Pension360

The board of the San Diego County Employees Retirement Association (SDCERA) voted unanimously on Thursday to part ways with Salient Partners, and firm that once served as the fund’s outsourced chief investment officer.

Salient Partners had a tumultuous relationship with the pension board; though the consultant had a couple staunch supporters on the board, many of the trustees had repeatedly endorsed firing Salient Partners over the past 10 months.

[Read Pension360’s SDCERA coverage here.]

The investment firm – and its man on the ground, Lee Partridge – became the subject of controversy when it got national press for Partridge’s high salary ($4.5 million over 39 months) and affinity for leverage.

More from the San Diego Union-Tribune:

Stephen Sexauer, the county’s new chief investment officer, credited Salient for its professionalism in implementing the transition, which will begin immediately.

He plans to move billions of dollars the Texas consultancy invested in “risk parity” and “trend” strategies into traditional index funds. Some of the less exotic investments overseen by Salient will be moved to stocks, fixed-income assets and hedge funds, he said.

“The transition portfolio has no leverage and no risk parity,” Sexauer said.

Salient had been collecting more than $8 million a year to manage the county portfolio, and Partridge was given broad authority to make day-to-day investment decisions.

His fondness for so-called alternative investments like credit default swaps and derivatives at one point exposed the fund to potential losses of more than double the portfolio value. A worst-case event could have lead the county to lose its entire fund and owe billions more.

Salient Partners will stay on at SDCERA through the end of July and the first two weeks of August.

The Central Bank of Iceland announced on Wednesday it will soon lift some of the capital controls put in place during the financial crisis; including one provision that disallowed the country’s pension funds from investing overseas.

The Central Bank will authorize 10 billion Icelandic krona – or $73 million – worth of overseas investments.

From Ice News:

The bank released a statement on Wednesday saying that it would make pension funds exempt from the Foreign Exchange Act, which bans financial investments issued in foreign currencies – regulations that have been in place since November 2008 in the aftermath of the country’s banking crisis.

A total of 10bn Icelandic krona will be authorised to be invested in foreign securities by pension funds, in addition to other domestic providers of personal saving initiatives, according to a central bank spokeswoman. This total will be allocated based on the size of the pension fund and net inflows, with the former having a 70 per cent weighting in the allocation decision and the latter having 30 per cent.

Recent foreign currency inflows coupled with reduced uncertainty regarding the prospects for the balance of payments after rules passed in Iceland relating to covering settlement of the estates of failed savings and commercial banks in addition to new initiatives relating to how offshore kronor will be handled, is to create scope for pension funds investment in financial instruments issued in foreign currencies, said the bank.

Read the bank’s statement here.

 

Photo by  Horia Varlan via Flickr CC License

New Jersey State Assembly Speaker Vincent Prieto has developed a proposal that would force the state to make higher annual pension contributions; he unveiled the proposal in a closed-door meeting with union leaders, according to NJ.com.

Currently, the state’s next contribution totals $1.3 billion – a big number, but still far short of the actuarially required contribution of $4.3 billion.

Christie has proposed slowly working up to making the state’s full actuarially required contribution by 2023; Prieto’s plan would speed up that timeline.

More details on the payment plan, from NJ.com:

The plan, which Prieto (D-Hudson) unveiled to labor leaders in a private meeting Thursday in Secaucus, would give the state five years to phase in the full contribution recommended by actuaries to keep the public-sector retirement system solvent, according to several sources familiar with the proposal who requested anonymity because it has not been made public.

Unlike Republican Christie’s pitch for a complete redesign of health and retirement benefits that stands little chance of passing the Democratic-controlled state Legislature, the unions appear more open to hearing out Prieto, whose proposal wouldn’t alter benefits.

In a meeting lasting less than an hour, Prieto briefed union leaders on the blueprint, which would build on this year’s $1.3 billion planned payment, sources said.

State Senate leadership has not yet seen the plan, a Senate aide said. Prieto did not respond to a request for comment.

[…]

The state is in the fifth year of this seven-year phase in but is billions behind schedule. After keeping pace with the promised payments for two years, Christie drastically cut them after lagging tax collections threw the state finances off course.

The proposal hasn’t been released yet, so further specifics are unavailable.

 

Photo credit: “New Jersey State House” by Marion Touvel. Licensed under Public domain via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:New_Jersey_State_House.jpg#mediaviewer/File:New_Jersey_State_House.jpg

San Jose and the city’s public safety unions reached a settlement Wednesday, ending 3 years of litigation surrounding Measure B, a voter-approved package of pension cuts that was passed in 2012.

