Pension360

China’s massive pension fund could soon be allowed to start investing in the country’s stock market, according to a Bloomberg report.

China is in the early stages of what many consider to be a bear market – a factor that may be driving the decision to let the pension fund begin putting its money in the market.

More from Bloomberg:

China will allow its basic endowment pension fund to invest in stock markets, according to draft regulations posted on the Ministry of Finance’s website.

The fund also will be allowed to invest in domestic bonds, stock funds, private equities, stock-index futures and treasury futures, according to the draft. The proportion of investment in stocks, funds and stock-related pension products will be capped at 30 percent of the pension fund’s net value, according to the proposed rules posted Monday.

Chinese stocks entered a bear market Monday, as the exodus of over-leveraged investors overshadowed central bank efforts to revive confidence with an interest-rate cut over the weekend. Chinese regulators are expected to take additional steps to steady the market, including possibly suspending initial public offerings.

“The access of the pension fund as a long-term investor will remarkably increase liquidity supply and will benefit the sustainable, healthy development of the stock market,” Wen Bin, a researcher at China Minsheng Banking Corp. in Beijing, said by text message. “The Chinese market will be stabilized by the policy.”

The pension fund manages $578 billion (USD) in assets.

 

Photo by  Horia Varlan via Flickr CC License

A new budget deal, recently crafted and passed by California lawmakers, contains an overhaul of the University of California retirement system.

The UC retirement system is shouldering $7.8 billion in unfunded, largely because nobody – the state, the school or employees – contributed money to the system for a period of 20 years.

From the Sac Bee:

A budget deal reached this spring holds the biggest changes for future university employees.

As part of an arrangement that includes four years of funding increases, a two-year tuition freeze and additional money for UC’s sizable pension debt, the university is undertaking a significant overhaul of its retirement system. Though details remain to be worked out, it will introduce a pension tier with a dramatically lower compensation cap, and could shift new hires from a guaranteed benefit to a 401(k)-style defined contribution plan.

The changes would apply to employees of the university’s 10 campuses, five medical centers and dozens of peripheral enterprises hired after July 1, 2016. They seek to address UC’s rising retirement costs, which were cited last fall as a major reason for the proposed tuition increase.

Any savings won’t be realized for decades, however. Until then, stabilizing the fund, and curbing how much it eats into the university’s multibillion-dollar annual operations, will largely depend on whether UC, and the state, remain committed to paying down the current debts.

The overhaul will decrease future pension costs, but won’t address the $7.8 billion in current unfunded liabilities. That burden can only be addressed by the University, in the form of consistent contributions to the system.

New Jersey’s Democratic lawmakers this week put together a package that would’ve doubled the state’s proposed 2016 pension payment, but Republicans balked at the measure because it would be paid for by levying a “millionaire’s tax”.

But there was one item in the package that lawmakers on both sides of the aisle responded favorably to: a mandate that the state make smaller quarterly pension payments, instead of an annual lump-sum payment.

From NJ Spotlight:

The first glimpse of a possible compromise may have come earlier this week when budget committees in both the Assembly and Senate advanced a measure that would change the way the state makes contributions into the pension system.

[…]

Assemblyman Chris Brown (R-Burlington), though he raised some concerns, voted for the bill as it advanced out of the Assembly Budget Committee. Two other Republicans abstained, but suggested they could also end up voting for the measure when it comes before the full Assembly today.

“I like this concept,” said Assemblyman Declan O’Scanlon (R-Monmouth). “I’m going to abstain right now, (but) I’m sympathetic to it.”

[…]

The bill resets the quarterly payment schedule to coincide better with the state’s cash-flow trends. The first two payments would be due on Aug. 1 and Nov. 1. The last two payments would come due on Feb. 1, well after the holiday shopping season, and May 1, several weeks after the income-tax filing deadline.

Even if the state has to borrow money initially to make the first two payments, proponents of the bill argued that the investment returns off those first payments would generate more than enough income to absorb the cost of short-term borrowing.

Lawmakers passed a similar measure last year, but with a different payment schedule. Christie vetoed the bill because the payment schedule didn’t align with revenue collection.

