

25

40.6

35

19

43.7

40

13

46.6

45

7

54.2

California is a bit of an outlier here compared to other states—it’s a big state and seems to have lower teacher turnover than other states—but it’s still worth asking if this system is working well enough for all teachers. Rhee and Fornia’s main point seems to be that, once you exclude short- and medium-term workers,  the remaining teachers tend to do pretty well under the current system. But that excludes lots of people!

I personally don’t think that’s the right way to look at things. I think it’s worth fighting for retirement systems that treat ALL teachers fairly and equitably. After all, teachers might not know how long they’ll stay in the profession. They might not like teaching as much as they thought, or life might take them on another path. And once we account for this uncertainty, the break-even points become less about raw numbers (do I have to stay 19 or 22 years?) and more about probability (what’s my realistic chance of teaching in this state for 31 years?). Looked at from that perspective, it becomes harder and harder to support pension systems with such extreme back-loading.

Photo by cybrarian77 via Flickr CC License