Measure B increased contribution rates for workers, eliminated retiree bonus checks and cut benefits for new hires. The settlement will restore benefits in some ways, but lock in cuts in other areas.

From the San Jose Mercury News:

After more than three years of bitter fighting, city and public safety union leaders Wednesday reached a tentative deal that would end litigation over the Measure B pension reforms voters overwhelmingly approved in 2012.

While the agreement Wednesday only covers retirement benefits for police and firefighters, Vice Mayor Rose Herrera said it would pave the way for settlements with other unions that also are suing the city.

“The other groups will look at this as a template,” Herrera said.

[…]

The proposed settlement would roughly maintain most parts of the measure already enacted, such as eliminating bonus checks for retirees and scaled-back pensions for new hires while abandoning provisions blocked by a trial judge’s 2013 ruling or which the council had not enacted, such as higher pension contributions from workers and some disability changes.

Police unions had argued the reforms made it extremely difficult to recruit talented officers. The number of officers employed by the San Jose Police Department has dropped dramatically since 2009, from 1,400 to 960.

 

Photo by Elektra Grey Photography via Flickr CC License

Ed Mendel is a reporter who covered the capital for nearly three decades, most recently for the San Diego Union-Tribune. More of his stories are at CalPensions.com

A union coalition contends that a proposed initiative is being falsely portrayed as only a potential cut in pensions for new employees, when in fact it could cut or eliminate pensions earned by current employees for work done in the future.

One of the initiative authors, former San Jose Mayor Chuck Reed, disagrees with the union reading of the proposal. But it’s a key pension reform issue that could lead to another disputed initiative title and summary.

Cutting pensions current workers earn in the future, while protecting amounts already earned, would get the immediate savings sought by those who say “unsustainable” rising pension costs are eating up funds needed for other programs.

Notably, finding a way to reduce pension amounts earned by current workers in the future, as allowed in private-sector pensions, was the top recommendation of a report by the watchdog Little Hoover Commission in 2011.

But like Gov. Brown’s reform enacted a year later, pension cuts are usually limited to new hires, which can take decades to yield significant savings. The pensions of current workers in California and 11 other states are protected by the “California rule.”

Under a series of state court decisions, a main one in 1955, the pension promised on the date of hire is widely believed to become a “vested right,” protected by contract law, that can only be cut if offset by a new benefit of comparable value.

An initiative filed last month by a bipartisan coalition led by Reed and former San Diego City Councilman Carl DeMaio is a state constitutional amendment that would give voters more control over pensions.

The dispute is over a part of the initiative that gives voters the right to use the initiative or referendum “to determine the amount of and manner in which compensation and retirement benefits are provided to employees of a government employer.”

Lance Olson, an attorney for public employee unions, said the provision overturns the “California rule” on vested rights and allows cities and other government employers to ask voters to reduce or eliminate pensions earned by current workers in the future.

He said the provision is strengthened by an introductory line, “not withstanding any other provision of this Constitution or any other law,” and there is no language limiting the provision to new employees.

“Voters will now have the right to change the benefits for current employees,” said Olson, who has drafted three statewide ballot measures approved by voters. “There is nothing in there about future or new employees.”
Reed, a lawyer, said the initiative clearly applies to current workers by requiring voter approval of pension increases. But he does not think the initiative allows voters to reduce the pensions current workers earn in the future.

“It confirms the voters’ right to approve compensation and benefits,” said Reed. “That’s not the same thing as approving a right to reduce benefits.” Then he added: “You can be sure they won’t be arguing that after this passes.”

Opponents of the initiative, concerned that the authors seem to be “defining” the issue on their terms, can get passionate about whether the initiative is being deliberately misrepresented.

“They come from the school you tell the lie early and tell it often enough, it becomes the truth — and we can’t let that happen,” said Dave Low, chairman of Californians for Retirement Security, a coalition of public employee unions.

Reed said one reason the initiative simply gives voters more control of pensions, rather than impose a complicated reform plan, is that it’s an easy-to-understand proposal voters can read for themselves.

“It’s their standard tactic to attack anybody on a personal level,” Reed said. “I’m used to it. I just say: Read the language. It is what it is. It doesn’t matter what I say.”

The vested rights of current worker pensions is not a new issue for Reed. He dropped an initiative last year after Attorney General Kamala Harris gave it what he said was an “inaccurate and misleading” title and summary, making voter approval unlikely.

