Pension360

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

The National Post weighed in on Canada’s pension debate in an editorial comment, The Ontario Retirement Pension Plan Act — a costly, unneeded plan:

Unnoticed amid the budget hoopla last week, the Ontario Retirement Pension Plan Act was passed into law, authorizing the provincial government to annex a portion of the wages of millions of Ontarians, totalling $3.5-billion annually, to invest on their behalf. You will forgive us if we do not cheer. This is bad policy, as unnecessary as it is misconceived, and destined to cause much harm.

To its alleged necessity, first: the Wynne government continues to claim there is a pension “crisis,” on account of the vast numbers of Ontarians who are said to be chronically “undersaving.” There is no evidence of this. Between the Canada Pension Plan, Old Age Security, Registered Retirement Savings Plans, and other private savings vehicles, the vast majority of Ontarians are not only in no danger of indigence when they retire — poverty, at record lows for the population at large, is even lower among the elderly — but can maintain themselves at a standard of living comparable to that of their working years.

Experts advise this requires a retirement income of one half to two thirds of earnings. According to a study by economists Kevin Milligan and Tammy Schirle, virtually every Canadian household in the bottom two fifths of the income scale meets or exceeds the 50 per cent threshold. At higher incomes, it is true, you find greater numbers with inadequate savings, particularly where neither spouse has a workplace pension: overall, these account for about one in six households.

And that’s only if you ignore the increasing amounts of savings held outside RRSP-type instruments, or in the equity in people’s houses. So it’s not clear there’s any need to force even these individuals to save more, let alone forcing everyone to, even assuming one could: many will simply save less through their RRSPs to make up for the income the government takes from them.

And that, remember, is what’s involved here. The Wynne government likes to make it sound like a gift they are giving Ontarians. But the money workers will receive, eventually, is only money the government takes from them, now: it’s a forced savings plan, not a redistribution scheme. Which might be tolerable, if the government had a halfway sensible plan to invest it. There are disturbing signs it does not.

While the plan is often said to be based on the CPP — indeed, it is touted as a substitute for expanding the CPP — the government has often cited the Quebec Pension Plan approvingly. The CPP’s runaway costs, wildly inflated salaries and exploding payroll are themselves a source of concern, but it is at least notionally focused on maximizing returns to pensioners (even if it underperforms the market as often as not). But the QPP is something else again: through the Caisse de Dépot et Placement du Québec, it is mandated to use pensioners’ savings to support Quebec’s “economic development,” meaning whatever schemes come into politicians’ heads.

So when we read in Ontario budget documents that the plan, starting in 2017, will provide “new pools of capital for Ontario-based project such as building roads, bridges and new transit,” we may be excused for feeling the government has something other than pensioners’ best interests in mind. And to the extent that Ontarians realize this, they will be less inclined to see it as a savings plan, and more as a tax grab by another name. But by then it will be too late.

Wow! The imbeciles at the National Post have really outdone themselves. They must be pissed the NDP just booted out the Conservatives in Alberta in an election upset, and now they’re targeting Ontario’s new pension plan which just received legislative approval to begin collecting contributions from large companies starting on January 1st, 2017 (not sure when the plan begins operations).

To be fair, the National Post comment raises some good points but completely bungles up most others. First, I met Kevin Milligan and Tammy Schirle at a conference in Ottawa back in November 2013 and wrote about it in my comment on whether Canada is on the right path:

I think the presentation that got a lot of us thinking was the one by Kevin Milligan, an associate professor of economics at the University of British Columbia. He argued convincingly that lower income Canadians are better off in retirement now and forcing them to pay more into the CPP will leave them worse off. You can read the paper he co-authored with Tammy Schirle of Wilfrid Laurier University by clicking here. The two main conclusions of their paper are:

1) CPP reform that expands coverage for lower earners can do them harm–it transfers income from a period they are doing poorly (while working) to one in which they were already doing better (retired).

2) An expansion of the CPP that simply expanded the year’s maximum pensionable earnings (YMPE) upwards would have nearly the same impact on combined public pension income as the PEI proposal, but with greater simplicity.

