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U.S. Public Pension Asset Growth Stalls in 3rd Quarter

The performance of corporate stocks hurt the growth of U.S. public pension assets in the third quarter of 2014, according to U.S. Census data.

After reaching a record high in the second quarter, public pension assets declined in the third quarter from $3.37 trillion to $3.31 trillion.

Court Dismisses Pensions’ Lawsuit Against BNY For Housing Crash Losses

An appeals court has dismissed a lawsuit brought by a handful of public pension funds against BNY Mellon. The lawsuit stemmed from investment losses on mortgage-backed securities and BNY’s alleged neglect to properly evaluate the quality of the securities.

From BenefitsPro:

The U.S. Court of Appeals for the 2nd Circuit has upheld a lower court’s decision to dismiss a class-action brought by pension funds against BNY Mellon.

Among others, Chicago’s police pension fund and the Grand Rapids, Michigan, city retirement fund sued BNY Mellon over claims related to losses from residential mortgage-backed securities suffered in the wake of the housing market crash.

BNY was trustee to 530 RMBS originated by Countrywide Home Loans. The plaintiffs alleged that BNY Mellon breached its fiduciary and trustee obligations by not overseeing the quality of the home loans built into the securities.

The plaintiffs had sought to build a class of any investors that owned any of BNY’s 530 mortgage securities.

In April of 2012, a U.S. District Court judge for the Southern District of New York granted BNY’s motion to dismiss the case on the grounds that the named plaintiffs had only invested in 26 of the securities, and the pension funds did not have the “standing” to bring claims against securities they didn’t own, according to court documents.

In upholding that decision, the appellate court deterred a much larger class-action, but did say the pension funds could bring claims against the 26 securities they actually invested in.

“In short, the nature of the claims in this case unavoidably generates significant differences in the proof that will be offered for each trust,” wrote Circuit Judge Debra Ann Livingston.

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Preqin: More Pensions Invested in Private Equity, But Average Allocation Down From 2013

Data from Preqin shed some light on private equity activity in 2014, and showed that more public pension funds invested in private equity in 2014.

Even still, public pensions’ average allocation to private equity has dipped slightly since 2013.

From ThinkAdvisor:

Preqin, the investment alternatives data provider, found that the number of active U.S.-based public pension funds in private equity has risen year over year, from 266 in 2010 to 299 in October 2014. The average allocation to private equity was 7% as of October 2014, down from 7.2% a year earlier.

Preqin said private equity looked set to remain an important component of U.S.-based public pension funds’ portfolios for years to come, offering investors good portfolio diversification and outsized returns over the long term.

Fundraising for the year was likely to be strong, Preqin reported, with $254 billion raised by funds that closed in the first half.

A record 2,205 funds are currently in the market seeking an aggregate $774 billion, compared with 2,098 funds that were looking to raise $733 billion in January.

Preqin also reported that its internal data showed co-investment would increase in 2014. It acknowledged that concerns about high expenses and competition were holding back some general partners from offering co-investment opportunities. But researchers found that co-investment figured prominently in the plans of many GPs and limited partners.

Preqin said that as the private equity industry matures and investors become more sophisticated, co-investment activity could increase, with benefits for both fund managers and limited partners.

Preqin also found that venture capital funds raised more money in 2014 than in 2013.

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Cincinnati Strikes Pension Deal; City to Pay More, Retiree Benefits Reduced

After nearly a year of negotiations, Cincinnati and its public workers have reached an agreement that aims to increase the sustainability of the city’s pension system.

The city will contribute significantly more money to the pension system. In exchange, retirees will not see a cost-of-living adjustment for the next three years and will see smaller COLAs in the years after.

The terms of the agreement, from the Cincinnati Enquirer:

Under the agreement, the city will:

* Contribute $38 million to the pension system next year. The city will do that over the next seven years by borrowing against future revenue.

* Contribute $200 million in 2016 from the financially stable retiree heath care trust fund to the pension system.

