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Questions Raised About Return Assumption of Japan Pension

Some experts, including a senior economist at the Japan Research Institute, have questioned whether Japan’s Government Pension Investment Fund (GPIF) is being too optimistic by assuming a 6 percent return per year on its domestic equity portfolio.

From the Asian Review:

The managers of Japan’s huge Government Pension Investment Fund must have their heads in the clouds to expect domestic shares to return an impressive 6% a year, some observers say.

The $1 trillion fund’s new medium-term investment plan, released at the end of October, assumes that economic growth and other macroeconomic conditions will resemble the Japan of 1983-93. But its expected nominal return on Japanese equities is based on corporate earnings from 1983 to 1989 — the high-flying years before the nation’s asset-price bubble burst.

Japanese bonds make up 35% of the GPIF’s new asset mix, down from 60% in the old portfolio model. Meanwhile, the fund’s target allocations for domestic and foreign stocks have each more than doubled, from 12% to 25%, while its allocation for foreign bonds has risen from 11% to 15%.

When it comes to international bonds and equities, the GPIF expects nominal returns of 3.7% and 6.4% at best. But its “upside scenario” for domestic stocks has them rising at 6% — a rate at which an investment, if compounded, would roughly double in 12 years. To arrive at this number, the fund crunched share prices, dividends, earnings per share and other stock-related data from 1983 to 1989.

Although Japanese shares returned far more than 6% during the bubble era, they did so amid an unprecedented economic boom. The odds of such an earnings-supported-rally occurring again are debatable. As to why the fund’s baseline for domestic equity returns ends at 1989, not 1993 as in the economic assumptions, GPIF President Takahiro Mitani said it was to control for the effects of the bubble bursting.

Japan’s GPIF is the largest pension fund in the world with $1.1 trillion in assets.

Photo by Ville Miettinen via Flickr CC License

Two Former Detroit Pension Officials Found Guilty of Fraud

Three former Detroit officials – including two who worked for the city’s pension systems – were convicted Monday of conspiracy to commit fraud.

The men accepted bribes and other kickbacks in exchange for directing pension money to certain investments.

From the Wall Street Journal:

A former treasurer for the city of Detroit — along with two other former city pension officials — were convicted Monday of conspiring to defraud retirees by trading lucrative investment deals for bribes and kickbacks as the city’s finances spiraled out of control.

A federal jury convicted former treasurer Jeffrey Beasley, 45, of Chicago following a two-month trial. Ronald Zajac, who was an attorney for the pension fund and Paul Stewart, a former pension trustee, were also found guilty of corruption charges.

[…]

All three defendants were convicted of conspiring to defraud the city’s pensioners by accepting bribes. In addition, Mr. Beasley was convicted of two counts of extortion and one count of bribery. Mr. Beasley was acquitted on three other counts of extortion.

The evidence at trial, according to federal prosecutors, showed that Detroit’s two retirement systems lost more $97 million on pension deals corrupted by bribes and kickbacks taken or paid by the defendants…

Messrs. Beasley, Zajac and Stewart conspired with each other and, prosecutors alleged, with former Detroit Mayor Kwame Kilpatrick and others to take bribes and kickbacks in return for votes on investment decisions made by the boards of trustees of Detroit’s two pension systems.

This happened under the watch of former city Mayor Kwame Kilpatrick, who is currently serving a 28-year prison sentence for racketeering, tax crimes and bribery.

Photo credit: “DavidStottsitsamongDetroittowers” by Mikerussell – Own work. Licensed under Creative Commons Attribution-Share Alike 3.0 via Wikimedia Commons

“Everybody’s Not Going To Retire At The Same Time”: Actuary Evaluates Former Illinois Governor Edgar’s Pension Comments

Last month, former Illinois governor Jim Edgar gave his thoughts on the state’s pension situation. He notably said he didn’t support the state’s pension reform law, and said the following:

“I don’t think also you have to have 100 percent funding in the pension plan. Everybody’s not going to retire at the same time. I think you can keep probably 75, 80 percent is sufficient, but I think what you’ve got to demonstrate to a lot of folks out there who rate the state’s credit and a lot of those things is that the plan will work over a period of time and that they are committed and are going to stick with it.”

