Chicago Pension Lawsuits Put on Hold Pending Supreme Court Ruling

chicago

Two lawsuits, both challenging the legality of recent pension reforms enacted by Chicago, have been put on hold until the Illinois Supreme Court rules on the state’s pension overhaul.

The plaintiffs filed the motion to put the lawsuit on pause, and it was approved on Thursday.

More from Reuters:

Lawsuits seeking to void a law aimed at shoring up the finances of two Chicago pension funds have been put on hold pending a ruling by the Illinois Supreme Court on a law affecting state public retirement funds, participants in the litigation said on Monday.

“Given the relative timing of the state and city cases, and because a decision upholding the (Sangamon County) circuit court in the state case could be determinative in the city case, the plaintiffs decided it is sensible to stay further proceedings until the supreme court’s ruling is received,” said Anders Lindall, a spokesman for American Federation of State, County and Municipal Employees Council 31.

[…]

During hearings on the preliminary injunction, Chicago’s attorney, Richard Prendergast, contended the 2014 law enacted for the city’s funds would not be derailed by a supreme court ruling voiding the 2013 law for state pensions because the city’s arguments go beyond the need to invoke police powers to ensure the funding of essential public services.

Chicago argues that the law does not unconstitutionally diminish pension benefits because without it the two pension funds would become insolvent in just years. The city’s attorneys have also suggested Chicago would not be responsible for retiree payments should the funds run out of money.

Chicago implemented pension reforms, effective as of Jan. 1, that limit cost-of-living increases and increase contributions from both employees and the city.

 

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New York City Pension Hires Risk and Compliance Officers As Part of Ethics Reform

Manhattan

New York City’s pension system has made a series of hires recently as part of an ethics package proposed by City Comptroller Scott Stringer in 2014.

The system has hired an internal auditor, a chief risk officer and a chief compliance officer.

More from ai-cio.com:

Miles Draycott, formerly at Merrill Lynch and Deutsche Bank, was appointed chief risk officer, and will be tasked with “developing and institutionalizing formal risk management,” the comptroller’s office said.

In addition, Draycott will be responsible for creating and implementing systems to “assess and monitor financial and enterprise risk.”

The pension system hired Shachi Bhatt, the associate director of compliance and risk management at Convergent Wealth Advisors, as chief compliance officer. She will be responsible for implementing systems to “assess and monitor regulatory compliance” within the pension funds as well as external managers, parent companies, and joint venture partners.

Lastly, the comptroller’s office employed Khanim Babaveva, formerly at Grameen America and FINCA International, as an internal auditor.

“One of the lessons of the financial crisis was that risk and compliance functions must have a clear line to the top, which is why these three executives will have direct access to me.” Stringer said.

The system manages $163 billion in pension assets.

 

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New Dynamic Emerging Between Pension Funds and Asset Managers As Pensions Look for Lower Costs, More Transparency

opposite arrows

Many pension funds are moving portions of asset management duties in-house in a bid to reduce costs; many more funds are pushing for more transparency from their external asset managers.

In the wake of these trends and others, a recent State Street survey claims that a new dynamic is emerging between pension funds and their asset managers.

More details on the findings of the survey, from State Street executive Rob Baillie:

Many pension funds are looking for a new type of relationship with their asset managers. In interviews conducted as part of our research, pension funds stressed how important it was to find asset managers who can understand their objectives and investment philosophy. The ability to align interests around shared goals is also key to success in these relationships. More than half of pension funds (52 per cent) find it difficult to ensure their asset managers’ interests are tightly aligned with their own. By contrast, asset managers that can build solutions around their clients’ objectives can gain an edge in a highly competitive market.

Transparency is also a key differentiator. In today’s highly regulated environment, pension funds need granular information on the issues that drive risk and performance across their investments. This is a huge challenge in the multi-asset world: almost three out of five pension funds surveyed (58 per cent) say it is a challenge to gain a complete picture of risk-adjusted performance. Asset managers that develop the analytical tools and reporting capabilities to address this need will again have a huge advantage.

[…]

In recent years, many pension funds have decided to insource some of their asset management. This was one of the strongest findings in State Street’s survey of pension funds: 81 per cent said they intended to manage more of their assets in-house.

Insourcing doesn’t remove the need for external asset management, but it does create a new dynamic in the relationship between pension funds and their service providers. They are less willing to pay a premium for straightforward investment strategies that they can easily support in-house. What they value, however, is asset managers that are able to deliver strong and reliable returns through a tailor-made investment solution.

Read more on the survey results here.

 

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Study: Pensions Put Pressure on Private Equity to Formulate Environmental, Social Investment Policies

wind farm

Research from the London Business School shows that the vast majority of large private equity firms – 85 percent – are feeling increased pressure from Europe’s institutional investors to incorporate environmental, social and governance (ESG) considerations into their investment policies and processes.