* Make a larger contribution to the pension starting in July 2016 – 16.25 percent of the annual operating budget compared to 14 percent – and continuing for 30 years.

Employees will:

* Take a three-year cost of living adjustment holiday.

* After that, the cost of living adjustment for both current retirees and active employees will go to 3 percent simple interest. Most current retirees receive an increase that is “compounded,” meaning the previous year’s increase is included in the following year’s calculation. Current employees already have a 3 percent simple COLA in place when they retire. The total cost of the cut was unclear Tuesday night, but can be projected. It is a significant amount.

More background and reaction from the city and unions, from the Cincinnati Enquirer:

Nobody walked away happy – not city officials, not current workers and not retirees – but everyone agreed it was a fair compromise.

The agreement ensures pension benefits will be sustained for current and future retirees and shores up the city’s financial position for years to come.

“I want to thank all of the parties for coming to the table and hammering out a compromise,” Cranley said. “It’s been a rough road and no party got everything they wanted. This settlement requires some sacrifice on all sides, but it will help strengthen the city’s financial health and ensures the pension system will still be there for everyone in it.”

The deal averts cuts to basic services for all Cincinnati residents.

Cranley, flanked by city union leaders and other top city officials, announced the agreement on the steps of the University Club at 10:45 p.m. Tuesday. All parties had been inside, negotiating since 1 p.m.

“We’re elated,” said Pete McClendon, the former president of AFSCME who is now the president of the Cincinnati AFL-CIO (of which AFSCME is a part). “The agreement stabilizes benefits … in a way that is fiscally responsible. We look forward to a workforce that can retire with dignity.”

The city’s unfunded pension liabilities hover near $862 million.

“Pension Smoothing” Makes WaPo’s List of Worst Policy Ideas of 2014

This year, the U.S. Congress addressed the insolvency of the Highway Trust Fund by allowing companies to engage in a practice called “pension smoothing”.

The plan addresses the Fund’s insolvency but comes with future costs.

On Wednesday, the Washington Post named pension smoothing one of the 11 “worst policy ideas of 2014”.

From the Post:

The Highway Trust Fund, which helps states pay for vital infrastructure, has been running out of money for years (here’s a quick explainer on why). This summer, Congress needed to find about $10 billion dollars to temporarily prop up the fund (in the absence of a long-term solution, that is). So what did Congress do to generate that money? Raise the gas tax? Create a better road user fee? In a rare act of bipartisanship, Congress found more than half that money instead through “pension smoothing,” which is widely derided by everyone outside of Congress as a mere budget gimmick.

In effect, Congress allowed corporations to underfund their future pensions to create the semblance of more tax revenue today. A succinct NPR explainer of the trick:

It allows employers that offer traditional pensions to set aside less money for future retirees. That makes the companies appear more profitable in the short run so they — or their employees — pay more money to the government in taxes.

Read more Pension360 coverage and analysis of pension smoothing here.

Research Firm: Institutional Investors Still Hungry for Hedge Funds

Research from eVestment indicates institutional investors are still hungry for hedge funds even after a year that saw low returns for the investment vehicles. The research estimates that investors will put at least $90 billion in hedge funds in 2015.

From Money News:

Wealthy investors are poised to put at least $90 billion into hedge funds next year, even after returns have largely been lackluster this year, research firm eVestment said.

Fresh demand from pension funds, endowments, and insurers looking for alternatives to traditional stock and bond holdings will fuel next year’s flows, the researchers wrote in a report.

“Will institutional investors maintain their investments and continue to allocate more to hedge funds in 2015 … The short answer is yes,” they wrote, adding “We expect asset flows into hedge funds of at least between $90 billion and $110 billion in 2015.” Hedge funds manage roughly $3 trillion in assets.

The appetite for hedge funds remains strong even after the $300 billion California Public Employees’ Retirement System, the largest U.S. pension fund, said in September it was pulling out of hedge funds because they are too costly and complicated.