But there was no debating that expanding the CPP would benefit the bulk of working Canadians who don’t have a workplace pension. Premier Kathleen Wynne said the province had to create its own retirement plan for the more than two-thirds of Ontario workers who don’t have a pension at work because the federal government refuses to enhance the Canada Pension Plan.

Where else does the comment above fall short? It attacks the CPPIB’s “runaway costs, wildly inflated salaries and exploding payroll” as a source of concern but fails to put it into proper context. I’ve also criticized Canada’s pension plutocrats, some of whom I think are outrageously overpaid, but there is no denying that the Canadian governance model is the envy of the world and this is the main reason why Canada’s large public pensions are global trendsetters.

The problem with compensation is that pretty much everyone working in finance is way overpaid and grossly self-entitled, some a lot more than others. And when you’re a pension based in Toronto trying to attract talent, competing with big banks and Canadian hedge funds, you have to pay up or risk hiring mediocre/ inexperienced employees who won’t help you deliver strong performance. At the end of the day, it’s long-term  performance that counts and even though I take shots at some of Canada’s senior pension executives for padding their compensation by beating their bogus private market benchmarks, they still have to deliver on their targets or else they can’t collect their hefty payouts.

And there is no denying that Ontario has the best pension plans in the world. Go read my comment on Ontario Teachers’ 2014 results as well as that on the Healthcare of Ontario Pension Plan’s 2014 results. There are a lot of talented individuals working there that really know their stuff and you have to pay up for this talent. The same goes for CPPIB, OMERS, and the rest of the big pensions in Canada. If you don’t get the compensation right, you’re basically condemning these public pensions to mediocrity.

What else does the National Post comment miss? It completely ignores the benefits of Canada’s top ten to the overall economy but more importantly, it completely ignores a study on the benefits of DB plans and conveniently ignores the brutal truth on DC plans.

But the thing that really pisses me off from this National Post editorial is that it fails to understand costs at the CPPIB and put them in proper context relative to other global pensions and sovereign wealth funds with operations around the world and relative to the mutual fund industry which keeps raping Canadians on fees for lousy performance. It also raises dubious and laughable points on the Caisse and QPP with no proper assessment of the success of the Quebec portfolio or why our large public pensions can play an important role in developing Canada’s infrastructure.

But the National Post is a rag of a national newspaper and I would expect no less than this terrible hatchet job from its editors. The only reason I read it is to see what the dimwits running our federal government are thinking. And from my vantage, there isn’t much thinking going on there, just more of the same nonsense pandering to Canada’s financial services industry and the brain-dead CFIB which wouldn’t know what’s good for its members if it slapped it across the face (trust me, I worked as a senior economist at the BDC, the CFIB is clueless on good retirement policy and many other policies).

 

Photo credit: “Canada blank map” by Lokal_Profil image cut to remove USA by Paul Robinson – Vector map BlankMap-USA-states-Canada-provinces.svg.Modified by Lokal_Profil. Licensed under CC BY-SA 2.5 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Canada_blank_map.svg#mediaviewer/File:Canada_blank_map.svg

Standard & Poor’s Rating Services this week announced an improved credit outlook for CalSTRS, upgrading the pension fund’s debt from “stable” to “positive”.

More from Reuters:

[The rating agency cited] a potential improvement to the pension fund’s funded ratio.

State legislation passed last year would substantially boost employer and employee retirement contributions to the pension fund, S&P reported.

S&P, which previously had an outlook of stable, affirmed the credit rating at AA-minus.

“We base the outlook revision on recent legislation that we believe should improve CalSTRS’ funded ratio over the next two years, assuming CalSTRS meets its actuarially projected investment returns,” S&P credit analyst David Hitchcock said in a statement.

[…]

S&P warned that if there are poor investment returns, or other changes in actuarial assumptions, “we could revise the outlook back to stable.”

CalSTRS manages $191 billion in pension assets for California’s educators.

 

Photo by Stephen Curtin via Flickr CC License

Several groups of lawmakers are meeting on Wednesday to discuss the privatization of Kansas’ public pension system.

Some lawmakers and government officials – most notably, the state’s budget director – have tossed the idea around for nearly six months, but all parties remain non-committal.

