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Pensions Uninterested in Indian Debt

Some of the world’s most prominent pension funds have been eyeing Indian infrastructure investments.

But pensions remain uninterested in the country’s debt. More from the Economic Times:

Despite record inflows in 2014, Indian debt was unable to draw attention of perhaps the stickiest investors in global arena -sovereign wealth funds (SWFs) and global pension funds. These two prominent categories constituted only 1.73% of foreign institutional investors (FIIs) assets under custody (AUC) in Indian debt in 2014 while their pie in equities was 17%.

“SWFs and pension funds participation has been tepid in debt securities compared with equities on account of two reasons. One, tight limits on government debts dissuade them from Indian debt instrument as it artificially creates demand and poses liquidity risks. Second, SWFs desire to see stability across macro variables ranging from currency to the current account deficit and accordingly , they invest for longer term. We have some semblance regarding stability, so we can see inflows to increase if things persist according to what we have seen last six months,” said head of treasury at an MNC bank on condition of anonymity .

[…]

Experts, however, believe that the phenomenon may reverse in the current year. In the last six months, the rupee has been least affected by the emerging market currency crisis. In case volatility in the rupee remains low for another couple of quarters, the outlook on Indian debt by SWFs will improve. In addition, sound decision making of the central bank, unlike the policies of central banks of Russia and Turkey, will boost confidence of these long-term investors. The central bank of the latter two countries had flip-flopped on the policy front.

The Canada Pension Plan Investment Board (CPPIB) has been active in India and considers the country a “key part” of its long term plans.

Top Kentucky Lawmaker Introduces Teacher Pension Funding Bill; Seeks $3 Billion in Bonds

Kentucky House Speaker Greg Stumbo has taken up the Teachers Retirement System on one of their funding proposals.

Stumbo on Friday filed a bill calling for the issuing of $3.3 billion in bonds that will be used to fund the teachers system.

More details from the Courier-Journal:

Stumbo, D-Prestonsburg, said Friday that the retirement system could capitalize on current low interest rates of around 5 percent and use the bonds to supplement the state’s pension contribution for the next eight years.

“This window is going to close pretty soon,” Stumbo said. “I think the feds, this year, will allow those rates to rise some because the economy is getting better and because the banks aren’t making any money on deposits.”

KTRS estimates that a $3.3 billion bond issue would save the state around half a billion dollars annually by 2026. But the plan only works if investments yield a higher rate of return than the interest on the bonds.

Supporters compare the idea to refinancing a home mortgage at a lower rate. But skeptics view it more like using credit cards to pay off debt, and the measure would need support from a supermajority of lawmakers to pass in an odd year of the legislature.

But lawmakers haven’t forgotten about the transparency issues present at both state pension systems. Lawmakers may still attach strings to the funding that forces the teachers system to make some changes to their opacity. From the Courier-Journal:

Stumbo said he is comfortable allowing bonds for teacher pensions because KTRS appears prudent in its investment strategy. But he said lawmakers might consider additional measures to improve oversight of the system as part of the debate.

Stumbo added that lawmakers are not interested in providing bonds to Kentucky Retirement Systems — the pension system for state and local workers — because of lingering questions over investments and transparency.

The Kentucky Teachers Retirement System is one of the worst funded educator’s pension funds in the U.S.

Likewise, the Kentucky Employees Retirement System is one of the worst funded plans in the country.

JP Morgan Reaches Settlement With Pension Funds in Suit Over Toxic Securities

JP Morgan and several pension funds have reached a settlement in a class action lawsuit filed against the bank.

The lawsuit stems from investment losses sustained from mortgage-backed securities sold to investors, which, the lawsuit claims, were “far riskier than represented”.

Under the settlement, JP Morgan will pay $500 million to investors, including the Public Employees’ Retirement System of Mississippi.

From Chief Investment Officer:

JP Morgan and a group of pension funds have reached a preliminary, $500 million agreement to settle a mortgage-backed securities lawsuit, according to court filings and the Wall Street Journal.

The pension funds, including the New Jersey Carpenters Health fund and Public Employees’ Retirement System of Mississippi, represent a class of investors who purchased securities they allege were “far riskier than represented, not of the ‘best quality’ and not equivalent to other investments with the same credit ratings.”