 

Photo credit: “New Jersey State House” by Marion Touvel – http://en.wikipedia.org/wiki/Image:New_Jersey_State_House.jpg. Licensed under Public domain via Wikimedia Commons

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

Alistair Gray and Josephine Columbo of the Financial Times report, OECD warns over pension scheme solvency as low rates bite:

Retirement funds and life assurers are in danger of being unable to keep their promises to pensioners and policyholders because of rock-bottom interest rates, the Organisation for Economic Co-operation and Development has warned.

Ultraloose monetary policy poses “serious problems to the solvency” of pension schemes and insurers as they struggle to produce enough income to fund their obligations, the group of rich nations said on Wednesday.

The warning from the Paris-based body is among the starkest yet about how institutions from Germany to the US can generate sufficient returns to meet their obligations without taking on extra risks.

In its inaugural annual business and finance outlook, the OECD identified the impact of cheap money from central banks on insurers and pension schemes as one of the biggest challenges facing economic policy makers.

“The current low interest rate environment poses a significant risk for the long-term financial viability of pension funds and insurance companies,” said the report.

The OECD raised the prospect the funds could be forced to cut payouts to retirees, saying they may have to “renegotiate” their promises to remain sustainable.

The organisation joins a growing chorus of economists and regulators speaking out about problems caused by historically low interest rates, as central banks from the eurozone to China try to stimulate economic growth.

Its assessment comes just three months after a similar warning from the International Monetary Fund, which said the European life insurance sector was facing “severe challenges”.

The problem arises because such institutions have little choice but to allocate a big chunk of their investment portfolios to conservative, low-yielding assets, notably government and corporate bonds.

The nature of their commitments prevents them from investing in potentially higher-returning but more risky securities, such as equities. Yet the cautious investment strategy they pursue has become increasingly problematic as bond yields have tumbled.

The OECD said it was growing concerned that the funds were being tempted to turn to alternative assets, such as private equity.

Presenting the study in Paris on Wednesday, Angel Gurría, the OECD’s secretary-general, said: “Pension funds and life insurers are feeling the pressure to chase yield . . . and to pursue higher-risk investment strategies that could ultimately undermine their solvency.

“This not only poses financial sector risks but potentially jeopardises the secure retirement of our citizens.”

While the report itself acknowledged there was a lack of detailed data to provide evidence for such an asset allocation shift, it said figures available for the UK showed that pension funds “may already be engaging in a ‘search for yield’”.

In response to the report, the UK’s National Association of Pension Funds, which represents 1,300 workplace schemes, said the switch into new asset classes did not necessarily mean they were taking on extra risk.

“Some of the underlying assumptions of the report do not necessarily hold true on the ground with UK pension funds,” said Helen Forrest, defined benefits policy lead at the NAPF.

“It is not necessarily taking extra risk in the search for yield, but finding alternative ways of providing the inflation-proofing the funds require.”

You can view the OECD’s new annual Business and Finance Outlook by clicking here. To view it in PDF format register and view it by clicking here.

What are my thoughts on all this? The OECD is right, ultraloose monetary policy is wreaking havoc on global pensions and life insurers looking for yield, forcing them to search for higher yielding alternative assets, but in my humble opinion, this report is missing something.

Importantly, why are central banks pumping so much money into the global financial system and why are ultra low yields here to stay, forcing pensions and insurers to take risks in illiquid asset classes and hedge funds?

Regular readers of my blog already know my answer. I’ve been warning you to prepare for global deflation for a very long time. Never mind what the reflationistas tell you. Forget about billionaire hedge fund managers warning you of the bigger short.

I’m warning all of you, in a world of rising inequality, structurally high long-term unemployment, pension poverty, and aging demographics, global deflation is virtually assured and it will decimate pension plans struggling with chronic underfunding.

Of course, fears of deflation seem to be fading in Europe but it is still too early to claim bond markets are signalling a decisive shift to a less worryingly-low inflation environment. Mark my words, this is only a temporary reprieve due to the lower euro. Deal or no deal for Greece, the structural problems plaguing the eurozone remain unaddressed, and deflation will come back to haunt the continent.

And it’s the specter of deflation that still worries me, central bankers and most intelligent economists, bond managers and hedge fund managers warning the Fed not to make a monumental mistake and start hiking rates too fast and too aggressively.

