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South Dakota Pension Officials Brainstorm Ways to Guard Funding Status Against Another Market Downturn

If another market downturn comes, officials at the South Dakota Retirement System want to be ready. That’s why they spent their last meeting talking about what they could do to mitigate damage if another downturn comes and plagues fund investments.

Among the options discussed: lower the fund’s assumed rate of return and raising the retirement age of new hires.

Arizona Pension Lowers Employee Contribution Rate For First Time in 5 Years; Strong Investment Returns Cited

Starting in July, members of the Arizona State Retirement System will pay a smaller percentage of their paychecks toward the pension system. It’s the first contribution rate decrease in five years, but it comes with a catch: retirees will not receive a cost-of-living raise in 2015.

More details on the contribution rate decrease from the Arizona Republic:

The decrease in the contribution rate, which was approved by the ASRS board of trustees, is the first in five years.

Chairman Kevin McCarthy said the reduction is small — a fraction of 1 percent — but a step in the right direction. He said it will save money for public employees and employers “who have seen nothing but increases.”

The reduction is possible because of large investment returns this past fiscal year. In addition, roughly 500 more public employees joined ASRS and began paying into the trust. Since 2009, the system annually lost thousands of active members — and their payments — because of government layoffs.

And details on the COLA:

Barbara Masztakowski, who retired in 2003 from Chandler, said it’s not fair that retirees are not getting an increase when ASRS investment staffers are.

“Truly, they should treat themselves the way they treat us,” Masztakowski said in a phone interview.

She said the formula that ASRS uses to trigger benefit increases for retirees is nearly impossible to achieve.

For a permanent benefit increase to kick in, the trust must produce a rate of return in excess of 8 percent — the assumed rate of investment growth — for 10 years and generate a pool of excess earnings.

That formula uses a “geometric and actuarially smoothed average” that takes into account compounding. The current 10-year average is about 7.6 percent, below the trigger.

Although ASRS retirees have not received a cost-of-living adjustment for nearly a decade, retirees in the more financially fragile state Public Safety Personnel Retirement System saw their COLA benefits restored earlier this year after winning a lawsuit. The ASRS retirees were not part of that case.

Paul Matson, ASRS executive director, said he understands retirees may not be happy but said he expects a benefit increase within the next few years.

The lack of a COLA is controversial among retirees because 10 of the System’s investment staffers are receiving bonuses in 2015 totaling $225,000. Fund investments returned 18.6 percent overall last fiscal year.

Photo credit: “Entering Arizona on I-10 Westbound” by Wing-Chi Poon – Own work. Licensed under Creative Commons Attribution-Share Alike 2.5 via Wikimedia Commons

Pennsylvania Lawmakers: Municipal Pension Reform Needed

Two Pennsylvania state Representatives – Rep. Seth Grove (R) and Rep. Keith Greiner (R) – have penned a column on Lancaster Online arguing for the reform of municipal pension systems.

Specifically, they argue for reforms that would remove pension negotiations from the collective bargaining process and would transfer new hires into a cash balance plan.

Grove and Greiner explain:

Gambling with pension funds needs to end by both local governments and employee unions. Pension negotiations need to be permanently removed from the collective bargaining process to ensure that our police and firefighters are not at risk of having their pensions destroyed, and taxpayers aren’t put on the hook because of short-term and short-sighted decisions.

These two fixes are both long-term solutions, but what can we do in the short term? The answer is change the pension benefit structure for new hires to a cash balance pension plan. A short-term solution will require new revenue to reduce the unfunded liability. A cash balance plan allows municipalities to use excess stock market earnings to pay off the unfunded liability.

Instead of raising taxes or creating new taxes, this allows the pension plan to fund itself. The cash balance concept also has long-term taxpayer protections built in. New hires will have their own accounts, just like a 401(k), which allows them to transfer their retirement between jobs and ensures taxpayers are not on the hook for future underfunding of pensions.

It also provides employees with the ability to take their retirement by monthly payments, which is just like a traditional defined benefit plan. And since a cash balance pension concept is considered a defined benefit pension plan by IRS guidelines, you can still combine pension funds together and ensure you do not underfund the old pension systems. Lastly and most importantly, it will not affect our current public safety personnel’s pensions, but will ensure that new hires will still receive a good pension, which they deserve.

We do not want to honor the dedication and service of public safety personnel by putting them in the poor house after retirement. However, we also do not want to shift costs from pensions to welfare.

Ultimately, these changes are actually about hiring more police and fire personnel and protecting the pensions of current police and fire personnel.

Furthermore, the changes are about ensuring that all municipalities across Pennsylvania are financially stable and that commuter taxes go away. There are tremendous upside benefits to all stakeholders.

Read the entire piece here.

Jacksonville Will Vote On Pension Reform Measure This Week

After months of debate, the Jacksonville City Council could approve this week a measure to reduce the city’s pension debt.

Observers say the measure, which would increase city pension contributions, change retiree COLAS and give the Council the right to change benefits, has the votes needed to pass through the Council.

From the Florida Times-Union:

The full council will meet Tuesday and could take a vote on the legislation.