Bear Stearns issued the nearly $18 billion worth of mortgage-backed securities in question. JP Morgan, now the world’s largest banking corporation, bought the foundering firm for $10 per share in March 2008, as the financial crisis sharply escalated.

On Thursday, lawyers for the pension funds filed a letter with the presiding New York judge indicating a preliminary settlement had been reached.

“Following extensive negotiations,” the letter stated, “the parties have reached agreement and executed a binding term sheet containing the material terms of the settlement.”

All parties have a deadline of Feb. 2 to give the court a detailed outline of the settlement.

Photo by Sarath Kuchi via Flickr CC License

Canada Pension Takes On $198 Million Real Estate Project in Suzhou

The Canada Pension Plan Investment Board (CPPIB) has committed $198 million to a massive real estate development project in Suzhou, China.

The fund is investing in the Times Paradise Walk project, a 735,000 square meter space consisting of residential, retail, office and hotel space.

From a release:

Canada Pension Plan Investment Board (CPPIB) and Longfor Properties Company Ltd. (Longfor) announced today that they have formed a new joint venture for a major mixed-use development project in Suzhou, Jiangsu Province, China.

The new joint venture was formed on December 23, 2014 with CPPIB committing RMB 1,250 million (C$234 million) to jointly develop the Times Paradise Walk project in Suzhou, the fifth most affluent city in China with a population of 10 million. The mixed-use development is an integrated project comprising residential, office, retail and hotel space covering a total gross floor area of 735,000 square metres. It is designed to be a top quality, one-stop commercial destination in Suzhou with completion scheduled in multiple phases between 2016 and 2019.

“This is CPPIB’s first direct joint venture in a mixed-use development in China and we are pleased to be doing this alongside Longfor, a well-respected and experienced developer in China,” said Jimmy Phua, Managing Director, Head of Real Estate Investments Asia for CPPIB. “We look forward to building a long-term strategic partnership with Longfor that will allow CPPIB to continue to invest in large scale mixed-use and retail projects in China, a market in which we see long-term growth potential.”

Located in the heart of the Central Business District of the Suzhou Gaoxin District with connections to the subway lines, Times Paradise Walk Suzhou, which started construction in 2013, has already received strong responses following two separate residential launches in 2014 with total contract sales of RMB 1.9 billion.

The CPPIB manages $234.4 billion for the Canada Pension Plan.

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Stakeholders Listening for Hints on Pension Reform in Chris Christie’s Annual Address

Chris Christie will deliver New Jersey’s “State of the State” address on Tuesday. The question on the minds of lawmakers, labor leaders and public workers is: how much will he reveal about his plans for reforming the state’s pension system?

Christie indicated over the summer that a new round of pension reforms are necessary, and they would likely involve benefit cuts.

But new details have been scarce, and the state’s Pension and Benefit Study Commission hasn’t released its recommendations.

From NJ.com:

When Gov. Chris Christie delivers his 2015 State of the State address Tuesday, lawmakers and public workers will no doubt be listening for remarks on pension reform.

On the eve of that speech, and months after a commission’s report on recommendations for the ailing pension system was expected to be released, legislators, union leaders and lobbyists say they are expecting to hear from the governor on one of the biggest issues facing Trenton. Christie’s office has not yet provided any details about his annual address to the state Legislature.

The governor made mention of the ailing public employee pension system nine times in his 2014 address, proposing to crack down on pension fraud and engage on pension reform.

“If we do not choose to reduce our soaring pension and debt service costs, we will miss the opportunity to improve the lives of every New Jersey citizen, not just a select few,” he said at this time last year.

The debate over pensions heated up again last spring when a budget gap suddenly erupted and Christie cut back on payments that were promised in a highly touted pension reform law he signed in his first term.

Since late summer, recommending ideas about overhauling public worker pensions has been the job of a bipartisan commission Christie designated. The commission issued a report in September laying out the severity of the state’s unfunded pension and health benefit liabilities, but has not released a final report with recommendations. The commission’s chairman Thomas J. Healey did not return calls for comment.

The state is shouldering $83 billion in pension liabilities, as measured by new GASB accounting rules.

