The above talk was given by Peter Shena, Executive Vice President and Chief Pension Officer of the Ontario Pension Board, at the 2014 Pension Research Council Conference.
Shena speaks about “creative, progressive risk-share models” implemented in some European countries that go beyond defined-benefit or defined-contribution plans. He also talks about his concerns about the sponsor’s role in these plans.
Here’s a graphic that shows what institutional investors believe to be the biggest potential risks to investment returns in 2015.
Seventeen percent of institutional investors are most worried about geopolitical risks. Meanwhile, 13 percent and 12 percent of investors, respectively, think slow growth in Europe and China pose the biggest risk to their 2015 returns.
Chart credit: Natixis “Under Pressure” report
David Sanko, executive director of the Pennsylvania State Association of Township Supervisors, penned an piece in TribLive on Friday claiming that Pennsylvania has a pension crisis – but it’s at the state level, not the municipal level.
Sanko contends that, aside from a handful of horror stories, most of the state’s municipalities aren’t buried in pension liabilities.
Sanko writes:
A handful of local governments — primarily large and midsize cities like Philadelphia, Pittsburgh and Scranton — have retirement programs that are underwater and have been for quite some time.
But the majority of municipal pension plans are doing just fine and provide a stark contrast to the horror stories. In places like Bethel Township in Berks County, Castanea Township in Clinton County, Connellsville Township in Fayette County, and Great Bend Township in Susquehanna County, employee pension plans are overfunded by as much as 700 percent.
These communities are the rule, not the exception, according to recent data from the Pennsylvania Employee Retirement Commission, which has been documenting the distress level of the 1,448 municipalities that receive state aid to offset mandated retirement benefits.
Despite the small number of severely distressed municipal plans, some are portraying the problems of a few as a statewide epidemic and want everyone, including communities that have kept their pension plans healthy and above water, to swallow the same bad medicine.
They’d like to consolidate all local retirement plans into a single statewide system and let the healthy ones’ assets be used to balance the troubled ones. But bigger isn’t better. All we have to do is look at the state’s behemoth and woefully underfunded system, which accounts for 90 percent of the pension stress in the state, for proof of that.
A report from Pennsylvania’s top auditor released last week found that the majority of the state’s municipal pension funds were not “in distress”.
However, 562 plans were classified as “distressed”.
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
In response to an SEC examination, private equity firm KKR & Co. has refunded some fees it charged investors in a handful of its funds.
The SEC last year said that some firms were charging investors “hidden fees” without proper disclosure.
From the Wall Street Journal:
KKR’s refunds were disclosed in a pension-fund document obtained by The Wall Street Journal through an open-records request. The precise amount of the refunds couldn’t be determined, but a Journal analysis suggests one set of refunds likely amounted to less than $10 million, while the other may have been similar in size or smaller.
KKR declined to comment on its discussions with regulators.
[…]
According to the notes, KKR officials said the SEC determined that the private-equity firm from 2009 to 2011 had allocated certain expenses to its private-equity funds that “should not have been allocated to the funds.”
As a result, the notes said, KKR gave “fee credits” to the investors in those funds. The sums were blanked out, but the total of such credits was listed as “$X million,” and the credit to the Washington state pension fund was listed as “$X thousand.”
[…]
The SEC staff also found fault with the way KKR handled disclosure of fees it collects from steering portfolio companies into a group-purchasing program run by a company called CoreTrust Purchasing Group, the notes show.
Read the full WSJ story here.
Photo by c_ambler via Flickr CC License
2014 was a year of change for Japan’s Government Pension Investment Fund (GPIF), and 2015 will bring more of the same.
Aside from appointing a chief investment officer, the pension fund is overhauling its investment strategy and hiring new managers.
But Japan’s welfare minister, Yasuhisa Shiozaki, along with other government officials, might not be on the same page as the GPIF.
From the Wall Street Journal:
Japan’s welfare minister has frequently disagreed with officials in Prime Minister Shinzo Abe ’s government over the nation’s $1.1 trillion Government Pension Investment Fund, according to people familiar with the matter, adding uncertainty to efforts to remake the fund.
[…]
Fights over the process—including the recent hiring of a London-based private-equity executive as chief investment officer—have broken out between Mr. Shiozaki’s camp and other officials at his Ministry of Health, Labor and Welfare, as well as aides to Mr. Abe, according to those involved.
[…]
So far, the disagreements haven’t significantly derailed Mr. Abe’s plans. But in an interview Wednesday, Mr. Shiozaki laid out a cautious investment strategy and declined to praise the chief investment officer, Hiromichi Mizuno.
Mr. Mizuno’s appointment “was decided by the GPIF’s president, so I don’t think it’s the kind of thing I should comment a lot about,” said Mr. Shiozaki.
He went on, “Mr. Mizuno must do his best to fulfill the necessary condition of being able to invest in a safe and efficient manner. That is what we expect. If he can’t do that—if it does not come out in favor of pensioners—then that’s a problem.”
The GPIF manages $1.1 trillion in assets and is the world’s largest pension fund.
Photo by Ville Miettinen via FLickr CC License
For institutional investors, New York is the most desirable real estate market in the United States, according to a survey conducted by the Pension Real Estate Association (PREA).
Other sought-after markets: Chicago, Boston, Los Angeles and San Francisco.
More from IPE Real Estate:
The Investment Intentions Survey, carried out with INREV and ANREV, found that the East Coast city was the most preferred market for 86.3% of institutional investors in 2015.
Among non-US capital, the Big Apple was also preferred, with 95% of non-US investors expecting to invest there this year.
PREA said non-US investors continue to target major US markets, while domestic investors are spreading capital more widely.