Hedge funds took in roughly $112 billion in new money this year even though returns have been paltry, with the average fund returning roughly 4 percent this year through November. As hedge funds posted low single digit returns, the stock market raced to a series of fresh highs and the Standard & Poor’s 500 index gained 12.8 percent since January. Last year, investors added $62 billion in new money to hedge funds.

The research suggested that investments in stock-oriented hedge funds could slow down, but investments in multi-strategy hedge funds will likely rise in 2015.

Photo by 401kcalculator.org

North Carolina Pension Changes Go Into Effect Jan. 1

As of January 1, 2015, highly paid government workers in North Carolina will no longer be allowed to boost their pension benefits with accumulated sick leave or other perks, according to a law signed over the summer by North Carolina Gov. Pat McCrory.

The law also lowers the “vesting period” for benefits of public employees from 10 years to 5 years.

Pension “spiking”, as the practice is sometimes called, happens when workers accumulate sick leave, vacation time, bonuses and other benefits until the year before they retire. In their final year on the job, they cash out all those benefits—inflating their final year salary.

Since final year salaries play a big role in calculating a worker’s pension benefits, spiking can increase a retiree’s annual pension by thousands of dollars per year. The practice is currently legal in most states.

But the practice is now outlawed in North Carolina for all state and local workers who make $100,000 or more annually. From the News & Observer:

The new law, which takes effect Jan. 1, comes after The News & Observer in November reported how four community college presidents and their boards converted tens of thousands of dollars in perks to pay as they neared retirement age, creating pension boosts the retirement system will have to subsidize. The retirement system is funded by contributions from employees, taxpayers through employer contributions, and investment returns.

“This law prevents North Carolina state employees from having to subsidize artificially inflated pensions of high earners at the end of their careers,” McCrory said in a statement. “It protects the retirement system from abuse and ensures state employees are rewarded for their important investments in our state.”

State Treasurer Janet Cowell has claimed in the past that pension spiking in the state is limited to only the highest-paid state workers. Thus, the current legislation outlaws spiking for those workers by creating a “contributions cap”. The News & Observer explains:

The law creates a new method of identifying pension spiking through a contributions cap that is based on the actual amount of money state and local employees and employers put into the retirement system. Those hired before Jan. 1 would continue to receive the difference created through the pension spiking, but it would have to be paid for by that unit of government, not the retirement system. Those hired after Jan. 1, would have the choice of the employer paying, the employee paying or a reduced benefit.

The law also returns the pension vesting period for state and local employees to five years. Three years ago it was doubled to 10 years as a cost saving measure, but Cowell’s staff said the savings were minor, roughly $1 million a year, while making the state less competitive in the job market.

“Returning to a five-year vesting period is critical step in North Carolina becoming more competitive in recruitment and retention relative to other public and private employers,” Cowell said in the release.

New York Senator Explains Why He Chooses to “Double-Dip”

Pension360 yesterday covered the quirk in New York law that allows lawmakers to file for retirement, collect a pension, but stay in office and continue collecting their normal salary, as well.

Nine lawmakers filed for “retirement” this year. But on Tuesday, one of those lawmakers explained what his motivations were for taking advantage of the legal loophole.

New York State Sen. John DeFrancisco explains his motivations:

“A state statute that was enacted long before I was first elected to the Senate allows state employees who are 65 or older to retire and also earn an income in a state position. This applies to all state employees.

In the past, many state employees, including legislators, have retired and continued to work in state government. I was eligible to do so three years ago, but chose not to. This year, I decided to file for retirement.

If I did not file and died while in office, my wife of 46 years would not receive my valuable retirement that I have earned over the last 37 years. Instead, she would receive a modest lump sum benefit. The older I have gotten, the more I have come to understand that I cannot risk depriving my spouse of what she is entitled to, and what I have earned.

Granted, I could simply retire and not serve any longer. However, now that Republicans have regained control of the State Senate, Central New York would be better served by my returning to my Senate seat, as a majority member and Chairman of the Senate Finance Committee.