Photo By Walter Burns [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

North Dakota Group Proposes Ways To Decrease Burden of Pension Costs on Schools, Teachers

Like in many states, North Dakota schools are finding their budgets strained by pension payments to the state’s teacher retirement system.

North Dakota’s Teachers’ Fund for Retirement is currently 62 percent funded, and contribution rates for teachers and districts have spiked in recent years to improve the system’s funding.

In a bid to reduce the burden on school districts and teachers, the North Dakota School Boards Association has made several proposals to lawmakers. From Inforum:

[Fargo School Board member Jim] Johnson and the school boards group want lawmakers to consider one or more of several options to rebuild the teachers’ retirement fund. They include:

* A series of catch-up allocations from the state’s general fund sufficient to fund TFFR at 100 percent. “It seems to me that they have a fund balance in Bismarck,” Johnson said. It “makes tremendous sense to me.”

* A separate state appropriation that gives school districts an annual amount equal to 5 percent of their certified staff payroll.

* A rollback to pre-2008 TFFR contribution levels, when the plan was funded at 70 percent of its long-term liabilities. The state would pay the post-2008 difference in contribution rates until the plan was 100 percent funded.

* An agreement to study the current funding system for TFFR and explore other solutions.

Teacher contribution rates have risen from 7.75 percent of salary (in 2008) to 11.75 percent in 2014. Meanwhile, school payments have risen from 8.75 percent of payroll (in 2008) to 12.75 percent now.

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Video: Solving Teacher Pension Underfunding

Here’s a long discussion on the state of teacher pension systems and how public policy can address the systems’ liability issues while causing the least amount of harm to teachers, retirees and students.

From the video description:

America’s teacher-pension systems (with up to a trillion dollars in unfunded liabilities according to some estimates) present a raging public-policy dilemma. Career teachers absolutely deserve a secure retirement, but lawmakers promised them benefits that the system cannot afford, as those promises were based on short-term political considerations and bad math. Now the bill is coming due, and someone’s going to get soaked.
What’s the least bad option going forward? Who should bear the brunt of this legacy of fiscal irresponsibility? Current retirees? Today’s teachers? New teachers? School districts? Taxpayers? The students themselves?

Ontario Teachers’ Pension No Longer In Talks to Buy Satellite Company

The Ontario Teachers’ Pension Plan had been in talks for months to buy satellite company Loral Space & Communications, and even had “handshake deal” in place.

But the talks have stalled, according to reports, because the pension fund “is so fed up” with the company’s founder that “they can’t see straight”.

From the New York Post:

Mark Rachesky’s $7 billion deal to sell satellite company Loral Space & Communications has been grounded, The Post has learned.

Talks between Loral and the Ontario Teachers’ Pension Plan, which were active in the fall, have ended, two sources close to the situation said.

In late October, Loral shares began a 15 percent rise, to $78.14, after reports had Ontario close to buying Loral from Rachesky’s MHR Fund Management.

Loral shares closed Friday at $78.32, up marginally.

Ontario had a handshake deal to buy Loral for roughly $85 a share, sources said, and the plan was to complete the deal once Loral settled a suit with ViaSat Inc. over patent infringement.

Loral on Dec. 2 announced a $45 million settlement.

Then Rachesky, a former protégé of Carl Icahn, failed to reach a deal with Ontario on who would pay the costs.

At the same time, Ontario found it was more expensive to raise financing for the deal to buy Rachesky’s 38 percent stake in Loral than it would have been in the fall.

“When the leveraged financing market stabilizes, the sides will be back putting it together,” a source said.

The pension is “so fed up with Rachesky they can’t see straight,” another source who believed it might take much longer for the sides to ever get back together said. Rachesky declined comment. Ontario did not return calls.

The Ontario Teachers’ Pension Plan manages $139 billion in assets.

Photo by Jeton Bajrami via Flickr CC License

Shareholder Engagement Produces Few Results, Says Activist Investor

Shelley Alpern, Director of Social Research & Advocacy at Clean Yield Asset Management, penned a piece on Monday weighing in on fossil fuel advocacy among institutional investors.

Most institutional investors have declined calls to divest from fossil fuel assets, citing their fiduciary duties as a major reason.

Instead, many have opted to use their clout as major shareholders to actively engage with companies.

But Alpern is skeptical of this tactic.

