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Pennsylvania Pension Officials Defend Investment Strategy After Governor Calls for Overhaul

Last week, Pennsylvania Gov. Tom Wolf released his first budget proposal.

Wolf has said many times that he doesn’t support a full overhaul of the state’s pension system. But his budget did contain some pension-related changes.

Wolf is calling for the state’s pension funds to take a more passive approach to investing and to cut down the fees it pays to managers. The proposal was short on specifics but called for the funds to “prudently maximize future investment returns through cost effective investment strategies.”

PhillyDeals columnist Joseph N. DiStefano talked to spokesman for the state’s two pension funds – SERS and PSERS – and got their official reactions to the budget proposal.

SERS reaction:

“We are working to gather details on the Governor’s plan, so I can’t speak to it specifically,” SERS spokeswoman Pamela Hile told me. “What I can tell you is that last year, a little more than 0.5% of the total fund value went to management fees. This, in the view of the Board, does not represent an excessive amount.”

“Looking at the issue from a long-term perspective, over the past decade, SERS paid $2.4 billion in fees, while earning $19.7 billion net of fees and expenses AND paying out $23.2 billion in retirement benefits.

“Compare that performance to an industry standard 60% equity/40% bond index fund, SERS’ performance added $4.9 billion of value to the fund with 0.5% less volatility.

“To further illustrate this value, our alternative investment program, built with top-tier investment managers, outperformed the U.S. public market equities return by 5% net of all fees over the decade ended 2013… Over the past five years, we reduced fees 30%. We get good value for the fees we pay…

“In 2013, SERS earned $3.7 billion, after all investment management fees and expenses of $175 million were paid. From a basic dollar perspective, that’s like paying $175 over the year to net $3,700 in your pocket at the end of the year.”

The PSERS spokesperson told DiStefano:

“We are not aware of the details of the Governor’s proposal on investment management fees. We have not met with him,” and won’t comment on details of the proposal until they are available.

“Our investment management fees are not excessive relative to the incremental value generated. PSERS paid $482 million in investment expenses for the fiscal year ended June 30, 2014. This amounts to 0.93% of our fund.

“By spending those fees, we earned an additional $1.27 billion (net of fees) ABOVE the index return,” Williams added in an email. “We would not have that additional $1.27 billion or 2.8% in additional investment performance if we did not use active managers.

“Looking longer term for the past 15 fiscal years (2000-2014), PSERS incurred $4.96 billion in investment management fees. In exchange for those fees, the Fund received the index returns plus an additional $16.42 billion in excess performance gross of the fees incurred. So, net of fees, PSERS generated $11.46 billion of incremental performance above the applicable index returns.

Read more of their remarks, including reaction to Wolf’s pension bond proposal, here.

Photo by c_ambler via Flickr CC License

Canada Pension Buys Student Housing Manager

The Canada Pension Plan Investment Board (CPPIB) announced on Friday that it is dipping its feet in the UK college student-housing sector.

[Read the press release here.]

CPPIB paid $1.67 billion to buy Liberty Living, a company that works with dozens of UK universities to provide and manage housing for students.

Pentagon Probes for Details on Proposed Military Retirement Overhaul

Last month, the Military Compensation and Retirement Modernization Commission released a long-awaited report containing a series of policy proposals designed to decrease the cost of military benefits, including retirement benefits.

One of the more controversial proposals: the phase-out of the military’s current defined-benefit plan in favor of a hybrid plan that features characteristics of a 401(k).

[Proposal details can be read here.]

Now, the Pentagon is digging deeper into the report, and officials are asking for access to the data that was used to form the proposals.

From the Military Times:

“[The commission] claims they’ve done all the analysis but we have not been able to see what’s inside that analysis, so I’m anxious to see it . … We are interested in looking at how the commission came to the conclusion that [its proposed retirement recommendations] would be a better option,” [Defense Department Chief of Naval Personnel Vice Adm. Bill] Moran said.

Military officials are receptive to the idea, Moran said, noting that the Defense Department last year offered its own proposal for military retirement reform that includes some similar features.

Still, Moran said he’d like more information about the commission’s claim that troops would prefer the proposed system and it would not affect retention.

“There are aspects we like and aspects we need more analysis on,” Moran said.

Top personnel officials have been working around the clock to analyze the controversial proposals.

Why is the Pentagon examining the proposals so closely?

The Pentagon’s official view of the report will hold sway on Capitol Hill when it comes time for lawmakers to vote on the proposals.

Photo by Brian Schlumbohm/Fort Wainwright PAO

Texas Pension Official: Sovereign-Wealth Funds Crowd Out Pensions on Co-Investing Opportunities

At a recent board meeting, a top official at the Teacher Retirement System of Texas outlined an emerging source of competition for pension funds looking to co-invest: sovereign wealth funds.