My fear is that they will sign another bogus “extend and pretend” deal for Greece, that Europe will stabilize somewhat in the coming months and the Fed will interpret this as a green light to start hiking rates in September.

Such a move would be catastrophic for the bond market and other markets suffering from liquidity constraints. A shift in monetary policy without an appropriate and sustained shift in long-term inflation expectations can precipitate a liquidity time bomb, bringing about another more pronounced global financial crisis.

As far as the shift into alternative assets like private equity, go back to read Ron Mock’s warning on alternatives as well as my recent comment on private equity stealing from clients. Private equity is an important asset class for pensions, one that has a fairly long-term focus and is a good fit in terms of asset-liability management but ultra low rates have pushed deal pricing to nosebleed valuations, which is why some think it’s time to stick a fork in it.

There are other problems with private equity. Yves Smith of the Naked Capitalism blog published a comment, “A Bad Man’s Guide to Private Equity and Pensions”, discussing how the surge in dividend recapitalization is loading private companies up with debt and jeopardizing private pension plans.

I’ve covered why private equity is eying dividend recaps and think this is a similar trend to what is going on in public markets where ultra low rates are inflating the buyback bubble, allowing corporate CEOs to artificially inflate earnings-per-share so they justify their pay which is spinning out of control. Meanwhile, average wages for workers stagnate as corporate profits are being plowed back into buybacks instead of hiring people, increasing wages or investing in research and development.

So, ultraloose monetary policy is driving inequality as corporate CEOs jump on the buyback bandwagon. It’s also making the top private equity and hedge fund managers obscenely wealthy as global pensions search for yield and “scalable alpha”.

Of course, none of this is discussed in any OECD, IMF or central bank report. Finance capitalism has serious structural problems, and unless policymakers and global pensions start discussing how they’re fueling extraordinary inequality, this trend will continue, decimating the middle class in all developed countries.

Again, rising inequality, aging demographics, high structural long-term unemployment and the global pension crisis are why I remain convinced that we are heading for an unprecedented and prolonged period of global deflation. Anyone who thinks we are on a path to global recovery is absolutely fooling themselves. The China bubble will only exacerbate this global deflationary trend.

Remember, the titanic battle of deflation versus inflation should be central to your investment approach and how you address market volatility. If you think deflation is dead, you’re dead.

 

Photo by  Horia Varlan via Flickr CC License

A bill, which would require CalPERS and CalSTRS to divest from their coal holdings, inched one step closer to passage on Wednesday.

A California Assembly committee approved the measure on Wednesday by a 5-1 vote; the bill has already cleared the Senate.

From Reuters:

The bill now heads to the California Assembly Appropriations committee. If it passes, it will go to the Assembly floor, where supporters expect stiff opposition from Republicans and moderate Democrats.

Calpers said its thermal coal mining investments as defined under the bill are valued at $100-200 million. It has investments in coal companies including Peabody Energy and Arch Coal according to its latest investment report.

CalSTRS has holdings of around $40 million, according to spokesman Ricardo Duran. Both Calpers and CalSTRS said they did not have a position about the legislation.

Calpers spokesman Joe DeAnda said if Calpers was required to divest, funds would be reinvested according to its equity index.

Before the vote, bill author and California Senate President Pro Tem Kevin de Leon told the committee that coal is a bad investment because coal plants were closing in the United States and demand from the world’s largest consumer, China, was reduced.

“The writing is on the wall. Our policies, our technologies, and global markets are moving in concert away from coal as an energy source,” de Leon said.

As noted above, the pension funds have between $140 – $240 million invested in coal, collectively.

Read more Pension360 coverage of the bill here.

 

Photo by  Paul Falardeau via Flickr CC License

Trustees of pension systems are tasked with significant power – yet, aside from stipends and travel reimbursements, most trustees do their job for free.

Should that be the case? Or would better pay lead to better trustees and stronger governance?