So in balancing these factors, I decided to file my retirement papers, effective January 1, 2015, and to continue to serve in the State Senate.”

Former Enron Trader Continues to Fund Pension Policy Reforms From Behind the Scenes

Former Enron trader John Arnold has given large amounts of money to various public pension reform initiatives around the county in recent years.

Many of those measures mandate a shift to a 401(k)-style system, or allow benefit cuts.

Most recently, he gave $1 million in support of Proposition 487, a Phoenix ballot measure that would have shifted new city hires into a 401(k)-style system.

From Politico:

When former Enron trader and Texas billionaire John Arnold donated more than $1 million to a November 2014 initiative to reform the public pension system in Phoenix, Ariz., pension activists took notice.

Arnold’s donation to Proposition 487, also known as the Phoenix Pension Reform Act, constituted close to 75 percent of total donations for the ballot measure, which failed. Had it passed, it would have moved new state employees from a defined benefit plan into a less-generous (and less expensive) defined contribution plan such as a 401(k).

Despite his Arizona defeat, no one believes Arnold is done.

Arnold’s money has also been involved in reform initiatives in Kentucky, Rhode Island and California. From Politico:

In the 2014 cycle, Arnold and his wife donated $200,000 to a super PAC that supported Democrat Gina Raimondo’s successful gubernatorial campaign in Rhode Island. As Rhode Island’s state treasurer, Raimondo had enacted pension benefit cuts that cost her union support. Rahm Emanuel, who made similar changes to Chicago’s pension system, also received financial assistance from Arnold.

San Jose Mayor Chuck Reed, another Democrat, tried, unsuccessfully, to place an initiative on California’s November 2014 state ballot that would have allowed public employers, under specific circumstances, to reduce employee benefits and to increase contributions to underfunded plans. Arnold bankrolled the entire effort, to the tune of $200,000.

According to data compiled by the NPPC, based on donations disclosed on the website of the Laura and John Arnold Foundation and on news articles, Arnold has since 2008 spent more than $53 million on pension policy reforms, not all of it in the political realm. (In an email interview with Reuters, Arnold disputed those numbers.)

Other beneficiaries listed include universities and think tanks such as Brookings and the Pew Research Center. Much of the money was spent to support pension reforms, but some was spent on education reform. Both efforts, unions point out, tend to favor benefit cuts to public employees.

[…]

The Arnold Foundation is also participating in the Colorado Pension Project, chaired by former Colorado governors Bill Owens, a Republican, and Richard Lamm, a Democrat. As governor, Lamm drew national headlines 30 years ago when he said that elderly people who were terminally ill had a “duty to die and get out of the way.” (Lamm will turn 80 next year.) The Colorado Pension Project’s website says that recent legislative reforms to the state pension system — which reduced cost of living adjustments, raised the retirement age for new employees and increased employee salary contributions — did not go far enough. McGee said Arnold’s foundation was drawn to the state’s history of “fruitful left ideological discussions.”

Read the full Politico report here.

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Alabama Supreme Court Blocks Lawsuit Against State Pension Investments

The Alabama Supreme Court has dismissed a lawsuit brought by public employees who said the Retirement Systems of Alabama has made unwise investment decisions leading to lower returns.

From the Associated Press:

The Alabama Supreme Court has blocked a lawsuit that challenged the state pension fund’s investment in hotels, golf courses and other properties in Alabama.

The court ruled 6-2 Wednesday that the suit filed by two public employees should be dismissed.

The employees contended the Retirement Systems of Alabama had invested up to 15 percent of its assets in Alabama properties that were yielding lower returns than other investments would have. It wanted the courts to block future Alabama investments that would yield lower returns.

The Supreme Court said the pension fund is immune from such suits. The justices also said the courts shouldn’t oversee the investment policies of another branch of government.

Retirement Systems CEO David Bronner called the ruling “good news.” The employees’ attorney said they are disappointed.

The Retirement Systems of Alabama manage $28 billion in assets.

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