One of Reed’s complaints was that the summary incorrectly said the initiative “eliminates” the vested rights of current workers, a portrayal found by a labor polling firm to foster a “visceral negative response” among voters.

The Sacramento Bee reported that a Garin-Hart-Yang poll said: “More important than rejecting the language of this ballot proposal, California voters reject the idea of reducing or eliminating retirement benefits for current public employees.”

Another Reed complaint was that Harris’s summary “singles out a few specific public occupations that are held in high regard by voters.” Dan Pellissier of California Pension Reform made a similar complaint when he dropped an initiative in 2012.

The first sentence of the Reed initiative summary said: “Eliminates constitutional protections for vested pension and retiree healthcare benefits for current public employees, including teachers, nurses, and peace officers, for future work performed.”

Reed filed a lawsuit asking for a rewrite of the summary. A superior court judge, finding the initiative was an attempt to overturn the “California rule” on vested rights, ruled the Harris description was not “false or misleading.”

Local pension reforms led by Reed and DeMaio, approved by voters in June 2012, attempted in different ways to reduce the cost of pensions earned by current workers in the future.

The San Diego measure switched all new hires, except police, to a 401(k)-style plan and called for a five-year freeze on the pay used to calculate pensions, while still allowing pay raises.

The San Jose measure gave current workers the option of 1) paying much more for their pension or 2) switching to a lower pension. A superior court judge upheld most of the measure, but ruled that the option violated the vested rights of current workers.

The city appealed the ruling. Reed and others think the “California rule” is an outdated misreading of contract law, quite different from federal interpretations, that is likely to be overturned if given a hard look by a high court.

The title and summary for the new initiative filed by Reed and others on June 5 is expected to be issued by Harris by Aug. 11. Reed said the initiative campaign, not yet accepting contributions, may do some polling on the new title and summary.

Low said the union coalition, after a decade of focus groups and polling on pension cuts, thinks the initiative would be rejected by voters even if it’s rewritten to remove obvious flaws.

“We are confident that just basically taking away pensions for all new employees is bad enough, from our research, that the voters won’t buy it,” he said.

Lawmakers on the Illinois House Personnel and Pensions Committee are examining and scrutinizing Gov. Bruce Rauner’s pension proposal this week, and some committee members are raising concerns about whether the law is constitutional.

Many Democrats have also criticized the way the measure handles collective bargaining; under the plan, workers wouldn’t be able to use collective bargaining to negotiate pensions, vacation time or salary.

From the State Journal Register:

Democrats on the House Personnel and Pensions Committee raised questions Wednesday about whether Gov. Bruce Rauner’s new pension reform proposal is constitutional and whether it virtually eliminates collective bargaining rights.

[…]

Rauner deputy counsel Dennis Murashko said the administration believes the plan would survive a court challenge. He said the pension protection clause of the Illinois Constitution protects benefits but not “inputs” into determining those benefits, such as wages paid. He said workers could stay in the Tier I plan, albeit with the changes to vacation time and other alterations to the baseline.

“Our plan offers a true choice to employees in the Tier I pension plan,” Murashko said.

Rep. Mike Zalewski, D-Riverside, wasn’t convinced.

“I don’t know that the court would allow us to do what the governor wants, to induce people to go into a much worse pension plan,” he said.

Zalewski noted that even lawmakers have come to recognize that the Tier II plan falls short in providing a good retirement plan for workers and have discussed the need to make changes to it.

Rep. Robert Martwick, D-Norridge, also questioned whether there was a true offer on the table.

“I’m wondering how removing benefits employees currently enjoy and then offering them back to them, how does that equate into adequate consideration?” he said.

Martwick also said the proposed changes to collective bargaining are drastic.

“It appears to me the changes suggested are not a modification of collective bargaining rights; it is almost an elimination of collective bargaining rights,” he said.

The Rauner administration says the reform package would save the state $2 billion annually.

 

Photo by “Gfp-illinois-springfield-capitol-and-sky” by Yinan Chen – www.goodfreephotos.com (gallery, image). Via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Gfp-illinois-springfield-capitol-and-sky.jpg#mediaviewer/File:Gfp-illinois-springfield-capitol-and-sky.jpg

CalSTRS chief investment officer Chris Ailman stopped by CNBC on Wednesday morning to talk about hedge fund investing, wall street fees and investing overseas.

See a portion of the interview, above.

Video credit: CNBC

Photo by Stephen Curtin via Flickr CC License

Leo Kolivakis is a blogger, trader and independent senior pension and investment analyst. This post was originally published at Pension Pulse.