Actuary Mary Pat Campbell, who runs the STUMP blog, weighed in on Edgar’s comments. As you’ll see, she is not a fan of Edgar’s pension knowledge. The full post is below.

_________________________________

By Mary Pat Campbell, originally published on STUMP

Seems that not all recent Illinois governors end up in prison, (Quinn isn’t out of the woods yet!) but perhaps they should be jailed for this crap:

“I don’t think also you have to have 100 percent funding in the pension plan. Everybody’s not going to retire at the same time. I think you can keep probably 75, 80 percent is sufficient, but I think what you’ve got to demonstrate to a lot of folks out there who rate the state’s credit and a lot of those things is that the plan will work over a period of time and that they are committed and are going to stick with it. We thought when we put in the provision you had to pay into the pension plan first thing before you did anything else that they would keep paying in. I never thought they would have the nerve to change that, but under (former Gov. Rod) Blagojevich they did and so you’re going to have to find some safeguards to put into the plan, but I think it’s going to take 20, 30 years to get to the level we want to get to, but if we start working toward it and don’t go on any spending spree with the pension plan, I think we can do that.”

First off, we do have an appearance of the 80% canard, but there’s a new lie that’s been creeping in that is pissing me off: “Oh, it’s not a problem right now… it would only be a problem if everybody retired at the same time.”

Let me explain, conceptually, what the pension liability is supposed to represent, and what the unfunded portion represents: it is what people have earned for their PAST service, and is using all sorts of assumptions, such as THE AGE THEY WILL PROBABLY RETIRE.

The actuarial value of the pension, under even the craziest approaches, does not assume everybody retires right now.

Let’s consider your pension value for a person still working: each extra year of service, they’ve earned some more. They are also a year closer to retirement. As long as they keep working and are still alive, the value of their pension increases, under most pension benefit design. Sometimes you’ll see a pension value drop at later ages, but that’s getting persnickety (though it has had some repercussions elsewhere).

The pension valuation is supposed to be a snapshot, indicating what has ALREADY BEEN EARNED. There are approaches that try to capture future salary increases, and tries to make accrual less drastic (as one usually does see huge increases in pension value right before retirement under some approaches).

The main time the pension value would be decreasing for a person is when they’re in retirement, as they’re not accruing more benefits, and each year they’re one year closer to death. The time the pension gets paid out is generally getting shorter. If the pension fund cannot cover retiree benefits, it’s in a really bad condition.

And here’s the deal: some pensions are not able to cover just the current retiree portion of the benefits:

Nobody is any more worried now than they were before the New Jersey Pension Study Commission report came out. Yes, “[t]his problem is dire and will only become much worse if meaningful steps are not taken quickly” but what does that really mean to anyone?

…. Scary Conclusions

1. For retirees there may be about $15 billion to cover $40 billion in liabilities and that’s ONLY for retirees leaving absolutely NOTHING for the 151,669 participants who have not yet started receiving monthly benefits except, for now, the refund of their contributions.

2. There is an equally good chance that Conclusion #1 is overly optimistic

I doubt New Jersey is the only state in that situation. As noted earlier, Kentucky is looking really bad.

And in my recent teaser, I showed a set of graphs I am developing for various pension plans. The ones being shown were for Texas Teachers Retirement System. I will explain them in a later post, and start showing you some truly scary information — using the official numbers from the plans themselves.

But shame on Gov. Edgar for mouthing the same bullshit everybody else does in favor of underfunding the pensions. I have looked at over a decades’ worth of Illinois pension valuations, and for all major funds (except one), they deliberately underfunded by substantial amounts, even in “good” years.

If you’re not going to make contributions when times are good, guess what will happen to the pensions when times are bad?

I guess ex-Gov. Edgar wants to cover his own ass for the pensions being underfunded in the go-go 90s, when he was governor (1991 – 1999). Hey! Everybody was doing it! 80% is good enough!