Britt Harris, the pension fund’s CIO, said that his fund might have to consider new strategies to get in on the best co-investing opportunities, according to LBO Wire.

More on Harris’ remarks, as reported by the Wall Street Journal:

“The whole emergence of sovereign wealth funds is disrupting the market,” said Britt Harris, the chief investment officer of the roughly $132 billion pension system during a board meeting in February. “We’re in competition with funds outside the country that are very large and very heavily resourced.”

Texas Teachers, which Mr. Harris said could “easily” do transactions above $100 million, faces intense competition for large co-investment deals as sovereign-wealth funds increase in influence.

[…]

Texas Teachers sources co-investment deals, which it calls “principal investments,” by focusing on a network of existing general partners and strategic partners.

“We have to convince these guys that we are the people to bring big investments to,” Mr. Harris said.

The pension fund may consider stationing staff in other major cities to expand its presence beyond its Austin, Tex., stronghold. It also is trying to structure transactions creatively.

“We have to come up with new ways of structuring things,” said Eric Lang, senior managing director of real assets and private equity.

Texas Teachers said it hopes to become involved in deals before they are signed and syndicated across a manager’s limited partner base.

“We’d like to be a full underwriting partner,” Mr. Lang said. He raised the possibility that if the pension fund has a larger role in due diligence before a deal closes, “We might have to share in deal costs with the [general partner].”

Texas Teachers manages $132 billion in assets.

Photo by Pete via Flickr CC License

Canada Pension Buys Big Stake in European High-Speed Rail

Caisse de dépôt et placement du Québec has acquired a 30 percent stake in Eurostar International, a high-speed rail service that runs between London, Paris and Brussels.

Caisse’s stake is reportedly worth $850 million, according to the International Business Times Australia.

Caisse purchased the stake from the UK Treasury.

More details from IBT:

Caisse expects to close the deal on the second quarter of 2015, if the state-owned railways in France and Belgium do not exercise their rights to purchase the British government’s stake. Together, France and Belgium own the remaining 60 percent of Eurostar. They could push to exercise their right by paying a 15 percent premium to the agreed price.

“We don’t think they will exercise it and hope they would not… but it remains in their discretion,” Macky Tall, senior vice-president of private equity and infrastructure at the Caisse, was quoted by The Financial Post.

Eurostar, launched in 1994, offers train service up to 300 kilometres an hour through the English Channel tunnel. It runs between London and Paris, as well as London and Brussels. It travels 2 hours and 15 minutes between France and Britain’s two largest cities for £69. In 2014, it carried over 10.4 million people.

Tall said the investment is another opportunity for the company to further build its expertise in the transport sector, noting Caisse’s global infrastructure investment portfolio was valued at more than C$10 billion as of Dec. 31.

When the deal is closed, ownership stakes in Eurostar International will look like this: French National Railway Company (55%), Caisse de dépôt et placement du Québec (30%), Hermes Infrastructure (10%) and National Railway Company of Belgium (5%).

Photo by Renaud CHODKOWSKI via Flickr CC License

Minnesota Pension Declines to Dump Israeli Bonds In Face of Protests

Minnesota and its retirement system hold about $10 million worth of Israeli bonds.

Those bonds have been the focus of public scrutiny recently, as one advocacy group has accused the System of taking sides in the Israel-Palestine dispute.

The group, called the Break the Bonds Campaign, has been attending recent meetings of the State Board of Investment and calling for divestment, according to the Associated Press.

On Wednesday, the Board voted on the issue – and decided 3-1 to keep the holdings intact and allow future purchases of the bonds.

Reaction from state officials who talked to AP:

“We do not make investments based on international policy. That is not our job. It’s not our role,” [State Auditor Rebecca] Otto said. “Although there are horrible things happening in the world, SBI is not the place to solve them.”

[…]

“This is obviously a very public and a very hypersensitive issue with strong feelings on both sides here and elsewhere,” Gov. Mark Dayton said as he presented the resolution, defending it as providing needed guidance to those in charge of Minnesota’s $80 billion portfolio. “I don’t think it is appropriate for us as a board to duck this decision and foist it onto the professional staff.”

Minnesota has been buying Israeli bonds since 1993, a decision Dayton helped steer while state auditor and still considers steady and reliable investments.

State chief investment officer Mansco Perry said the current 10-year bond due to mature this summer has a 2.4 percent yield compared to the 1.5 percent benchmark for treasury bills.

The Minnesota State Board of Investment manages $80.3 billion in assets, most of which are pension assets.