Details from Investments & Pensions Europe:

The study was based on responses from 42 private equity firms with collective assets under management of more than $640bn.

“Issues such as climate change, sustainability, consumer protection, social responsibility and employee engagement are no longer viewed solely as components of risk management, but have also gained recognition in recent years as important drivers of firm value, particularly in the long term,” the study said.

[…]

But even though ESG policies were being adopted more and more, there were still some big obstacles to these being implemented, the study showed.

The most notable barrier was the difficulty in collecting the necessary data, it said.

Also, some respondents cited the attitude of internal managers as a barrier to implementation.

“It appears that, while ESG integration has become common, there remain pockets of internal managerial resistance to the whole idea of considering such issues as relevant for investment decisions,” the study said.

[…]

Ioannis Ioannou, assistant professor of strategy and entrepreneurship at the London Business School, said: “The private equity industry is increasingly placing greater importance to ESG, moving it from a purely compliance and risk mitigating strategy to a key long-term strategy through which private equity firms pursue value creation.”

Read the research report here.

 

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Canada Pension Defends Saskatchewan Land Purchase

Canada

The Canada Pension Plan Investment Board (CPPIB) has had to absorb some criticism lately, stemming from its recent purchase of a large tract of Saskatchewan farmland.

CPPIB bought 115,000 acres of Saskatchewan farmland in 2013; but the fund is now coming under fire for artificially inflating land values, among other things. Some observers are worried that there is a disconnect between what is best for the land and what is best for CPPIB’s bottom line.

[Read the criticism of the deal here.]

CPPIB senior official Michel Leduc has responded to some of those remarks in a column published last week in the Leader Post. From the column:

CPPIB has the ability to spend money on improvements to the farms, and to own the land for decades. During that time many emerging countries will see rapid increases in population and wealth, increasing the demand for food. Saskatchewan has the potential to be a big beneficiary of this global trend.

We spent a long time studying farming dynamics before we bought this land. And we’re proud to own it.

[…]

For a long time now roughly 40 per cent of Saskatchewan’s farmland has been rented, rather than owned, by the farmers who farm it.

Within about six months of owning the land we ensured that 18 abandoned buildings were demolished, seven old storage and fuel tanks were removed, and three yard sites were cleared up.

In addition, two ponds that were being used to dump waste were cleaned out. An abandoned water well was capped. We are working on improvements to irrigation, storage and drainage.

We want to partner with local farmers to improve production techniques – and the livelihoods of those working in the sector.

[…]

CPPIB is a patient, responsible, long-term investor. We do not plan to amass huge individual holdings of farmland, or to squeeze out returns. We will make reasonable investments to improve farms and help those farmers who choose to partner with us to compete.

Read Leduc’s full column here.

 

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

Australia’s Largest Pension to Bring Global Equity Management In-House

Australia

In a bid to cut external management costs and handle more asset management duties internally, Australia’s largest pension fund is preparing to hire a team to bring its global equity management in-house.

AustralianSuper’s plan is to bring 40 percent of total asset management duties in-house by 2018.

But for now, the fund is looking to hire a team of managers to manage its global equities investments internally.

From Bloomberg:

AustralianSuper Pty, the country’s largest pension fund, is recruiting money managers as it prepares to start investing in global equities through its own team within a year.

[The fund] expects to have as many as nine people on the new team, said head of equities Innes McKeand, who is traveling to the U.K. next week to interview candidates.

AustralianSuper wants to cut external management costs and aims to manage about 40 percent of its assets in-house by 2018, from the current 15 percent. It already has in-house teams overseeing some of its Australian equities, infrastructure, property and cash holdings and has just hired two managers for Australian small cap investing, McKeand said.

“Global equities is the next big thing” for in-house management, McKeand said by phone Wednesday from Melbourne. “We are just in the process of building the team. In the next nine months to a year we would be funding the team.”

The global equities team will be based in Melbourne and have a mix of Australian and international managers, he said.

AustralianSuper manages $67 billion in pension assets.

Illinois Gov. Rauner Would Fine Schools For “Spiking” Pensions

Bruce Rauner

Illinois public schools that hand out late-career pay raises could be subject to heightened penalties under the Rauner administration.

Gov. Bruce Rauner this week laid out a series of pension-related measures as part of his budget proposal; among them was the idea of levying a penalty on schools that give late-career raises to teachers.

Illinois already penalizes schools for handing out such raises if they exceed 6 percent. Under Rauner’s proposal, schools would be penalized for any such raise that exceeds the cost of inflation, which is a much lower threshold.

More from the Daily Herald:

Tucked away in his plan to cut teachers’ pensions, though, is a detail school districts would have to be wary of should Rauner’s plans become law.

Here’s all it says on the list of details released publicly by the governor’s office: “Eliminates spiking.”

Rauner wants to change a state law that makes local school districts pay penalties if they give big end-of-career pay raises to teachers and administrators.