NO, IT’S NOT.

SHAME.

Newspaper: Kentucky Pension Officials Have “Forgotten Whom They Work For”

Pension360 has covered the push in recent weeks by several Kentucky lawmakers to make the state’s pension system more transparent.

The secrecy surrounding Kentucky’s pension investments is well documented, and the issue has even spurred a lawsuit.

One Kentucky newspaper wrote Tuesday that pension officials have “forgotten whom they work for” – the public.

The Herald-Dispatch editorial board writes:

Apparently, [pension officials] are in sore need of a reminder that they are employed to serve the public and, as such, how they conduct their business should be open to scrutiny by the public.

[…]

Some want to know more about how the pension funds operate. As of now, Kentucky law allows the systems to operate partly shielded from the public. For example, the public is not allowed to know how much is paid out to individual retirees, nor does the systems have to reveal how much they pay out in fees to individual hedge fund managers who are investing the pension money and other external investment advisers. But we do know they are paying out hefty sums, to the tune of $55 million last year to investment management firms.

The public has a right to know both of those aspects of the pension system.

[…]

Private investment companies doing business with governments also must realize who’s paying their fees and that accountability comes with gaining contracts with government-run pension systems. The excuse put forth by Kentucky officials and others about how revealing the investment companies’ contracts would reveal “trade secrets” doesn’t hold up. That argument simply is not sufficient to conceal how much money they are making from taxpayers and the public employees who contribute to the systems. Until that information is revealed, the public has no way to know whether it’s getting its money’s worth from those companies.

A couple of Kentucky lawmakers plan to introduce bills next month that would require the pension systems to use the state’s competitive bidding process, disclosing terms of the deals and the proposed management fees, as well as shed more light on the pension payouts to the state’s lawmakers. All of those requirements would be steps in the right direction and should be put into law.

Read the full piece here.

Unions Speak Out Against Quebec’s Bill 3, Plan Next Moves

Quebec’s controversial pension reform legislation, Bill 3, passed into law last week. The law divvies up responsibility for paying down governments $3.9 billion pension debt 50-50 between employers and employees. As a result, employees now shoulder more of the burden for paying down pension debt in the form of higher contributions.

Now, union leaders are speaking out against the law and planning their next moves. Union leaders say government officials have “started a fire”. From the Montreal Gazette:

“We’re more determined than ever,” Marc Ranger, spokesperson for the Coalition syndicale pour la libre négociation, told a press conference at the Crémazie Blvd. E. headquarters of the Quebec Federation of Labour.

“We will target municipal administrations, that’s for sure,” he said.

“Most of these mayors will not find this funny in the months to come.”

Ranger did not specify what the pressure tactics would be, but promised that after the Christmas break, municipal employees would take action that will make the public sit up and take notice.

However, he said the coalition, representing 65,000 firefighters, police officers, transport workers, blue-collar workers and white-collar employees, will steer clear of illegal actions like the Aug. 18 ransacking of city hall, which has resulted in criminal charges.

Bill 3, calling for negotiations with unions on underfunded pension plans and a 50-50 sharing of costs to refinance plans that are in the red, is the government’s response to a $3.9-billion pension shortfall.

[…]

He added that the union is prepared to take its legal challenge to the pension bill to the Supreme Court of Canada.

“They’ve started a fire. Now it’s up to them to put it out,” he said.

Britain Secretary of Energy: Investing in Fossil Fuels Big Risk for Pension Funds

Last week the advisory board of one of the largest asset owners in the world, the $857.1 billion Norway Pension Fund Global, concluded that divesting from fossil fuels would be an unwise financial decision that would reduce returns.

But Edward Davey, Britain’s Secretary of State for Energy and Climate Change, said Monday he thinks fossil fuel companies could become the sub-prime assets of the future.

He called on Britain’s pension funds to examine the risk associated with oil, gas and coal investments.