The IB Times discusses the issue:

Fiduciary management is a complex matter that often takes an extraordinary amount of time, effort and know-how. But some of the most powerful fiduciaries in the country — pension fund trustees overseeing more than $3 trillion in capital — work entirely unpaid. While many states bar gifts to elected officials who oversee pension policy, the appointed trustees of many pension systems are allowed to attend subsidized conferences where they are wined and dined by asset managers seeking to gain business.

Pension and ethics experts say that’s a problem.

Craig Holman, the ethics in government lobbyist for Public Citizen, has found that there is a strong correlation in state legislatures between low pay and poor ethical standards. “While all legislatures have their problems, it is an indisputable fact that Texas — which pays their legislators next to nothing — and California — which pays their legislators a high-level civil service salary — have vastly different standards when it comes to government ethics, with California the winner,” said Holman. “Passing strong ethics laws is far easier in states where legislators make enough to maintain a good standard of living.”

[…]

Jay Youngdahl, a fellow at Harvard’s Initiative for Responsible Investment and a leading legal expert on fiduciary issues, pointed out the wide distinction between unpaid trustees and asset managers who make hundreds of millions annually. “Trustees are expected to do an enormous amount of fiduciary work and take on difficult responsibilities for little or no pay, yet the service providers and investment managers for their funds earn some of the highest salaries paid in this country. The comparison is startling and makes no sense. The system is in need of reform.”

Pension360 has previously covered the pay of trustees sitting on the CalPERS Board of Administration.

 

Photo by c_ambler via Flickr CC License

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.

The CalSTRS board voted this month to “watch” a new cost-neutral bill in Congress that would reduce what has been an unpleasant surprise for some teachers and a shock to others — joining CalSTRS can cut Social Security benefits.

Two federal laws enacted to avoid Social Security overpayment and inequity are mainly aimed at government employees who receive a pension but no Social Security. In California, that includes nearly all teachers and many police and firefighters.

A long-standing CalSTRS policy seeks the repeal of the Government Pension Offset enacted in 1977, which cuts Social Security survivor benefits, and the Windfall Elimination Provision enacted in 1983, a cut in Social Security monthly payments.

The two federal laws are unfair, CalSTRS argues, and harm teacher recruitment. Among those often hit are teachers who earn Social Security before entering the profession or who earn Social Security on non-teaching summer jobs.

“CalSTRS members (873,329) represent the single largest group of state and local government employees in the country who do not participate in Social Security, and the offsets particularly impact educators who begin their career at a later date,” Mary Anne Ashley, CalSTRS governmental affairs director, told the board.

A survey done for the California State Teachers Retirement System in 2013 found that 63 percent of retired CalSTRS members earn a Social Security benefit, and 41 percent were affected by the Windfall Elimination Provision.

Offset repeal legislation, costly and unneeded in many states with full Social Security participation, has been routinely rejected in Congress. A few years ago the estimated cost of repeal to Social Security was $61 billion to $80 billion over 10 years. Only 15 states do not provide Social Security for teachers.

This year, a cost-neutral bill was introduced. But it only partially reduces the Windfall offset and leaves the Pension survivor offset untouched. Part of the cost of allowing workers to keep more of their Social Security earnings is reduced by recovering Social Security overpayments.

Another part of HR 711 by Rep. Kevin Brady, R-Texas, that helps reduce its cost was criticized by CalSTRS board members. The Windfall offset would be expanded to cover another large group: those who teach less than the five years needed to vest and receive a pension.

“So is it correct, then, that this is a bill that would basically help some of our members and hurt other of our members, and if that’s the case is there a rationale?” asked board member Paul Rosenstiel.

The CalSTRS fiduciary counsel, Harvey Leiderman, compared the bill to “Sophie’s Choice,” the mother in a William Styron novel and movie forced in Nazi Germany to choose a labor camp for one child and the gas chamber for the other.

Last year CalSTRS had 146,471 inactive non-vested members who could be hit by the Windfall offset under the bill. If these members do not remove their interest-earning pension contributions from CalSTRS by age 70½, they face a tax penalty.

Ed Foglia of the Retired Employees Association of the California Teachers Association said the bill is not supported by its affiliate, the National Education Association.

The bill would fix “half of the problem” for some at the expense of others, he told the CalSTRS board, and Congress might think passage of the bill solved the problem, so there is no need to repeal the offsets.

