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Chicago Treasurer: Investment Firms Overcharging Chicago Pensions By $50 Million

Chicago’s new Treasurer, Kurt Summers, said last week that he believes investment firms are overcharging the city’s pension funds to the tune of $50 million annually.

Summers says firms are levying higher fees on the city’s smaller pension funds than on the larger funds, for the same work.

From DNA Info:

Since taking office in December, Summers claims he’s discovered that investment managers are wringing upwards of $50 million a year in extra fees out of the city and Cook County’s 10 employee pension funds by charging substantially higher fees to the smaller pension funds for the exact same investments.

“I don’t begrudge any firm from making as much money as it can, that’s what they’re in the business to do,” Summers said in an interview last week. “It’s our fault for operating in silos and not looking at this sooner.”

Summers said when he came into office he found that just 23 firms are raking in half of the $142 million in fees the pension funds pay out to manage $35 billion in funds.

“Let’s go have 23 conversations,” Summers said. “Let’s start with the firms who have gotten plenty of their fair share.”

[…]

Summers plan is to aggregate pricing, similar to New York City’s system, and convince investment managers to offer the lowest fee to all the pension funds, not just the largest ones.

He said he’s already spoken with four firms and gotten a commitment from one to lower fees by a third.

Summers has previously advocated using pension money to make direct investments within Chicago.

Photo by bitsorf via Flickr CC License

Former EU Commissioner Calls For Netherlands’ Pension Funds to Invest in Start-Ups

Neelie Kroes, former EU commissioner and current Dutch start-up ambassador, called on Monday for pension funds to start throwing their money at the country’s start-up companies.

From Dutch News:

Neelie Kroes has called on pension funds, insurers and other institutional investors to put money into innovative companies.

Kroes made the call in a speech to foreign investors in Eindhoven on Monday, the Financieele Dagblad reports. Kroes, a stalwart of the right-wing VVD, said it is harder to get risk capital for innovative companies and that is limiting the opportunities for start-ups.

‘The Netherlands has enormous pension assets. Pension funds should be investing in venture capital funds but have not yet done so,’ the paper quotes her as saying. ‘I want to find out what the options are.’

Kroes has been appointed start-up ambassador by the government for 18 months. Based in Amsterdam, she has been charged with encouraging a new generation of entrepreneurs to develop their talents and put the Netherlands on the map as a start-up haven.

How Hedge Funds Keep Winning Clients Despite Prolonged Slump

The average hedge fund has returned 5.1 percent annually over the last 10 years, according to HFR, a hedge fund data firm.

The investment vehicle has even been outperformed by many “balanced” mutual funds. But the flow of clients to hedge funds isn’t slowing down, which begs the question: how do hedge funds keep winning clients when performance is so paltry?

Gregory Zuckerman dives into that question and comes up with some interesting answers:

How to explain the paradox of a superhot investment vehicle producing ice-cold returns for clients more smitten than ever?

Part of the reason for the lackluster returns: Hedge funds don’t have the same incentive to hit home runs they once did. They can charge management fees of close to 2% of assets. As the industry swells, many managers can get rich just keeping their funds afloat. A decent performance and no huge loss will do just fine.

The head of one of the world’s largest funds recently told me his challenge is to get his traders to embrace more risk, not less. Hedge-fund traders are more conservative because it’s in their self-interest to be more conservative.

There are similar ways to explain why hedge-fund clients aren’t up in arms. Some see an expensive market and want to be in a vehicle that should do better in a downturn.

But others simply want to keep their jobs. Recommending low-cost balanced mutual funds can be hard to justify if one has a well-paid job at a big pension fund or endowment. Properly allocating money to hedge funds is seen as a bigger challenge. Investing in brand-name hedge funds instead of big stocks once might have put an institutional investor’s career on thin ice. Today, avoiding popular hedge funds to wager on the market is seen as a risky career move.

Pennsylvania Pension Director Defends Investment Management After Op-Ed By Lawmaker

Late last month, Pennsylvania state Rep. Tom Caltagirone and financial advisor Richard Shuker took the state’s pension systems to task over the management of pension assets and fees paid to Wall Street.

[Read their arguments here.]

Now, the executive director of the state’s Public School Employees’ Retirement System (PSERS) has fired back in his own op-ed, defending the system’s investments. An excerpt from the piece, published in the York Dispatch:

1. PSERS is a well-managed, professionally run pension system that is audited by an independent, private sector auditing firm every year and follows all accounting standards issued by the Governmental Accounting Standards Board and all reporting requirements as required by the Securities and Exchange Commission.

2. PSERS received 15 recommendations from the Department of Auditor General’s 2006 Special Performance Audit. PSERS has resolved 13 of those recommendations and the two remaining address governance issues that are long-term projects and are currently in process.

