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Study: Pension Funds Flock to ETFs for Diversification

A recent survey of European institutional investors, including almost 70 pension funds, attempted to pin down why institutional investors are driven towards ETFs.

The research, conducted by Greenwich Associates, concluded that most investors are drawn toward ETFs because of the diversification they promise.

More on the results from Investments & Pensions Europe:

Pension fund allocations to exchange-traded fund (ETFs) are driven by diversification and tactics over short-term transition management, research shows.

[…]

The study, sponsored by BlackRock, also found 69% of pension fund investors used ETFs for international diversification.

More than half (53%) used the funds for tactical adjustment in portfolios, as well as part of a core allocation.

Only 9% used ETFs for transitional management, with roughly one in 10 using the strategy for interim beta or overlay management.

The report said: “Despite the widespread use of ETFs for tactical applications, few institutions are employing ETFs as true short-term investments.

“Less than 2% of study participants report average holding periods of a month or shorter. In practice, European pension funds seem to be employing ETFs in the most strategic manner.”

The full report can be accessed here.

Photo by Nick Wheeler via Flickr CC License

It’s Hard to Find a Good Deal When Everything is This Expensive, Says Ontario Teachers’ Pension CEO

The CEO of the Ontario Teachers’ Pension Plan, Ron Mock, spoke at the World Economic Forum last week. One of the topics he touched on was how hard it is to find bargains in the current market, where “everything is expensive” and deals can turn into “non-stop auctions”.

New York City Names New Chief Pension Adviser

NYC Mayor Bill de Blasio on Monday appointed John Adler to the post of chief pension investment adviser.

Adler will preside over the city’s five public retirement funds, conducting investment research and providing advice to the trustees who sit on the boards of the funds.

Video: Comparing the Retirement Income Systems of Australia and the United States

The above talk was given by John Piggott (University of New South Wales) at the 2014 Pension Research Council Conference; Steuerle spoke about his research into Australia’s “atypical” retirement system, how it compares to the United States’ system, and the lessons that can be learned from the comparison.

Kansas Treasurer Voices Support For Governor’s Pension Bond Plan

Kansas Treasurer Ron Estes is backing Gov. Sam Brownback’s plan to issue $1.5 billion in bonds to go towards funding the state’s Public Employees Retirement System.

Pension officials told Kansas lawmakers last week that such a decision, coupled with Brownback’s plan to delay pension payments, could end up costing the state almost $4 billion.

From the Topeka Capital-Journal:

The gambit put forward by Gov. Sam Brownback carries risk, the state’s treasurer said in an interview, but the state government’s general budget needs infusion of $137 million that would be available over the next two years by adjusting the Kansas Public Employees Retirement System. Kansas’ general operating deficit over the next 18 months has been estimated to be $700 million.

“The changes the governor suggests will help address the state’s budget shortfall while keeping KPERS in line with the pension reform plan passed by the 2012 Legislature,” Estes said.

Three years ago, legislators and Brownback committed the state to higher contributions to KPERS and other system reforms to chip away at a $9.8 billion funding gap on scheduled payouts to retirees through 2033.

Under the governor’s latest plan, the break-even point for the pension system would be pushed to 2043. The cost of delaying resolution of the deficit in KPERS could cost the state as much as $9 billion — nearly double the existing unfunded liability — when carried forward over three decades.

“You can lower your payments now, but if you add 10 years of payments, you’re going to pay more,” said Alan Conroy, executive director of KPERS.

“There are pros and cons to it,” said Estes, who is on the KPERS board of directors. “It’s a reasonable burden.”

Brownback also urged legislators to authorize issuance of $1.5 billion in bonds to infuse the pension system with capital that would be invested in the markets. The bonds might cost the state less than 5 percent, Estes said, while the average rate of return in the KPERS’ portfolio is about 8 percent.

“The bonding is a great idea,” he said. “We can take that $1.5 billion and invest it with other KPERS’ assets and start making money.”

Brownback is planning on delaying state payments to the pension system by $39 million in fiscal year 2015-16 and by $92 million in fiscal year 2016-17.

Photo credit: “Seal of Kansas” by [[User:Sagredo|Sagredo]][[User talk:Sagredo|⊙☿♀♁♂♃♄]] – http://www.governor.ks.gov/Facts/kansasseal.htm. Licensed under Public Domain via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Seal_of_Kansas.svg#mediaviewer/File:Seal_of_Kansas.svg

Moody’s Has Concerns About Quebec Pension Taking Over Public Infrastructure Projects

Caisse de dépôt et placement du Québec, Canada’s second-largest pension fund, recently reached an agreement to finance, execute and own the province’s new public transit projects.