Ashlea Ebeling of Forbes reports, Treasury Curtails Lump Sum Pension Payouts:

In a sudden move, the Treasury Department said it will stop allowing employers to offer certain workers the option to take out their pensions in a lump sum. Notice 2015-49, Use of Lump Sum Payments to Replace Lifetime Income Being Received By Retirees Under Defined Benefit Pension Plans, applies as of July 9, 2015.

“The drums were beating, but no one thought this would be manifested by the IRS issuing this deadline-driven edict,” says Nancy Gerrie, an employee benefits lawyer with McDermott Will & Emery.

The idea of a defined benefit pension plan is that you (and your spouse) get guaranteed payouts for life. As the plans have become a drag on corporate balance sheets, companies have been shedding pension liabilities by offering participants the option of taking a lump sum buyout (cash) or transferring their pension to an insurer who would continue the lifetime payments. While the lump sum may seem like a windfall, it often short changes the retiree.

The new rules will change the lump sum game of pension derisking going forward. The new rules close one door, prohibiting lump sum offers for people already in pay status—those receiving a stream of pension payments. If a plan has been around a long time, there will be a lot of people in pay status. There are some outs for employers already in the process of offering lump sums: if the board has met and made an irrevocable decision to do this, or if the employer has already sent communications to participants about an upcoming offer. But otherwise, if an employer hasn’t started the process, forget about it for those in pay status.

Employers will still continue derisking and offering lump sum payouts to participants who haven’t started receiving payments. Employees offered lump sums should consider 8 Questions To Ask Before Taking A Lump Sum Offer.

The first big companies to offer lump sum pension payouts to both participants with deferred benefits and those in pay status were Ford and General Motors, who got private letter rulings from the IRS okaying the move in 2012 (the rulings were on a technical issue, whether the move ran afoul of required minimum distribution rules). When that was cleared up, that prompted interest among other big employers, and the IRS issued four more private letter rulings okaying the move in 2014. “Now all of a sudden, boom! It’s not okay,” Gerrie says.

The Pension Rights Center, an employee advocacy group, welcomes the fact that the IRS told off employers. Many workers just don’t get it, but lump-sum buyouts can easily be outlived, and often result in a loss of retirement wealth. Surviving spouses and older participants in payout status are at particular high risk.

“Offering a lump-sum can be a form of corporate elder abuse,” says Norman Stein, senior policy advisor to the Pension Rights Center and a law professor at Drexel University in a policy paper here. Stein elaborates on the lower economic value of a lump sum for most employees, outlines retirement management, spousal protection and tax problems, and discusses election and consent issues for employees facing cognitive decline.

Is the new IRS rule a harbinger of tougher rules to come on lump-sum buyouts? “Some would love to say, ‘You can’t offer lump-sum cash-outs anymore,’ but I don’t think [regulators] would go that far,” Gerrie says.

Jerry Geisel of Business Insurance also reports, Pension advocate backs IRS rule banning annuity conversions to lump sums:

A new IRS and Treasury Department ban on employers offering pension plan participants currently receiving monthly annuity benefits the option to convert their benefit to a cash lump sum was needed to protect retirees, a consumer advocacy group says.

Federal regulators said last week that employers will not be “permitted to replace any joint and survivor, single life, or other annuity currently being paid with a lump sum payment or other accelerated form of distribution.” The ban generally went into effect July 9, though in certain situations, such as when an employer notified participants of the offer prior to July 9, the conversions still can place.

The Washington-based Pension Rights Center said it was “gratified” that regulators are ending the practice.

“The offer of a lump sum can create considerable confusion and anxiety for older Americans, who are often not in a position to appreciate the risks they face and the losses they might suffer,” Norman Stein a senior policy advisor at the Pension Rights Center and a professor at Drexel University School of Law in Philadelphia said Monday in a statement.

“Retirees who choose a lump sum have to invest the money at the same time they are drawing it down, which is even harder than investing money before retirement. They will have to pay new fees, which will reduce their account balance, and fluctuations in the markets can destroy their investment portfolio with no time to make up the losses,” he added.

Experts say to date, only a small percentage — less than 5% of employers, including Archer Daniels Midland Co., Ford Motor Co. and NCR Corp. — have given plan participants currently receiving benefits the option to convert their monthly annuity to a cash lump sum. Typically, such offers have been made to former employees who have earned an annuity but are too young to start receiving the benefit.