3. Under Section 8521 (a) of the Retirement Code, PSERS is subject to the Prudent Investor Standard, which is a higher level standard than the Prudent Person Standard mentioned in the editorial.

4. Rep. Caltagirone and Mr. Shuker appear to use simple math to subtract the plan’s net asset values at two periods of time and imply that $48 billion is missing. For the 10-year period noted, we paid out $48.7 billion in benefit payments which they fail to even recognize. Evidently they are not aware that PSERS is a defined-benefit pension plan that currently pays out over $6 billion in pension benefits each year to over 213,000 retired members, including over $184 million in pension benefit payments in Berks County, where Rep. Caltagirone’s legislative district is located.

Read the full piece here.

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 – http://commons.wikimedia.org/wiki/File:Flag-map_of_Pennsylvania.svg#mediaviewer/File:Flag-map_of_Pennsylvania.svg

For CalPERS CIO, Lack of Stock and Bond Experience Not a Problem

The LA Times on Sunday published an interesting and thorough profile of CalPERS chief investment officer Ted Eliopoulos.

It chronicles Eliopoulos’ beginnings as an Ivy League tennis star, his appointment to CIO of the country’s largest public pension fund, and his headline-making decision to pull out from hedge funds.

The piece also dives into why Eliopoulos was an interesting choice for the CIO position, given that he was an expert in real estate but had little experience with stocks or bonds.

From the LA Times:

In turning to Eliopoulos, a consummate insider, CalPERS’ board made what is in some ways an odd choice.

Trained as a lawyer, not an investment professional, Eliopoulos has spent much of his career in state bureaucracies and had never directly managed stocks or bonds — more than 70% of the total CalPERS portfolio — before being named interim chief investment officer a year ago.

His area of expertise had been in buying, selling and managing real estate, which makes up only 10% of CalPERS’ portfolio and remains a rehabilitation effort.

[…]

Some believe even the most deft investor can’t keep the system solvent over the long term. But his supporters said he’s up to the task.

Former state Treasurer and Democratic Party Chairman Phil Angelides called Eliopoulos, whom he mentored, a methodical thinker and steady manager.

“He’s not threatened by having good, strong people around him,” Angelides said.

[…]

His lack of stock-and-bond experience may matter less than his ability to manage the massive investment operation that includes 400 in-house staffers and dozens of highly paid consultants and advisors, said investment professionals.

“It’s perfectly possible to be a very effective leader even if you don’t have all the experience in the weeds,” said Michael Rosen, a principal at Angeles Investment Advisors, which advises institutional investors.

Read the whole profile here.

Photo by rocor via Flickr CC License

Towers Watson: DC Assets Will Overtake DB Assets in Next Few Years

A Towers Watson study has found that global defined-benefit pension fund assets are at an all-time high – $36 trillion – but defined-contribution assets could soon overtake them.

From a press release:

The Towers Watson study also shows that defined contribution (DC) assets grew rapidly for the 10-year period ending in 2014, with a compound annual growth rate (CAGR) of 7%, versus a rate of over 4% for defined benefit (DB) assets. As a result, DC plan assets have grown from 38% of all pension assets in 2004 to 47% in 2014 and are expected to overtake DB assets in the next few years. In the U.S., DC assets continued to climb steadily and now represent 58% of all assets, up from 52% in 2004 and 55% in 2009.

“The continuing shift to DC plans means they are becoming the world’s most prevalent retirement savings model,” said Steve Carlson, head of Towers Watson’s Americas Investment practice. “This shift brings a transfer of risk and new tension to the balance between ownership and control, which will test governments and pension industries around the world.”

The study found that only two countries had more DC assets than DB assets: the United States and Australia.

As mentioned in the excerpt above, DC assets represent 58 percent of all U.S. pension assets.

The trend is more pronounced in Australia, where DC assets represent a whopping 85 percent of all pension assets.

Photo credit: TaxCredits.net

Former NY Lieutenant Gov: Kansas’ Pension Bond Plan a “Dreadful Idea”

Kansas Gov. Sam Brownback last month proposed issuing $1.5 billion in bonds to help cover the state’s pension funding shortfall.

The bonds would allow Brownback to go through with another proposal – lowering state payments to the pension system by $39 million in fiscal year 2015-16 and by $92 million in fiscal year 2016-17.

But pension bonds don’t come without risks. Over the weekend, a former New York lieutenant governor called Brownback’s plan “a dreadful idea”. From the Wall Street Journal:

Richard Ravitch, the former New York lieutenant governor who helped save New York from bankruptcy in the 1970s and now sits on the board of The Volcker Alliance, called Kansas’ plan “a dreadful idea.”