”In general, US-based investors are targeting investments on a more widespread basis across the US than are non-US investors, who continue to be most interested in the major, primary markets,” PREA said.
Boston, Chicago, San Francisco and Los Angeles are also high on investors’ wishlists, with two-thirds expected to place capital in the four cities in 2015.
Fund managers have a stronger interest than investors in major West Coast markets such as San Francisco, Los Angeles, Texas and Florida.
For domestic investors, Texas is tied with Boston as the top US destination for domestic capital in 2015, with 71% of US-based investors.
However, amongst non-US investors, there is far less interest in either Texas, Florida or other markets outside the largest and most liquid.
The survey results can be accessed here.
Photo by Dirk Knight via Flickr CC License
The Canada Pension Plan Investment Board, among other pension funds, has been vocal about making India part of their long-term investment strategy.
CalPERS hasn’t announced it from the top of the hills, but the numbers reveal that the country’s largest public pension fund is also taking considerable interest in India.
CalPERS increased its exposure to India by over 33 percent in 2014.
From VC Circle:
The California Public Employees’ Retirement System (CalPERS), one of the top public pension funds in the US, saw its exposure to assets linked to Indian currency rise by over a third to $1.7 billion in the fiscal ended on June 30, 2014 as compared to $1.27 billion in the year ago period, according to the annual financial report of the company.
Almost all of this was due to changes in fair value of assets in the equity securities bucket from $885 million to $1.3 billion. The value of the real assets, representing primarily real estate assets, shrunk marginally.
This data represent investment securities of all CalPERS managed funds, including derivative instruments that are subject to Indian rupee foreign currency risk.
It did not list any quantum against PE assets in India and it could not be ascertained if this is due to its forex hedging over dollar denominated offshore funds or it has actually disassociated itself with India-focused PE funds.
But CalPERS does counts itself as an investor in several global PE funds investing in India including some in their regional funds. These include Blackstone, KKR, Carlyle, TPG, Clearstone, SAIF Partners, etc.
CalPERS manages over $300 billion worth of pension assets.
Photo by sandeepachetan.com travel photography via Flickr CC License
A new Moody’s report says that Texas and its municipalities will face rising pension costs in coming years. The report also notes that local governments may not be able to ease those costs as legal hurdles prevent significant pension reforms.
On the state level, the costs come in the form of higher contributions – at least one state-level system is requesting the state contribute more money starting in fiscal year 2016-17.
From Moody’s:
The State of Texas (Aaa stable) and some of its local governments face rising pensions costs due to a history of contributions below actuarial requirements, Moody’s Investors Service says in a new report, “Cost Deferrals Drive Rising Pension Challenges for Texas and Some Locals.”
While the state has a broad ability to tackle pension funding challenges, many local government pension plans are subject to state constitutional protection.
“Most Texas local governments face greater legal constraints and procedural hurdles to pension reform, while the state has substantially more legal flexibility to change and adjust benefits to its plans,” said the report’s author and Moody’s Assistant Vice President — Analyst, Thomas Aaron.
Texas participates in four single-employer plans, with the majority of costs associated with the Employee Retirement System (ERS), and the Teachers Retirement System (TRS). In order to address an ongoing funding challenge, the ERS requested a 59% increase in the state’s contribution rate for the fiscal 2016-17 biennium for that system alone, a cost increase of nearly $540 million across all of the state’s funds.
The full report can be read here [subscription required].
Hedge funds experienced the most asset growth of any alternative asset class in 2014, according to a Preqin report.
Despite scrutiny over low returns and high expenses, investors put more money into hedge funds in 2014 than private equity, infrastructure or venture capital.
More from Chief Investment Officer:
Despite a disappointing year for returns and some high-profile withdrawals from the sector, Preqin’s “2015 Global Alternatives Report” showed that hedge fund industry assets grew by roughly $360 billion during the year.
This accounted for more than half of the $690 billion increase in total assets invested across hedge funds, private equity, venture capital, private real estate, and infrastructure. In total, Preqin estimated $6.91 trillion was invested across these sectors.
“The recent news of CalPERS cutting hedge funds and reducing the number of private equity partnerships within its portfolio does not reflect the wider sentiment in the industry,” said Mark O’Hare, CEO of Preqin.
“From our conversations with investors, the majority of investors remain confident in the ability of alternative assets to help achieve portfolio objectives.”
However, Preqin predicted that investors would continue to scrutinise hedge fund performance and fees during 2015.
Preqin’s “2015 Global Alternatives Report” can be bought here.
To reach its target real estate allocation, the San Diego County Employees Retirement Association (SDCERA) could invest $500 million in real estate over the next two years, according to an Investments & Pensions Europe report.
The fund’s target real estate allocation is 10 percent.
More details from IPE Real Estate:
According to board meeting documents, San Diego is considering placing this capital with existing and new real estate managers.
The pension fund, advised by consultant The Townsend Group, is considering hiring a manager for a new separate account.
It is also considering investing in commingled funds to gain access to niche investment strategies, as well as real estate investment trusts (REITs).
The fund has previously placed capital with CBRE Global Investors, Blackstone, Cornerstone Real Estate Advisers, JP Morgan Asset Management, Pramerica Real Estate Investors and Deutsche Asset & Wealth Management.
San Diego will look to rebalance its portfolio, moving from an even split between core and non-core investments to a 70-30 weighting, a move that will be aided by some of its existing opportunity fund investments coming to an end.
The expected return for the new portfolio weighting is around 7.5%, with a standard deviation of 10.8%, according to Townsend.
SDCERA manages approximately $10 billion in pension assets.
Photo by c_ambler via Flickr CC License