From the Telegraph:

Investing in fossil fuels is becoming increasingly risky because global action to tackle climate change will curb demand, forcing companies to leave unprofitable reserves in the ground, Ed Davey, the energy secretary, has warned.

Financial authorities must examine the risks posed by coal, oil and gas companies to prevent pension funds investing in what could become “the sub-prime assets of the future”, Mr Davey said.

The comments are Mr Davey’s first intervention into the debate over the “carbon bubble”, the theory that the world’s existing fossil fuel reserves are overvalued because the majority must be left unburned in the ground if extremes of global warming are to be avoided.

Mr Davey told the Telegraph: “One has got to worry about the investments for pensioners.

“If pension funds are investing in companies or banks that have on their balance sheets huge amounts of assets in fossil fuels, and those assets don’t give the return that people expect – because of changes in technology where low-carbon becomes cheaper or because of the world having to take action against carbon emissions – one has got to protect those pensioners and those investments.”

OECD Report: Longer Life Expectancy Threatening Pension Sustainability; More Reforms Needed

The Organization for Economic Cooperation and Development released a report Monday morning highlighting the challenges that longer life expectancy poses to pension systems around the world.

From CNBC:

The world’s retirement bill is coming due—and many countries aren’t ready to pay it.

That’s the conclusion of a report Monday from the Organization for Economic Cooperation and Development, a Paris-based group representing the world’s developed countries.

With populations aging and lifespans rising, government-supported pensions are cutting deeper into national budgets, crowding out spending on other programs and services. The added burden comes as the economies of the developed world are growing slowly, putting added pressure on the tax revenues needed to pay rising pension costs.

[…]

“The ongoing rapid demographic shift and the slowdown in the global economy highlight the need for continuing reforms,” OECD Secretary-General Angel Gurría said. “We must communicate better the message that working longer and contributing more is the only way to get a decent income in retirement.”

The report acknowledges numerous pension reforms by countries and states in recent years, but says more needs to be done. The report presented a handful of reform proposals. From the OECD:

Increasing the effective retirement age can help but more efforts are needed to assist older workers find and retain jobs. Public policies to reduce age discrimination, improve working conditions and increase training opportunities for older workers are essential.

Countries have also introduced reforms to strengthen funded private pensions. The report highlights the importance of increasing coverage rates in countries where funded pensions are voluntary. Auto-enrolment programs have been successful in raising coverage in the countries that have implemented them.

The report also calls for strengthening the regulatory framework to help pension funds and annuity providers deal with the uncertainty around improving life expectancy. It argues that regulators should make sure that providers use regularly updated mortality tables, which incorporate future improvements in mortality and life expectancy. Failure to account for such improvements can result in a shortfall of provisions of well over 10% of the pension and annuity liabilities.

Capital markets could offer additional capacity for mitigating longevity risk, but the transparency, standardization and liquidity of instruments to hedge this risk need to be facilitated. The regulatory framework will also need to reflect the reduction of risk exposure these instruments offer by ensuring they are appropriately valued by accounting standards and lowering the level of required capital for entities hedging their longevity risk.

Issuing longevity bonds and publishing a longevity index to serve as a benchmark for the pricing and risk assessment of hedges would support the development of longevity instruments.

Rebuilding trust is also an important challenge that policy makers face, says the OECD. Young people in particular need to trust the long-term stability of the pension system and the pension promise that is made to them. Communication campaigns and individual pension statements to explain the need for reform and facilitate choice by individuals are needed, says the OECD.

The full OECD report can be read here.

Photo by Horia Varlan via Flickr CC License

Video: CalSTRS CIO Talks 2015 Market Expectations, Asset Allocation Changes

CalSTRS chief investment officer Christopher Ailman sat down with Bloomberg TV on Monday morning to talk about the odds of the market returning 8 to 10 percent in 2015, and how CalSTRS might change its asset allocation next year.

Cover photo by Santiago Medem via Flickr CC

Two UK Pensions Enter Investment Partnership – What Will It Look Like?

Last week, two UK pension plans, each with assets of around $7 billion, entered an agreement to pool their assets and invest as one entity.