During Wednesday’s meetings, lawmakers will hear from several companies that could be involved in the privatization process, if it were ever to happen.

More from the Lawrence Journal-World:

The process being discussed [is] called “annuitization,” or selling off the pension system’s assets and liabilities to an outside company. Officials have not said how such a process might affect the retirement benefits of KPERS’ 289,000 active and retired members.

Wednesday’s meeting, scheduled for 8 a.m. to noon, will involve the Senate Ways and Means Committee, the House Appropriations Committee and the Joint Committee on Pensions, Investments and Benefits.

Sen. Ty Masterson, who chairs the Ways and Means Committee, said the meeting will include presentations by four companies that offer annuitization services: Prudential Financial; Security Benefit Group; Fidelity Investments; and Dimensional Fund Advisors.

“We’re just looking at what some of the market options are,” Masterson said.

KPERS provides retirement benefits to most state employees outside the Regents university system, as well as school district, city, county and other local government employees. Officials for unions representing those workers said they see little benefit to privatizing the system.

“The bottom line is, the KPERS system is a good system. But it has been chronically underfunded,” said Mark Desetti, a lobbyist for the Kansas National Education Association, the state’s largest teachers union. “If you let someone else run it and you still underfund it, it doesn’t solve the problem.”

The Kansas Public Employees Retirement System manages $16 billion in pension assets for nearly 290,000 members.

 

Photo credit: “Seal of Kansas” by [[User:Sagredo|. Http://commons.wikimedia.org/wiki/File:Seal_of_Kansas.svg#mediaviewer/File:Seal_of_Kansas.svg

U.S. public pension funds outperformed their institutional investor peers – and the broader market – in the first quarter of 2015, according to data released by Wilshire on Wednesday.

From Reuters via Business Insider:

U.S. public pension funds returned a median 2.19 percent in the first quarter of 2015, outperforming the 1.61 percent returns for the larger asset classes of institutional investment plans and real estate, according to a report to be released on Wednesday.

The results this year are above the first quarter of last year, when public pensions returned a median of 1.87 percent.

The annual median return for public funds also remains high, at 7.15 percent, after the first quarter of 2015, according to data from the Wilshire Trust Universe Comparison Service.

[…]

By comparison, the Wilshire 5000 Total Market Index returned 1.61 percent in the first quarter and 12.24 percent during the trailing 12-month period, while the Barclays U.S. Aggregate Index also returned 1.61 percent for the quarter and 5.72 percent for the previous year.

Most public pension plans need to see a return of 1.82 percent every quarter to meet the median assumed rate of return of 7.5 percent.

 

Photo by www.SeniorLiving.Org

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

Chris Johns of The Irish Times reports, Pension crisis is still a financial disaster waiting to happen:

Benjamin Franklin famously said the only two things about which we can be certain are death and taxes. If he were alive today he might be tempted to add pensions crisis as a third certainty of human existence.

I wrote my first “pensions are in crisis” article (for this newspaper) more than a decade ago. That is not a claim to successful futurology or deep insight. It was merely an observation of an existing state of affairs. It was also something that pension experts had been warning about for a long time. Attempts have been made to make things better but these have mostly been piecemeal. Of course, with regard to the National Pension Reserve Fund, it was a case of one step forward and then fall off a cliff. Many pensions are still in crisis, both public and private.

The list of culprits is a familiar one: we are living longer. In particular, we are living longer than expected by the actuaries who set up the pension schemes in the first place – yet another example of the futility of forecasts. Investment returns have also, in many instances, been lower than forecast. The ending of company defined benefit schemes has also created more problems than it solved.

Dilemma

All of this is standard stuff. The response of pension experts is always a rational one: above all else, we should be saving more for our old age. The action taken by most of us is often to yawn and pay attention to something more interesting. Like slowly boiled frogs, we do nothing as the problem builds. Curiously, unlike boiled frogs, we know what is happening and why. We also know what to do to escape the pensions dilemma but mostly choose not to.

This is where it gets interesting. The pensions industry yells louder at everyone to save more. During good times and bad times, the experts are mostly ignored. It’s not just about the recent recession leaving no money left over for saving. When things were booming we saved more but still nowhere near enough.