Moody’s views the deal as a credit negative for the pension fund.

From Chief Investment Officer:

Rating agency Moody’s has outlined concerns it has over a C$4 billion (US$3.2 billion) public infrastructure deal signed by one of Canada’s provincial pension funds.

[…]

“Although the province is responsible for identifying projects of public interest and has the right to select projects on the basis of optimal solutions provided by the Caisse, the Caisse will be responsible for the execution of the selected projects,” Moody’s said in its latest credit outlook.

Moody’s clarified that the Caisse itself was not rated by its analysts, but the company created to carry out the projects—CDP Financial Inc—currently held an Aaa stable assessment from the agency.

The C$4 billion project is viewed as credit negative by Moody’s.

“The province could participate as an equity partner in projects, but will not have voting rights,” Moody’s said. “As a result, the pension fund will have greater exposure to operational and reputational risks associated with the performance of public infrastructure projects, risks that would have otherwise rested with the provincial government.”

The Caisse de dépôt et placement du Québec manages $214 billion in assets.

Photo by Claire Brownlow via Flickr CC License

Pension Funds, Other Shareholders Pressure Oracle CEO Over High Pay With Letter to SEC

The CEO of the Oracle software company, Larry Ellison, is one of the highest paid executives in the United States ($67.3 million in 2014) despite numerous calls by shareholders to reduce his compensation package.

Shareholders are fed up. They, led by two of Europe’s largest pension funds, are on Monday filing a letter with the Securities and Exchange Commission (SEC) regarding their concerns with the Oracle’s corporate governance.

From the Financial Times:

Larry Ellison, one of the highest paid executives in the US and co-founder of the Oracle software company, has come under renewed pressure from shareholders over his “excessive” remuneration and “unprecedented” failure to engage with investors.

The Netherlands’ second-largest asset manager and one of the UK’s largest pension funds, will on Monday file a letter to Oracle with the Securities and Exchange Commission, outlining their corporate governance concerns.

More than half of the group’s shareholders have voted against the executive compensation scheme in each of the past three years.

[…]

PGGM of the Netherlands and Railpen, the UK’s Railway Pension Trustee Company, say the company’s “lack of communication” has heightened their concern over pay, boardroom accountability and the independence of non-executive directors.

It is rare for such groups to go public with criticism of a company they invest in, underlining their anger and frustration after four years of trying to engage with the board and company executives.

In their letter to the company, they say: “As global investors, we believe that governance risk is particularly heightened in companies in which the founder serves as CEO or otherwise remains in a leadership role with the company.”

The pension funds aren’t a particularly large shareholder in Oracle – combined they only own about a 0.16 stake in the company, according to the Financial Times.

Photo by Securities and Exchange Commission via FLickr CC License

UK Pensions Argue For Better Reporting Framework For Responsible Investments From Fund Managers

A coalition of UK pension funds is calling on fund managers to improve and increase disclosure of the social impact of their investments.

Many of the pension funds in the coalition are taking an increased interest in socially and environmentally responsible investing.

From IPE Real Estate:

Over a dozen schemes with £200bn (€267bn) in assets – including the BT Pension Scheme (BTPS), Universities Superannuation Scheme and Pension Protection Fund – argued that improved reporting and disclosure on public equity investments would help asset owners better assess how well RI matters were aligned with the fund manager’s strategy.

It identified two main principles – of transparent integration of environmental, social and governance (ESG) factors and of good stewardship – as key, and added that only “explicit” reporting would allow schemes to gain a better understanding of how such issues impacted short and long-term risk and performance.

Daniel Ingram, the guide’s lead author and head of RI at BT Pension Scheme Management, told IPE reporting was the “missing link” to allow asset owners to make the case for ESG-focused investment.

[…]

Leanne Clements, one of the guide’s deputy editors and responsible investment officer at the £10bn West Midlands Pension Fund, said that, in the fund’s view, there was a need for “broad improvements” in reporting across the fund management industry.

“This is what makes that alignment of UK asset owners totalling over £200bn so important – we need to send a signal to the market, not just select individual managers,” she said.

“There has been some positive direction of travel with regards to climate change and other environmental issues in select managers – and also governance issues. However, social issues appear to be less understood.”

The coalition consists of 16 pension funds that collectively manage more than $300 billion in assets.