“If you cover current obligations by borrowing money, you’re on an unstable course,” said Mr. Ravitch.

There are other criticisms of pension obligation bonds, as well. The states and municipalities that issue them, for example, are frequently in ill-equipped to deal with the fallout if pension investment returns don’t exceed bond interest rates.

From the Wall Street Journal:

The state would make a decades-long bet that pension-fund returns will exceed current interest rates for taxable municipal bonds. Kansas officials said interest rates near historic lows make the bonds an attractive way to help manage retirement obligations.

If examined from the stock market highs at the end of 2007, such deals returned an average of 0.8%, the Center [For Retirement Research] said in a report last year. By 2009, however, most pension bonds were a net drain of -2.6%. Thanks to stock market gains following the recession, however, most of the deals were back in positive territory by 2014, returning an average of 1.5%.

Pension-bond deals made at the end of the market run-up in the 1990s, or right before the crash in 2007, have produced negative returns, the report said. Many of the bonds have a 30-year lifespan, meaning the final results won’t be known for years.

“This should be a tool in a well-functioning governments arsenal,” said Alicia Munnell, the Center’s director. “Unfortunately, those that use them tend to be cash-strapped and desperate.”

Read the Center for Retirement Research report on pension obligation bonds here.

Photo credit: Lendingmemo

Chart: The Highest Paid Pension CEOs

Over the weekend, the Financial Times released a list of the 14 highest-paid pension CEOs in the world.

Jim Leech of the Ontario Teachers’ Pension Plan, who earned over $7 million in 2013, tops the list.

The rest of the list can be seen above, along with fiscal year 2013’s investment returns.

The accompanying Financial Times story can be read here.

West Virginia Retirees To Rally at Capitol For Tax Exemption, COLA

The Coalition of Retired Public Employees (CORPE), a West Virginia retire advocacy group, is organizing a rally this week at the state’s capitol.

The retirees have gripes with several elements of the state’s retirement policy, and are trying to get the attention of West Virginia lawmakers.

Among the issues retirees are pushing for is a larger (or longer) tax exemption on pension income. From the WV Metro News:

The top item on the retirees’ agenda for 2015 is an increase in the tax exemption on their pension. Presently only $2,000 is exempt from taxes out of the pension and that exemption goes away at age 65. [CORPE President Ernie] Terry said other groups have a full tax exemption or a much higher threshold.

Also on the agenda: a cost-of-living-adjustment.

In West Virginia, COLAs are ad hoc – they are one-time events, and issued by the legislature on a case-by-case, year-by-year basis. Current retirees think another adjustment is in order. From the WV Metro News:

As usual, a cost of living adjustment or any pension increase would be welcomed.

“Several years ago our retirees that were age 70 received a three percent bump in their pension,” [CORPE President Ernie] Terry said. “Those people who have reached that milestone of 70 since then have not gotten anything.”

Terry said they aren’t asking for a retroactive raise, but want everyone in their class to be increased in what is already a meager pension.

The rally will be held at the capitol on Tuesday.

Rally-ers will meet in the capitol cafeteria at 8 a.m.

Photo by David Wilson via Flickr CC License

Illinois Gov. Rauner Proposes Bankruptcy As Strategy for Taming Municipal Pension Debt

Illinois Gov. Bruce Rauner didn’t touch on pensions during his State of the State address this week.

But in a list of policy proposals handed out to lawmakers, Rauner suggested giving municipalities the power to file for bankruptcy as a way to tame pension debt.

Even if towns and cities didn’t act, the threat of bankruptcy could give them leverage in pension negotiations with workers.

From the Chicago Tribune:

Gov. Bruce Rauner wants to give cities, towns and counties the authority to file for bankruptcy protection, a move that could give local governments a stronger foothold when negotiating with local police and fire officials over costly pension obligations.

[…]

Rauner aides would not elaborate on how it might work.

But the single sentence calling for the state to “extend to municipalities bankruptcy protections to help turn around struggling communities” mirrors a proposed law introduced last month by state Rep. Ron Sandack, R-Downers Grove. Sandack said his aim was to give cities more tools for getting their financial affairs in order, including a “level field” when negotiating over pensions.

Federal law only allows municipalities to file for bankruptcy with explicit permission from the state where they are located, said James Spiotto, a municipal bankruptcy expert and attorney who is managing director of Chicago-based Chapman Strategic Advisors.

Currently, only the Illinois Power Agency has been given such authority. It would take passage of a new state law to extend the authority to municipalities.

Chicago Mayor Rahm Emanuel was quick to dismiss the idea that the city would use such a tactic to lower its pension costs, according to the Tribune.

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