Alpern writes:

Institutional investors and asset owners owe it to themselves to understand when engagement works and when it doesn’t.

On the whole, shareholder engagement has an admirable track record. Its practitioners can take credit for many achievements: increased disclosure of corporate political spending; reduced waste, pollution and water usage; greening supply chains; broad adoption of inclusive nondiscrimination policies; and greater diversity on corporate boards. Not to mention the anti-apartheid campaigns of the 1980s.

Engagement succeeds when we can make a persuasive case that change will enhance shareholder value, reduce business or reputation risk, or both. Ethical imperatives rarely carry the day on their own.

Engagement will fail when a company with flawed policies or practices perceives them to be unalterable. As engagement with tobacco companies demonstrated, it also will not work when the goal is to change the core business model of a company.

She then looks at the track record of shareholder engagement with fossil fuel companies:

It’s been 23 years since the first climate change proposal was filed at a fossil fuel company. Using conservative estimates based on records kept by the Interfaith Center on Corporate Responsibility, at least 150 such proposals have been filed at fossil fuel companies since, and at least 650 climate proposals and dialogues on climate change have taken place at non-fossil fuel companies.

Space limitations preclude a detailed inquiry into these engagements, so let’s take a snapshot look at the most recent efforts and where things stand as of right now.

In late 2013, 77 institutional investors with more than $3 trillion in assets called on 45 companies to assess the potential for operational assets to lose value if carbon regulations become stricter and if competition from renewables takes market share.

Most coal and electric power companies didn’t provide the written responses requested. Most oil and gas companies did respond, but none acknowledged the existential threat to their activities or the need to scale them back. As former SEC Commissioner Bevis Longstreth observed, ExxonMobil not only denied that any of its reserves could become stranded, but also stated that it is “confident that future reserves, which it intends to discover and develop in quantities at least equal to current proved reserves, will also be unrestricted by government action.” With this report, Longstreth concluded, “ExxonMobil has thrown down the gauntlet after slapping it hard across the collective face of humanity.”

Two successive waves of “carbon asset risk” shareholder proposals followed this initiative, but have done nothing to budge the denialist positions held by their targets.

Read the entire piece here.

Photo by penagate via Flickr CC

Private Equity Firms May Inflate Returns, Claims Research

Private equity firms now manage hundreds of billions of dollars of public pension money, in part because the asset class advertises its ability to deliver strong returns without the volatility of the stock market.

Due to the illiquid nature of private equity, the industry’s return figures are often estimates – a valuation of what the firm’s investment would have sold for, had it been sold.

But new research from George Washington University suggests that private equity firms inflate the on-paper value of their investments.

More details from the International Business Times, which received an advanced look at the soon-to-be-released research:

Now comes new data from [investment banker Jeffrey] Hooke and George Washington University’s Ted Barnhill and Binzi Shu that purports to prove mathematically that the private equity industry’s books are misleading.

The researchers essentially created a portfolio of publicly traded companies that they say closely resembles the kinds of privately owned companies that private equity investors buy. The researchers then weighted their public companies’ returns to reflect the same level of debt that private equity firms typically impose on their portfolio companies.

The researchers argue that their index of public companies should show roughly the same returns as the private equity industry. “All things being equal, an auto parts company that is publicly traded will have the same value as an identical auto parts company that is privately owned,” Hooke, who is an executive at Focus Investment Banking, said.

Instead, though, the private equity industry’s stated returns were noticeably less volatile than the publicly traded companies’ returns. The researchers assert that the private equity industry uses its latitude to self-value its own portfolios in order to make their returns look “smoother” than they actually are. “Investors may have been unfairly induced into placing monies into these investment vehicles,” they conclude.

The CalPERS website says “there are no generally accepted standards, practices or policies for reporting private equity valuations.”

The SEC has taken notice, as well:

At the Securities and Exchange Commission, a top enforcement official in 2013 declared that the private equity companies that the agency had been scrutinizing were “exaggerat(ing)” the reported values of their portfolios. That declaration followed the release of studies by academic researchers finding evidence that valuations were being manipulated. The SEC subsequently reported that it found “violations of law or material weaknesses in controls” at more than half of the private equity firms that the agency investigated.

Read the full IBT report here.

Photo by Roland O’Daniel via Flickr CC License

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