All of these remarks apply to many economies, not just Ireland’s. We are uninterested in our pension arrangements. Attempts to persuade people to do something often fail. Perhaps it is time to face up to this and acknowledge the consequences for public policy: a lot of people are going to be very disappointed by their pension entitlements. State pensions will remain a significant part of old-age income. This, in turn, will generate another fiscal crisis, sooner or later.

The political power of older people is growing in line with their numbers. Few politicians are willing to antagonise a most important bloc of voters. It seems to be easier to cut public sector pay than to take on pensioners. Nobody dares tackle existing benefits, some of which are as daft as they are unaffordable.

Journeys on the Aircoach from Killiney to Dublin Airport are illustrative. The conversation is often about overseas villas and the latest cruise. These well-heeled pensioners are travelling to their holiday destination in leather-seated, free wifi luxury at the expense of the taxpayer. It really is quite an experience.

Indefensible

Free travel for all is just one indefensible, unaffordable benefit that, I forecast, will never be tackled. I am not going to mention healthcare spending for fear of what will happen to me the next time I am on that bus.

It is tempting to say I must be wrong: a future financial crisis will force politicians to do the right thing and sort out pensions and unaffordable entitlement spending. But we have just lived through the worst financial crisis of all time which left many “unsustainable” benefits untouched and did little to sort pension arithmetic that doesn’t add up. These are battles that seem to be too hard, politically, to fight.

Future governments will be faced with a paradox: the ever-increasing power of pensioners will lead to ever-decreasing willingness to tackle unaffordable spending commitments. But those older people will be growing more and more disgruntled with their pensions.

There is no doubt in my mind the global pension crisis is getting worse and that along with the jobs crisis, these will be the political issues of the next decade(s). The author is correct, this isn’t an Irish problem, it’s a global problem and quite amazingly, it’s a topic that receives little if any attention because most people just prefer to ignore it until it’s too late.

What happens when it’s too late? As an extreme example, look at Greece. Their pensions are on the verge of collapse and the country’s left-wing leaders are desperately trying to negotiate terms to save them. But as Greece searches for a new deal, the reality is that its economy is in a dire predicament because decades of public sector profligacy have finally caught up, and the math simply doesn’t add up.

I had a chat with a friend of mine in Greece yesterday who told me he thinks most Greeks are “hopelessly delusional.” He shared the following with me:

“…there are 2.5 million private sector workers supporting 1.5 million public sector workers in Greece. How is this sustainable? I got into a fight with a professor of geology who was complaining to me her salary went down from 2,300 euros a month to 1,300 euros a month and she still has to work 12 hours a week. I told her she’s lucky she still has a job and told her to go see my butcher who works close to 60 hours a week and only earns 750 euros a month to feed his family of four. And it drives me crazy when I hear Greeks talk about the good old drachma days when they were collecting 25% interest at a bank but the inflation rate was sky high and you took out loans at 40% interest, if you were lucky.”

He added:

“The country is in desperate need of reforms but Greeks are incapable of governing themselves and cutting public sector expenses. Did you know that by law you’re not able to foreclose on a primary residence in Greece? Did you know that if you own a private business you cannot fire more than 2% of your workforce at a time? The Greek government owes private businesses billions of euros in arrears and isn’t paying them so many businesses close up shop, at which point people lose their job. But god forbid we cut expenses at Greece’s over-bloated public sector, all hell will break loose. Still, this is what Greece needs, someone to come in here and make the needed cuts and I think that is what is going to happen once Syriza balks and signs a new agreement on specific reforms.”

On Grexit, he doesn’t think it’s going to happen. Instead, he thinks Syriza will eventually cave and the ECB will take over the IMF loans to Greece (about 30 billion euros) and then Germany and other creditors will put the screws on Greek leaders to reform their economy once and for all (I certainly hope he’s right).

But while Greece is an extreme example, other European countries face equally big challenges, especially when it comes to their pensions. Paul Kenny, a senior investment consultant at Mercer Ireland, wrote a comment for The Irish Times on how quantitative easing is creating new challenges for pension schemes:

The first month of quantitative easing (QE) has come and gone. Although early indicators are positive, it will take some time to tell whether QE will ultimately lift the euro zone out of its economic malaise. But the immediate impact of QE on defined benefit (DB) pension schemes is clear, and it is creating huge challenges.