Officials say the partnership will lead to lower investment costs and stronger governance. But what will the partnership look like?

Chief Investment Officer found out:

Under the proposed new agreement, each fund would remain responsible for its own liabilities but the asset management would be pooled.

[…]

“Both funds have a similar investment philosophy,” says Susan Martin, CEO of the LPFA. “We have a joint aspiration to close our funding gap.”

The basis for this relationship lies in bringing more assets to be managed in-house, both sides say.

“It gives us better governance, lower costs, more efficiency, and better control over execution,” says Martin. “There will be a joint committee that is responsible to both funds, on which a representative from each will sit as they will understand the cash flow required.”

Each fund already has a substantial in-house investment team, but approval from the FCA will mean the partners can carry out a range of investment activities that had previously been accessible to them only through asset managers and other providers.

Clearly, the move would see several fund managers lose their mandate.

“We need to look in detail at each fund,” says Graham. “There might be funds and some managers that can be merged or pooled or we could run some in parallel for a time.”

Graham also has ambitions that push outside the strict boundaries of the pension.

“In creating our own investment manager and partnering with LPFA we are mitigating risk,” he says. “We can begin training people up and start succession planning. We could have a centre of excellence for finance in the North West of England.”

More background on the partnership, from Ai-CIO.com:

“We believe in greater collaboration, so this is really putting our money where our mouth is,” says Lancashire County Council Deputy Treasurer George Graham.

Graham is speaking to CIO on the day the £5 billion local authority pension announced it had agreed—in principle—to tie up with one of its peers based 300 miles away in the UK capital, the $5 billion London Pensions Fund Authority (LPFA).

“We have a broad agreement about the shape of something and now we will sit down with lawyers and the Financial Conduct Authority (FCA) to come up with something that suits both funds and to which we can both formally agree,” says Graham. “We have been in talks about this since the late summer.”

The funds have collective assets of £10 billion and want to bring the majority of them under their own auspices. Along with a joint belief in self-management, the funds are against a push from central government towards public pension funds being managed purely on a passive basis. It would be a “backwards step”, according to Graham, and would work against the efforts each team has been doing to manage its own assets and liabilities.

The pension funds say that they would be receptive if other pension funds were interested in joining the partnership.

Photo by @Doug88888 via Flickr CC License

Fast-Tracking of Illinois Pension Case Could Be Blocked

Last week, Illinois asked the state Supreme Court to expedite the hearing over the state’s pension reform law.

But on Sunday, attorneys representing the state workers and retirees said they could block the attempt to fast track the case. Such a move could drastically change the timeline for the lawsuit’s hearing.

From the Southern Illinoisan:

In a move that could play a significant role in how Gov.-elect Bruce Rauner crafts his first budget this spring, the lawyers say Illinois Attorney General Lisa Madigan’s bid to put the case on a fast track is unwarranted.

“We do not believe there is any need to impose an emergency schedule,” said attorney John Fitzgerald, who is among a team of lawyers representing retirees. “We see no need to depart from the rules.”

On Thursday, Madigan asked the high court to move quickly in hearing the case because of the financial ramifications the pension changes will have on the state budget.

[…]

Madigan suggested the court schedule oral arguments for as early as Jan. 22 or no later than mid-March.

Attorneys for the retirees, who say the expedited schedule is unnecessary, have until Tuesday to file their objections to the motion.

Without the expedited schedule, the deadline for filing the first significant set of records in the case wouldn’t occur until the final week of January.

After that, the typical court schedule calls for both sides in the lawsuit to trade paperwork for nearly three months. Once that is completed, the high court would then schedule oral arguments.

Under that scenario, the court could hear the case as early as May. If they miss the May docket, the next time the judges are scheduled to hear oral arguments is September.

Following the argument phase, the court could take months to issue a ruling. In a similar case regarding health insurance costs, the court took nearly 10 months to overturn the state’s attempt to force retirees to pay a portion of their pensions toward that expense.

Sangamon County Circuit Judge John Belz ruled last month that the law was unconstitutional.

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