School districts can still give the pay raises, but the state says local officials have to pay for the pension consequences.

Now, school districts have to pay penalties if they give late-career pay raises of more than 6 percent. Rauner wants to enact penalties for those pay raises if they’re greater than the rate of inflation, which lately has been around 1 percent.

Suburban schools have already had to pay big bucks when they’ve been caught by the 6 percent law. For the 2012-2013 school year, for example, Elgin Area District U-46 had to pay $135,393.

The year before that, Schaumburg Township District 54 had to pay $489,841.

Most districts avoid big penalties, even writing in a 6 percent pay raise cap into their contracts with teachers. But 1 percent is a lot lower, of course.

“While a so-called reform was enacted in an effort to prevent pension spiking, teacher contracts in recent years have made the six percent cap a floor rather than a ceiling,” Rauner spokesman Lance Trover said.

A teacher’s salary during his/her final year of teaching plays a large role in determining pension benefits.

 

By Steven Vance [CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

San Francisco Pension Weighs Larger Emphasis on Local Real Estate

Golden Gate Bridge

The San Francisco Employees Retirement System is deciding whether to increase its allocation to real estate in the San Francisco Bay Area.

Specifically, the board is weighing whether to begin allocating up to 3 percent of its assets toward such investments.

However, the area’s high real estate prices warrant caution, according to the fund’s advisors.

From Investments & Pensions Europe:

A 3% target allocation to real estate in the nine-county San Francisco Bay Area – first mooted by the retirement board in 2013 – is still being mulled by the pension fund.

No plans were approved at a meeting this month. Its advisers, Angeles Investment Advisors and Cambridge Associates, warned against over-concentration in its real estate porfolio at a time when the pension fund is looking more broadly at real assets.

A recent board meeting document stated: “SFERS private markets team and Cambridge Associates recommend maintaining a broad allocation to real assets rather than carving the category into several pieces such as infrastructure, natural resources, or San Francisco-based real estate.”

[…]

Investment staff will approach managers active in local real estate and evaluate the merits of entering into local co-investments with them.

The staff will also explore whether there are further efforts it can undertake to source and evaluate San Francisco-based real estate investment opportunities with attractive valuations and good prospective returns.

The San Francisco Employees Retirement System manages $20 billion in assets.

 

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UK Hedge Funds Paid Record Taxes in 2014, Says Group

moneyAn industry trade association reported this week that UK hedge funds paid a record amount of taxes in 2014 – and that the industry paid over $2.5 billion more in taxes last year than in 2009.

The report comes from the Alternative Investment Management Association, a global hedge fund trade association.

From ValueWalk:

The report indicated that the UK Hedge Funds paid approximately £4 [$6.16] billion in taxes to the HM Revenue and Customs last year, an increase of around £1.7 [$2.63] billion in 2009.

According to AIMA, the growth of the hedge fund industry and the recent changes in the tax system in the United Kingdom was the primary reason behind the increase in tax contribution.

The association forecasted that the tax payments of UK hedge funds will increase further in 2015 due to the changes in partnership tax rules that were implemented last year.

According to AIMA, the £4 billion in tax payments by UK hedge funds last year could pay for approximately a dozen new NHS hospitals. The associations released the data amid claims that the hedge funds are exploiting loopholes or tax breaks to avoid paying stamp tax on UK share purchases.

[…]

In a statement, AIMA CEO Jack Ingles said, “Despite some of the recent highly publicized claims, it is clear that the tax contribution of the 500 firms and 40,000 people working in the hedge fund sector in Britain has actually increased to record levels in recent years.”

Read the AIMA release here.

 

Photo by 401kcalculator.org

Ratings Agencies Express Concern Over Maryland Pension Debt, But Uphold Rating

bonds

The major ratings agencies all upheld Maryland’s AAA bond rating this week.

But all three agencies expressed concern over the state’s pension debt. S&P in particular warned that pension liabilities, if not addressed, could lead to a rating downgrade in the future.

From the Maryland Reporter:

Fitch Ratings and Moody’s Investor Services call Maryland’s debt “moderate,” but Standard & Poor’s report says it is “above average.”

Moody’s said “low retirement system funded levels” represent a credit challenge for the state and “failure to adhere to plans to address low pension funded ratios” could make the rating go down.

Comptroller Peter Franchot said Wednesday he was concerned that the legislature would be tempted to cut the state’s pension contribution in order to find money for other programs.

Fitch Ratings noted, “Despite pensions being a comparative credit weakness, the state has taken multiple steps to reduce their burden and improve sustainability over time.”

S&P noted “implementation of various reforms and some improvements in funded ratios,” But it said “the state’s below-average pension funded ratios and annual contributions that do not meet the full [annual contribution] also continue to represent downside risk to the rating.”

The Fitch report can be read here.

The Moody’s report can be read here.

The S&P report can be read here.

 

Photo credit: Lendingmemo


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