Thirteen council members — more than a necessary majority for passage — voted last week in favor of the bill during two committee meetings after making several changes they said make the agreement a financially better deal for taxpayers.

After years of failed attempts to reform the police and fire pension and reduce the city’s $1.65 billion debt obligation to it, council members appear close to passing a bill that Brown’s administration says will save the city $1.2 billion over a 30-year period.

“I suspect there will be limited discussion on it, and I suspect the vote will be significantly in favor, maybe even an unanimous vote,” said Councilman John Crescimbeni.

If the Council passes the bill, it will still need to be approved by the Police and Fire Pension Fund Board. There’s no guarantee they will accept the deal. From the Florida Times-Union:

The pension fund board is composed of five members. The police and firefighters union each appoint one member, the City Council appoints two members and the fifth member is chosen by the four other members.

Whether the board members pass the bill remains a major question, because it includes some significant differences from Brown’s original legislation that they supported.

Council amendments include changes to guaranteed annual cost-of-living adjustments that current police and firefighters will receive to their pensions and interest rates earned in their Deferred Retirement Option Program accounts. The council would also retain the power to impose pension benefit changes in three years if future collective bargaining talks reach an impasse.

When Brown negotiated his deal with the pension fund earlier this year, pension board members nixed the concepts now included in the council’s changes.

Officials from the mayor office told the council last month that any changes made to the deal could effectively kill it.

The reform measure would increase city contributions to the pension system by $40 million per year for the next 10 years. It would also change the way COLAs are calculated and would give the Council the right to change worker benefits for the next three years.

Photo by pshab via Flickr CC License

Illinois Senate Passes Bill That Allows Felons To Be Stripped of Pensions

A bill that would allow the Illinois Attorney General to strip pension benefits from felons passed through the state Senate unanimously last week.

From the Chicago Sun-Times:

The House bill, co-sponsored in the Senate by Sen. Kwame Raoul, D-Chicago, Jacqueline Collins, D-Chicago, and Daniel Biss, D-Evanston, passed the Senate 51-0 without debate.

“What we did in this bill is to clarify the language to make sure that it authorizes the attorney general to petition the court to enjoin the payment of pension funds where somebody’s convicted of a felony in connection to their duty,” Raoul said.

[…]

The bill was debated in committee with some Republicans worried the attorney general could abuse the authority. But Raoul said the attorney general could file a petition to the court, then to the appellate court and ultimately to the Illinois Supreme Court.

“It’s unlikely that you would have an attorney general who could have a conspiracy with the Appellate Court and the Supreme Court,” Raoul said.

A Madigan spokeswoman said the bill will give the attorney general an important new role in pension board cases.

“A public employee convicted of a felony related to their service should not be allowed to receive a taxpayer-funded pension,” state attorney general’s office spokeswoman Maura Possley said. “This bill provides the attorney general with an important watchdog role to ensure taxpayers are not left to foot the bill for a convicted felon.”

The bill came about after former Chicago policeman Jon Burge was allowed to keep his pension even after being convicted of a serious felony. From the Sun-Times:

In July, the Illinois Supreme Court ruled a Cook County court was correct in not allowing Madigan to intervene in a police pension matter. The decision allowed disgraced former Chicago Police Cmdr. Jon Burge, who was convicted in 2010 for lying about the torture of police suspects, to keep his public pension of about $54,000 a year.

The police pension board deadlocked 4-4 on a motion to strip Burge of his pension. Some argued his conviction was not related to his police work, since he was convicted on perjury and obstruction of justice from a civil suit filed after he left the force.

The bill now goes to Gov. Quinn’s desk.

Photo credit: “Gfp-illinois-springfield-capitol-and-sky” by Yinan Chen – www.goodfreephotos.com (gallery, image). Via Wikimedia Commons

Questions Raised About “Dual Structure” of Governance At San Diego Pension Fund

Most of the news surrounding the San Diego County Employees Retirement Association (SDCERA) has been about the board’s decision to move on from its outsourced CIO, Salient Partners.

But also noteworthy are parts of SDCERA’s governance structure. At least one expert has raised concerns about the effectiveness of the fund’s “dual” reporting structure.

Dan McSwain of the San Diego Union-Tribune writes:

Structural woes were the main take-away from a parade of experts at a two-day workshop held last month by the system’s nine-member board of trustees.

[…]

One expert at the workshop, hired by the board to evaluate its governance, said the chief executive wasn’t clearly accountable for the fund’s investments. Indeed, the Houston-based chief investment officer appeared to report directly to the board.

This “dual structure” is found almost nowhere else. Instead, the CIO reports to the CEO, in a straight line of authority, at nearly every public or corporate pension fund in the world, not to mention insurance companies and private endowments.

Another expert said conflicts of interest were “inherent” in the county’s outsourced investment management structure. Yet another questioned the oversight of the retirement system’s outside lawyers, one of whom also reports directly to the board.