The key reason that such offers have not been extended to retirees collecting benefits is the fear of adverse selection in which retirees in poor health would be more likely you accept than those in good health, experts said.

Finally, Mekanie Waddell of ThinkAdvisor reports, IRS, Treasury Halt Lump-Sum Buyouts for Retirees Getting a Pension:

The Treasury Department and Internal Revenue Service amended Treasury regulations last week to stop companies from offering lump-sum buyouts to retirees who already receive a monthly pension.

The agencies’ new guidance will apply to plans going forward and not to employers that have amended their plans to make lump-sum buyout offers to retirees prior to July 9, 2015.

Norman Stein, senior policy advisor to the Pension Rights Center and a law professor at Drexel University, said that the Center is “gratified that Treasury has moved to stop these lump-sum buyouts, which are truly among the most cynical and dangerous pension abuses we’ve seen.”

The Pension Rights Center has criticized these so-called “de-risking” transactions, which it says “erase the federal private pension protections of [the Employee Retirement Income Security Act], turn guaranteed lifetime retirement income into a onetime chunk of money that can easily be outlived, and often result in a significant loss of retirement wealth for elderly Americans.”

Earlier this year Stein authored a policy paper on lump-sum buyouts and annuity transfers — another form of so-called “de-risking” activities. The paper asks whether pension plan de-risking is bad, whether it’s legal, and whether it can be stopped, slowed or moderated.

Stein notes that the offer of a lump sum can create considerable confusion and anxiety for older Americans, “who are often not in a position to appreciate the risks they face and the losses they might suffer.”

Retirees who choose a lump sum “have to invest the money at the same time they are drawing it down, which is even harder than investing money before retirement,” he said. “They will have to pay new fees, which will reduce their account balance, and fluctuations in the markets can destroy their investment portfolio with no time to make up the losses.”

Some retirees may also be exploited by unethical financial advisors who gain to profit from a lump sum’s resulting fees.

By taking a lump sum, retirees also lose any guaranteed benefit for their spouses, should they die first. In fact, “offering a lump sum can be a form of corporate elder abuse,” Stein said.

I applaud the IRS and Treasury for clamping down on lump-sum pension payouts. America’s pensions are in peril and the last thing it needs is more lump sum payouts which will exacerbate pension poverty.

While lump sum payouts sound attractive, the truth is they place enormous pressure on individuals to invest the money wisely and even if they do, they still run the risk they or their loved ones will outlive these savings. In other words, lump-sum pension payouts are no substitute for defined-benefit pensions which provide steady and secure payouts for life.

And while most companies have not offered lump sum pension payouts to their employees, the trend to de-risk pensions is clear, and it’s important that regulators nip this trend in the bud as soon as possible.

More importantly, it’s high time U.S. policymakers enhance Social Security for all Americans adopting the same approach and governance that has allowed the Canada Pension Plan Investment Board to prosper and successfully manage the pensions of millions of Canadians. Enhancing Social Security in the U.S. and enhancing the CPP in Canada is smart pension and economic policy.

 

Photo by TaxCredits.net

The Uniformed Firefighters Association this week filed a lawsuit against the New York City Council in a bid to gain access to documents the union was previously unable to obtain through a public records request.

Earlier this year, the Council weighed a measure that would boost disability pensions for newly hired firefighters. But the Council voted down the measure before the UFA has a chance to debate the legislation.

From Capital New York:

According to U.F.A. president Steve Cassidy, the Council is refusing to honor a Freedom of Information Law request which the union filed to obtain details about a disability pension proposal first submitted by Councilwoman Elizabeth Crowley of Queens last year.

Specifically, Cassidy and the union allege that Council Speaker Melissa Mark-Viverito and her senior staff purposely kept the union from being able to debate the legislation or to obtain information about who introduced a competing proposal after Crowley’s version expired at the end of the legislative session last year.

[…]

The union backed a proposal to allow recently hired firefighters injured in the line of duty to retire on disability and collect 75 percent of their salary. Under a change in pension policy in 2009, firefighters (and police officers) hired after that year are eligible for a 50 percent pension if they are injured on the job. Mayor de Blasio opposed the proposal, although it had wide support in the Council. The change would have required the Council to send a home-rule message to Albany requesting the Legislature and governor to act on the proposal.

Mayor de Blasio supported a similar, but less generous, piece of legislation that would award larger disability pensions to new firefighters as long as they didn’t qualify for Social Security.

The Council passed that measure in June, but the legislation needs to be approved by state lawmakers before it passes into law.