“What we are asking you to do is at the very least have a ‘no position’ on this and see if you can mitigate the problem so no one is hurt,” Foglia said.

The CalSTRS board voted to “watch” HR 711 and “engage” the author about board concerns. The board voted to support the current bill to repeal the two Social Security offsets, HR 973 by Rep. Rodney Davis, R-Illinois.

What’s eliminated by the Windfall Elimination Provision? Social Security is designed to replace a much larger part of the income of low-wage earners than of higher-wage earners.

A worker whose primary job provides a pension but not Social Security could get the “windfall” of being treated like a low-wage earner while working on another job covered by Social Security.

So, instead of getting the usual 90 percent of the first $826 of average monthly earnings, a worker covered by the Windfall Elimination Provision only gets 40 percent of the first $826. (See chart above)

What’s offset by the Government Pension Offset? The Social Security spousal payment was established in the 1930s when spouses who stayed home to raise families often were dependent on the working spouse.

As it became common for both husband and wife to work, the Social Security spousal payment to a widow or widower was reduced dollar-for-dollar by the amount of their own Social Security benefit.

So, to give workers who receive a government pension but no Social Security a similar “offset,” their Social Security spousal payment was reduced by two-thirds of their government pension.

In the past CalSTRS has given Congress a detailed analysis showing why the two Social Security offsets are unfair and arbitrary, emphasizing the impact of the spousal offset on its membership that is 70 percent female with longer expected life spans.

“There are discrepancies between the theoretical policy of the offset provisions and the actual consequences of the offsets,” board member Dana Dillon told a Senate subcommittee in 2007.

Leading politicians have urged repeal of the offsets. Sen. Dianne Feinstein carried repeal legislation for a decade, followed by former Sen. John Kerry. President Obama, while campaigning in 2008, said he would work to repeal the offsets.

The California Retired Teachers Association makes lobbying trips to Washington, D.C., each congressional session. A grass-roots group, the Committee for Social Security Fairness, has an educational and organization campaign to reform the offsets.

The California Legislature routinely passes resolutions urging Congress to repeal the offsets. This year it’s SJR 1 by Sen. Jim Beall, D-San Jose. While in the Assembly in 2009, Superintendent of Public Instruction Tom Torlakson carried the resolution.

At an Assembly hearing, Torlakson gave specific examples of teachers hurt by the offsets. “This comes under a couple of possible labels,” he said. “It would be a ‘Catch 22’ or it would be a massive rip-off.”

A law in 2005 requires employers not in Social Security to tell new hires about the offsets. In a 2008 survey of CalSTRS members, 29 percent with Social Security credits were unaware of the income offset, and 44 percent of active members were unaware of the spousal benefit offset.

 

Photo by Stephen Curtin via Flickr CC License

A Pennsylvania Senate panel on Wednesday approved a bill that would allow municipalities to shift new police and firefighter hires into a 401(k) system.

The measure is designed to help the state’s municipalities, who are dealing with rising, massive pension costs. But labor groups say this latest proposal eases costs at the expense of the retirement security of police and fireman.

From the Citizen’s Voice:

The measure cleared the Republican-controlled Finance Committee by a mainly party-line vote.

The Senate bill gives municipalities an option of putting those new public safety hires under a defined-contribution benefit plan rather than a traditional defined-benefit plan.

In a defined-contribution plan like a 401(k), workers designate a portion of their current salaries to be paid into an investment account. In a traditional defined-benefit plan, workers typically negotiate deferred compensation in lieu of current salary or raises, and the amount is paid directly by the employer into a pension fund.

The Senate bill would keep existing pension benefits for current public safety employees in place. Pension benefits under the bill wouldn’t be subject to the collective bargaining process for paid police and firefighters under Act 111.

What are the chances the bill will become law? The odds are long, because many Democrats oppose the bill, including the most important one: Gov. Tom Wolf, who is likely to veto any measure that aims to curb benefits.

 

Photo credit: “Flag-map of Pennsylvania” by Niagara – Own work from File:Flag of Pennsylvania.svg and File:USA Pennsylvania location map.svgThis vector image was created with Inkscape. Licensed under CC BY-SA 3.0 via Wikimedia Commons