QE has dealt Irish DB pension schemes, which are facing exceptionally low interest rates, yet another blow. The €60 billion per month of bond purchases in which the European Central Bank (ECB) is engaged is distorting an already stressed market very significantly.

Although QE has boosted asset returns, the considerable associated reductions in bond yields have pushed DB liability values to ever-dizzying heights and reduced expected returns on asset portfolios. This brings further massive financial reporting pressures for plan sponsors, who are committed to delivering pension benefits to their employees.

Liabilities

QE has likely already increased the value of Irish DB scheme liabilities by up to 20 per cent (ie by between €10 billion and €15 billion across all plans), making an already difficult situation at the end of 2014 considerably worse.

Yields on long-dated German bonds have now fallen below zero at maturities up to just under 10 years. As a result, local insurers are or may soon be pricing annuities at negative interest rates, resulting in the rather bizarre outcome that it may cost more than the sum of expected future payments to buy out a pension benefit.

For schemes that are required to reserve to this level under the local regulatory test, this provides significant funding difficulties.

For schemes in wind-up, it may result in an even more unfair distribution of assets from the viewpoint of non-pensioners.

The concept of building a regulatory funding hurdle around what is a very uncompetitive annuity buy-out market in Ireland remains a concern. This has not been adequately alleviated by the advent of sovereign annuities, which remain a relatively unused and unwieldy solution.

How should trustees react to these QE-related challenges? First, they need to realise that QE will not be permanent. It is scheduled to run until September 2016 and although it may be extended beyond then, there are some challenges in upsizing the programme. As a result, the current issues, although extremely challenging, may be temporary.

Second, they need to be aware that QE has provided massive support to asset prices but that this support will not be permanent and, at some stage, assets will have to stand on their own feet.

Caution

Third, they need to treat with caution the Pensions Authority’s position that bonds are the optimum investment class.

In its 2014 annual report, it expressed concern about the level of investment risk to which Irish DB pension schemes are exposed.

Risk management and diversification away from volatile equities should certainly be encouraged and supported. However, now is a very expensive time to reduce risk by increasing allocations to euro zone bonds. De-risking in this form, while QE is influencing the market, will likely have a permanent impact on pension benefits (through benefit reduction or a forced move away from DB schemes).

The regulatory framework should ideally take account of the unprecedented market conditions Irish schemes face due to QE and allow schemes that are well managed, have defined risk management strategies and are sustainable over the long term to navigate the current short-term challenges.

Unfortunately, there appears to be little sign of pragmatism or even acknowledgement that we going through extraordinary market conditions. The Pensions Authority says “…there should be no question of changing the standard in order to give schemes and their members the false impression that the situation is easier than it actually is… ”

Accordingly, it falls to trustees and sponsors to make sensible risk management decisions and do their best to plot a course for the long term while managing short-term financial challenges.

I’m not so sure this is a temporary problem. If anything, my fear is that Euro deflation crisis will get worse as politicians there keep putting off major structural reforms, forcing the ECB to take on more expansive and aggressive quantitative easing in the future. This is why I don’t agree with those who think now is the time to short the mighty greenback.

Closer to home, I read a comment from real estate doom and gloomer Garth Turner on why Stan is a lucky guy:

Stan worked on the line at GM’s Oshawa plant for thirty years. “Last of the breed,” he says. “Man, look at the news.” Indeed. GM just punted a thousand workers, who will be gone by November. When Stan started there, 15,000 guys crowded the gates. Now there are 3,600. Soon, a third less. “This place is doomed,” he prophecies.

Pensions are one reason, which is why I was talking to the guy. GM Canada has about 30,000 retirees drawing monthly cheques. It also has an unfunded pension liability estimated to be more than $2 billion. That’s despite a $3.2-billion cash gift the company received from the government when GM was bailed out in ‘09. It effectively means most company pensioners today are drawing taxpayer money. Yep, just like civil servants. Except most ex-GM workers get more.