Photo by penagate via Flickr CC

Louisiana Lawmakers Weigh Uses for Pension System’s $300 Million Reserve

Louisiana’s state pension systems have $300 million sitting in “reserve” accounts; the money is meant to fund future cost-of-living increases.

But lawmakers have begun eyeing the money, and are now weighing ways to use the money for other purposes.

One lawmaker, Senator Elbert Guillory [R-Opelousas], wants to use the money to give retirees an extra, immediate cost-of-living adjustment (COLA).

Current Louisiana law allows one COLA increase every two years. State retirees received a 1.5 percent increase this fiscal year, so they normally wouldn’t be eligible to receive another until 2016-17.

But retiree groups, along with Sen. Guillory, are pushing to use the reserve money to fund another 1.5 percent increase this year.

More details from the Advocate:

A state senator wants the 90,000-plus retirees to get an immediate boost in their pension checks.

[Retired State Employees Association legislative liaison Frank] Jobert said retirees want the money reserved for its intended purpose — cost-of-living adjustments to retiree pension checks.

The retiree group will publish the required public notice that legislation will be filed aimed at granting a cost-of-living increase, Jobert said.

Retirees will push for a 1.5 percent cost-of-living increase in the fiscal year that begins July 1 with help from Senate Retirement Committee Chairman Elbert Guillory, R-Opelousas. Retirees got a 1.5 percent adjustment during the current fiscal year. Under a 2014 law, retirees would be eligible for cost-of-living adjustments only every other year, meaning there would not be one in the new fiscal year, which begins July 1.

Other lawmakers have other plans. If history is any indication, many lawmakers likely want to use the money to pay down the state’s pension debt, which in turn will lower the state’s future pension payments and give lawmakers more money to work with in the general budget. From the Advocate:

The money cannot legally be taken out of pension systems for use in funding other areas of the budget. But the dollars can be used toward reducing the pension systems’ long-term debts, which stand at $19 billion: $12 billion for teachers’ retirements and $7 billion for state government retirees. The payments toward the UAL would reduce the required state contribution. That would free up state dollars for other purposes.

[…]

Cindy Rougeou, Louisiana State Employees Retirement System executive director, said it would not be the first time dollars were “swept” from the retiree cost-of-living accounts. She said it happened in 2009 with dollars going to payments on the systems’ unfunded accrued liability. Commonly called the UAL, the term refers to the amount of money necessary to pay out all promised future benefits. The state contributes extra dollars to pay down the immense debt.

Sen. Guillory plans to file a bill in the coming months that would give retirees the extra COLA.

Guillory is chairman of the Senate Retirement Committee.

Photo by Dewayne Neeley via Flickr CC License

Chicago Lawyers Predict “Catastrophic Outcome” If City’s Own Pension Reforms Are Eventually Overturned

The City of Chicago submitted a brief to the Supreme Court this month supporting the legality of the state’s pension reform law.

That’s because a court decision against the pension law wouldn’t bode well for the legal standing of the city’s own set of pension reforms. Chicago’s lawyers said in the brief that a “catastrophic outcome” should be anticipated if the city’s reforms are eventually overturned.

From the Chicago Sun-Times:

Chicago faces a $300 million deficit in 2016 with shortfalls continuing “for the forseeable future” — even before piling on $20 billion in pension liabilities that have saddled the city with the “worst credit rating of any major city other than Detroit.”

And if state legislation that saved two of four city employee pension funds is overturned, a “catastrophic outcome” awaits retirees and Chicago taxpayers alike triggered by “further downgrades.”

After putting the state case on a fast-track, the Illinois Supreme Court ruled this week that it won’t have time to hear any friend-of-the court briefs.

But the city’s filing nevertheless paints the bleakest and most accurate picture yet of the financial crisis that awaits the winner of the Feb. 24 mayoral election.

“The Chicago bill should survive, regardless of the outcome of this appeal. If it doesn’t, the city’s liabilities will increase by $2.5 million a day,” Corporation Counsel Stephen Patton wrote in the Jan. 12 filing.

“The city will suffer further [bond rating] downgrades that could materially increase the cost of borrowing money essential to funding basic operations. And it could make the city immediately liable to pay hundreds of millions of dollars as a result of default and early termination of debt-related obligations.”

Chicago’s pension reform measure ended compounded COLAs for some retirees and raised employee contributions by 29 percent.

Photo by bitsorf via Flickr CC LIcense

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