Photo credit: “Emblem of Israel” by Original design by Max and Gabriel Shamir; Tonyjeff, based on national symbol. – symbol created in 1948.. Licensed under Public Domain via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Emblem_of_Israel.svg#mediaviewer/File:Emblem_of_Israel.svg

Pennsylvania Gov. Budget Proposal: Overhaul Pension Investment Strategy and Cut Fees, Managers

Pennsylvania Gov. Tom Wolf released his first budget proposal last week, and there were several items of interest related to pensions.

On Wednesday, Pension360 covered Wolf’s proposal for issuing $3 billion in pension bonds to attempt to shore up the funding of the state’s two major pension systems.

But Wolf is also proposing an overhaul of the systems’ investment strategy.

Specifically, Wolf is calling for the systems to take a more passive approach to investing and to cut down the fees it pays to managers.

The proposal was short on specifics but called for the funds to “prudently maximize future investment returns through cost effective investment strategies.”

Nevada Lawmakers Debate Bill to Switch New Hires into 401(k) Plan

Public employee groups, businesses and lawmakers all hotly debated a Nevada bill this week that would make major changes to the state’s pension system.

The measure under scrutiny is Assembly Bill 190, which would close off the state’s defined-benefit system and funnel all new government hires into a hybrid plan that more closely resembles a 401(k).

The bill was proposed in late February by Assemblyman Randy Kirner [R].

More on how the pension system would look under the bill, from the Review-Journal:

Kirner said there would still be a defined benefit element to the plan worth 6 percent of an employee’s salary that would be paid by the public agency. This piece of the plan is intended to account for the fact that Nevada public employees do not pay into Social Security, he said.

The remainder of the retirement plan would be a defined contribution plan, with 6 percent being provided by the state or local government agency and another 6 percent coming from the employee.

For police and fire, the defined contribution rate would be 9 percent each from the employer and employee.

At the hearing this week, state businesses were supportive of the measure.

But public employee groups argued against the bill, saying the changes would make it harder to recruit talented workers.

Tina Leiss, a top official at the Nevada Public Employee Retirement Systems, also spoke against the bill.

The bill is still in committee. Read the text of the bill here.

Photo credit: “Flag-map of Nevada” by Darwinek – self-made using Image:Flag of Nevada.svg and Image:USA Nevada location map.svg. Licensed under CC BY-SA 3.0 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Flag-map_of_Nevada.svg#mediaviewer/File:Flag-map_of_Nevada.svg

Oklahoma Auditor Cries Foul Over Pension Consultant

Oklahoma’s top auditor is asking questions about fairness and bias in the hiring of a pension fund consultant.

The consultant, NEPC LLC, was hired to analyze the performance of the state’s pension systems and investment managers.

But state Auditor Gary Jones says there were irregularities in the way the consultant was hired, and a pension board may have violated stated Open Meeting laws in the process.

From the Oklahoman:

[Auditor] Jones said communications were taking place between commissioners outside of official meetings and he has asked the attorney general’s office to also look into whether there were violations of the state Open Meeting Act.

“It appears that a violation of the Open Meeting Act may have occurred with regard to some commission members being contacted prior to the Feb. 18, 2015, meeting, to obtain a consensus with regard to changing the RFP (request for proposals) process after the sealed bids had been opened and evaluated to approving the second highest bidder’s proposal,” Jones said in his letter to the attorney general’s office.

Jones contends Miller also showed favoritism by scheduling the commission meeting on the same day as the state Tobacco Settlement Endowment Trust meeting. Boston-based NEPC provides consulting services to that trust and the special scheduling enabled its officials to save on travel expenses.

As for the bidding process:

The auditor told The Oklahoman he saw several irregularities.

NEPC was not the low bidder, Jones noted.

When bids were originally submitted in October, NEPC submitted a bid of $125,000 a year plus up to $10,000 a year for expenses.

Competitor RVK Inc. submitted a significantly lower bid of $98,000 a year plus up to $7,500 a year for expenses, Jones said.

After the bids were publicly revealed in November, commission officials went back and gave NEPC officials the opportunity to lower their bid, even though there was nothing in the commission’s request for proposals that said that was permissible, Jones said.

NEPC came back with a bid of $100,000 a year, plus up to $10,000 in expenses.

The commission voted 4-1 to accept that bid Feb. 19, even though it was still higher than the bid submitted by RVK. No one at the meeting questioned the ability of RVK to fulfill the contract, Jones said.

All other commission members defended the process. Read their statements here.

Pennsylvania Gov. Wolf Proposes $3 Billion Pension Bond

Pennsylvania Gov. Tom Wolf unveiled his budget proposal on Tuesday, and it contained a number of pension-related items.

The biggest was undoubtedly the proposed issuance of $3 billion in pension bonds, to be used to pay down the liability of the Public School Employees Retirement System (PSERS).

As is always the case with pension bonds, the state runs the risk of worsening its financial position. But if PSERS’ investment returns exceed the bonds’ interest rates, the state will come out on top.