Stan never saved a nickel, has no RRSPs, no TFSA, no investment portfolio and $12,500 in his TD Canada Trust daily savings account earning 0.10%. But he does have a house east of Toronto he paid $220,000 for, plus a wife who works at Loblaws.

But Stan’s one lucky dude. He has a gold-plated pension from the olden days when automakers secretly sweated as the union’s brass swaggered to the negotiating table. He also has a big choice to make. He can collect a monthly cheque until he dies. Or he can commute it – taking over the pension himself with a lump-sum payment. In his case, it will be just under $1 million – some of it rolled into a tax-free registered account, some of it in taxable cash.

“I’m scared,” he said. “I can’t sleep, and now all I do is worry.” That’s normal, I told him. People lacking money worry occasionally about being poor. People who have money obsess about losing it. It’s why rich people never smile.

Well, Stan made his choice finally. He took the money, will have it invested privately and get his monthly allowance that way. Here’s why.

“I don’t trust them.” These are the words of a guy who’s watched the ranks of the employed decimated, seen his company rescued from colossal failure by the government, and knows there’s not enough money in the pot to fund his pension for the next 35 years. In fact, unfunded pension liabilities are a ticking timebomb with the potential to blow up the lives of many unsuspecting people.

For example, Canada Post has an unfunded pension liability of $6.5 billion, which should explain why it’s trying hard to get out of the mail delivery business and laying off armies of people. Across Canada it’s estimated there are $300 billion worth of pensions that public sector workers are expecting that actually have no dollars allocated to them. Some bitter surprises are in store.

Anyway, Stan’s smart. Why even take a chance when you can take the money now?

Then there’s this: “What if they screw up again?” Governments struggling with their own debts and deficits might not be so generous with GM the next time it hits the rocks. Pensioners in Canada could live through the same experience as cops and firefighters have in American cities and states where pension benefits are arbitrarily cut. Already teachers in Ontario have been forced to pay more into their massive pension plan and will be receiving less, just to keep it solvent.

By taking the money and putting it to work, hopefully matching long-term investment returns, Stan will never deplete it and harvest a monthly amount equal to that the pension administrators were promising.

Most importantly he said, “I have to do this for Brenda.” Smart. If Stan took the company pension the way most of his greying buddies are, with its stress-free payments, then died in a few years, Brenda would get a small and temporary survivor benefit. But by commuting the pension amount, Stan’s family owns 100% of the money – forever. If he passes first (“Like that won’t happen…”) then Brenda gets every cent, to support her and help the kids as they get established.

Besides, there couldn’t be a better time for the guy to be doing this, since interest rates have cratered. Low rates make a commuted pension worth more in today’s dollars, since the present value of it rises. If current rates were a couple of percentage points higher then the autoworker’s pension value would be at least $300,000 lower. In fact, his commuted value jumped enough to buy a new RV with the tiny quarter-point bank rate drop in January.

Like I said. Lucky dude.

Finally, Stan can take his wad, invest it reasonably for growth and stability, and end up paying less tax than his pension-collecting pals. That’s because a portion of his income can be deemed return of capital, which means it’s not reportable, keeping him in a lower tax bracket.

Of course, in return for these benefits, he worries. He has to trust someone with his million. And that is the highest hurdle.

Although I understand why Stan opted to take a lump sum pension payment, I don’t share Garth Turner’s enthusiasm for this option as it places the onus on Stan to invest that money wisely and make sure he and his beneficiaries don’t outlive those savings.

He’s probably going to invest the money in some crappy “balanced” mutual fund which will underperform the market and get eaten alive on fees. Even if he invests wisely in dividend staples like Bell Canada and those much loved Canadian banks which I’m shorting, he might live through another financial crisis and take a huge hit at a time when he needs stable income during his retirement.

As you can see, when it comes to retirement policy, Garth Turner is just as clueless as his Conservative buddies in Ottawa. If they had any policy sense whatsoever as to what’s best for Canada which is about to go through a major crisis, they would have enhanced the Canada Pension Plan for all Canadians by now. Instead, they will increase the TFSA limit to help rich Canadians, which is just another dead giveaway to the financial services industry.

So, if you ask me, Stan is right to worry as the burden of retirement falls entirely on him now, but he should focus on his health first and foremost, and worry less about his retirement savings (retirement anxiety is bad for your health, another reason which is why I prefer DB plans!). As for others living in Ontario, there is hope as the provincial government recently passed legislation to create a provincial pension plan for more than three million people who do not have a workplace pension, despite critics’ warnings it amounts to a job-killing payroll tax (they are clueless too!).

When it comes to the pension crisis, Ontario is wisely bypassing the feds and going it alone. I can only hope other provinces will follow its lead because the pension crisis isn’t going away in Canada and elsewhere. It’s only going to get worse, forcing politicians to take some very tough decisions down the road. I just hope they take the right decisions, not the politically expedient ones which will exacerbate pension poverty.

 

Photo by Roland O’Daniel via Flickr CC License

Utah’s Legislative Auditor General’s Office released its audit of the Utah Retirement System (conducted at the urging of an anonymous lawmaker) on Tuesday.

The report found that the System has turned in average performance in recent years. But the report also said the fund could be leaning too heavily on alternatives – which make up about 40 percent of System assets – and should conduct a review of its asset mix.

Additionally, the audit suggested the System incorporate a greater level of transparency when it comes to administration.

From the Salt Lake Tribune:

Auditors hired a consultant, Chris Tobe, to study the agency’s investment performance. He said it has been about average compared with peer agencies. But it holds more alternative assets and hedge funds than normal, and a change toward them since 2004 may have cost it the $1.3 billion extra in assets.

URS now has about 40 percent of its assets in such investments, up from 16 percent in 2005. Similar agencies average about 25 percent.

The study said URS’ pre-2005 mix of investments — with no hedge funds and fewer alternative investments — would have performed better through 2013, and increased holdings by $1.35 billion.

In a written response to the audit, URS said it has followed a conservative strategy designed more to protect its assets during the recent tough economy than to seek the biggest returns possible.

“Those who try to hit home runs in their investment portfolio will often strike out,” the agency wrote. “The URS asset allocation is designed to minimize losses in down markets, allowing URS to take advantage of compounding returns.”

[…]

The audit also said the agency could be more transparent with its administration board meeting notices to the public and should designate a records officer to manage information requests.

“Transparency,” the study said, “helps to promote accountability, public confidence, informed participations by stakeholders and acts as a check against the possibility of mismanagement.”

Read the full report here.

 

Photo by  vxla via Flickr CC License

Chicago mayor Rahm Emanuel wants to build a city-run casino, and he wants to use a portion of the resulting revenue to pay off the city’s pension obligations.

But to do so, he has to go through state lawmakers, and he’ll likely face an uphill battle in doing so – even if the casino is expected to bring in over $450 million a year in revenue, of which $200 million will go to the state for taxes, according to the Chicago Sun-Times.

From the Sun-Times:

Emanuel is back in the dealer’s chair, this time trying to sell legislators on a Chicago casino he wants to use to shore up the city’s severely underfunded police and firefighter pension funds.

Emanuel has personally discussed a proposed city casino with all four legislative leaders, as well as with Republican Gov. Bruce Rauner and his staff, sources told the Chicago Sun-Times. The talks have come as two legislative hearings on gambling expansion are scheduled in downtown Chicago over the next two weeks, with the first set for 10 a.m. Monday at the Bilandic Building.

There’s a lot riding on the mayor’s casino hopes.

Under Illinois law, the city expects to pay $839 million into its public safety pension funds next year, up $550 million from this year. In all, the city’s 2016 budget deficit stands at $300 million, leaving the mayor with few revenue-generating options short of a property-tax hike he’s trying to avoid.

State legislators — working under a May 31 deadline to wrap up the legislative session — are aiming to fill a $6 billion budget hole. So they have as strong an incentive as Emanuel to use gambling to try to fill some of that void.

Still, history isn’t on the mayor’s side when it comes to getting a casino deal done. Dozens of gambling-expansion bills have been offered and then fizzled out in Springfield in the past two decades.

According to the Sun-Times, lawmakers are considering two bills that would establish a state-run casino in Chicago. But Emanuel is pushing hard to a city-run casino, and has submitted a proposal to that end, which lawmakers are currently working over.

 

Photo by  dktrpepr via Flickr CC License

Chris Christie on Monday vetoed a bill that would have tightened rules around the disclosure of fees paid by the state’s pension system to investment managers.

Lawmakers had been crafting the bill for months in an attempt to increase the level of transparency around New Jersey’s pension investments.

But Christie opposed the bill, arguing that it could dissuade the best managers from working with the pension fund. That would result in lower returns, which would increase the state’s pension costs.

More from NJ Spotlight:

Christie’s late-afternoon conditional veto struck a blow to lawmakers’ efforts to enhance the disclosure of the fees that are paid to the managers of hedge funds, venture-capital, and other private-equity firms when they are hired to handle the investment of a portion of the state’s roughly $80 billion public-employee pension system.

[…]

Lawmakers have questioned whether the state is getting the best value by using the outside fund managers when impressive gains could potentially be realized using just in-house staff. Enhanced reporting of the fee arrangements would help demonstrate if the outside investments are worth it, they argued in support of the bill.

Christie, in his veto message, said though he generally agrees with the idea of disclosure, the bill would make New Jersey an outlier and put it at a competitive disadvantage. He recommended annual disclosure instead of the every few months of reporting called for in the bill.

“Many of the premiere fund managers may elect not to continue a relationship with the State if their confidential fee arrangements will be made public,” Christie said. “Any resultant loss of diversity in the fund manager pool will lead to suboptimal returns.”

New Jersey’s pension system has $80 billion of assets under management. It paid $600 million in management fees in 2014, but returns net-of-fees beat the fund’s assumed rate of return of 7.9 percent.

 

Photo by Bob Jagendorf from Manalapan, NJ, USA (NJ Governor Chris Christie) [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

The Oregon Supreme Court last week overturned a series of pension cuts enacted in 2013, paving the way for public employees and retirees to see their COLAs restored.

The decision is good news for members of the state’s Public Employees Retirement System, but state agencies and school districts aren’t rejoicing; for them, the reversal means higher costs, and what one government official calls an “actuarial nightmare”.

More on the original law and the court decision from the Statesman Journal:

Two bills passed by the Legislature in 2013, Senate Bills 822 and 861, reduced the 2 percent cost-of-living adjustment for retirees in the Public Employees Retirement System. SB 822 also ended a payment meant to compensate out-of-state retirees paying Oregon income taxes.

Retirees appealed, saying the changes violated the contractual agreement between the state and workers.

[…]

In its unanimous opinion issued Thursday, the court upheld the state’s ability to eliminate the income tax offset, and said the legislature can change the COLA for benefits being offered to current and future PERS members.

But it agreed with retirees that it is unconstitutional to cut the COLA retroactively. That provision accounted for the majority of the approximately $500 million in annual savings to public employers.

The COLA for current and new members is calculated with a series of graduated levels similar to tax brackets.

“As a result, PERS members who have earned a contractual right to PERS benefits both before and after the relevant effective dates of SB 822 and SB 861 will be entitled to receive a blended COLA rate, reflecting the different COLA rates applicable to benefits earned at different times,” the Oregon Judicial Department said in a news release.

It’s unclear how much the ruling will affect PERS’ unfunded liability or the state’s finances.

New York City’s pension funds will begin asking managers and other service providers to hand over data on the demographics of their staff, according to city Comptroller Scott Stringer.

The new policy is part of an effort to allocate more pension assets to managers with a diverse investment staff. Stringer said on Friday that diversity has to be a “living, breathing part of how we do business.”

From ai-cio.com:

“For the first time—working with trustees—we’re asking firms that want our business to give us hard data about the composition of their investment teams and professionals,” he told to audience of investment professionals, internal staff, and media.

This information, gathered by surveys, is to become a formal criterion for determining which managers are most likely to outperform on a long-term risk-adjusted basis. The many consultants that assist in manager selection have likewise been instructed to consider diversity as a meaningful attribute.

“We’re doing this to add value to our funds, and the new information will help us select managers in the future,” Stringer continued. “Let me stress: This is a game-changing expansion of our commitment to opportunity.”

The city’s retirement systems collectively manage around $160 billion in pension assets.

 

Photo by Tim (Timothy) Pearce via Flickr CC License