Still, the most obvious problem was the one nobody talked about, at least explicitly: Responsibility for this chronic buck-spreading lands squarely on White, the chief executive officer since 1996. If the county’s pension system has structural flaws, it’s hard to imagine how that’s not also a CEO problem.

Fund CEO Brian White defended the structure:

The outsourced CIO, Lee Partridge of Salient Partners, does in fact report to the CEO, White said, so the system already had the “linear” structure recommended by several governance experts.

“We’ve had a linear structure here, and I think what the board did Friday was confirm or reaffirm the linear structure,” he said, referring to the board’s vote on Nov. 21 to hire an internal CIO and have the position report directly to the chief executive.

White also said that, acting as investment strategist, Partridge was indeed supervising his own firm’s direct management of leveraged investments. But this wasn’t the “inherent” conflict of interest one expert asserted, because no money changed hands as additional fees, White said. Besides, the board of trustees endorsed the idea.

“I’m here to serve the board and support their decision,” he said. “That’s what they wanted.”

SDCERA manages $10.5 billion in assets.

Photo by Roland O’Daniel via Flickr CC License

Texas Employees Retirement System Hires Executive Director

Porter Wilson has been tapped as the new executive director of the Texas Employees Retirement System. His hire was approved on Thursday.

Reported by Pensions & Investments:

Trustees of the Austin-based pension fund approved Mr. Wilson’s hire at a board meeting on Thursday to eventually replace Ann S. Bishop, the current executive director, as a “step in succession planning,” said ERS spokeswoman Mary Jane Wardlow, in an e-mail.

Ms. Bishop announced her intention to retire to the board “some time ago,” Ms. Wardlow said, but the date of her departure has not been set.

Mr. Wilson’s arrival date has not been set yet either, although the plan is that Mr. Wilson will join ERS soon in order to work side by side with Ms. Bishop during the forthcoming Texas legislative session, which begins in January, Ms. Wardlow said.

Mr. Wilson now is associate vice chancellor for governmental relations for the Texas Tech University System, Lubbock.

The Texas Employees Retirement System manages $26 billion in assets.

Japan Pension Considers Change In Stock Classifications

Japan’s Government Pension Investment Fund (GPIF) last month decided to double the amount of assets allocated to domestic and foreign stocks.

Now, the President of the GPIF is considering further changes that would remove the distinction between domestic and foreign stock holdings.

From Bloomberg:

Japan’s Government Pension Investment Fund is considering whether to overhaul its $389 billion of stock investments by loosening rules that restrict managers to domestic or international equities.

A month after the $1.1 trillion pool unveiled plans to more than double local and foreign share targets so that each makes up 25 percent of assets, Takahiro Mitani, its president, said separating the world into Japan and everywhere else may not be the best approach. GPIF should consider letting some of its managers invest both at home and abroad, he said.

“More funds are investing without discriminating between domestic and foreign, and I think that’s worth considering,” Mitani, 65, said in an interview in Tokyo on Dec. 3. “If choosing between Toyota and Volkswagen, instead of being limited to just Toyota and Nissan, raises investment performance and efficiency, it’s an option we mustn’t rule out.”

The California Public Employees’ Retirement System, the biggest U.S. public pension, makes no distinction between local and foreign holdings. Calpers, which oversees about $295 billion, has a 51 percent target for public equities, according to its website. GPIF’s stock investments were parceled out to managers in 45 different pieces as of March 31, according to the fund’s annual report.

[…]

GPIF would have to revise its systems to allow one manager to invest across Japanese and non-domestic shares, Mitani said. Alternatively, it could create a new global stock class on top of the existing ones, he said. The fund is due to review foreign equity managers in about 18 months, according to Mitani, who said he plans to retire when his five-year term finishes at the end of March.

Regardless of how it deploys managers, the Japanese fund is looking to put more money in foreign assets at a time when its home currency is slumping. The yen weakened past 120 per dollar for the first time in seven years yesterday.

Here’s what the fund’s asset allocation targets look like after last month’s overhaul:

GPIF’s new portfolio is split into four asset classes: the 25 percent targets for Japanese and foreign stocks, up from 12 percent each; the 35 percent allocation to domestic bonds and 15 percent for foreign debt, an increase from 11 percent. The fund had 18 percent of its holdings invested in Japanese stocks at the end of September.

Government Pension Investment Fund is the largest pension fund in the world. It manages $1.1 trillion in assets.
Photo by Ville Miettinen via Flickr CC License

San Diego Pension Begins Transition To In-House CIO

The Board of the San Diego County Employees Retirement Association (SDCERA) moved closer on Thursday to firing Salient Partners, the firm that acts as the pension fund’s chief investment officer.

Board members indicated that the firing was all but official, but that the transition to a new CIO still needs to be worked out.

From Bloomberg:

If the San Diego County Employees Retirement Association goes ahead with the proposal, it would mean the end of the fund’s five-year relationship with Houston-based Salient Partners LP, said board member Dianne Jacob, a San Diego County supervisor.

Just two months ago, the board voted 5-4 against firing Salient after some officials criticized the chief investment officer, Lee Partridge, as needlessly risking retiree income through use of futures contracts tied to securities and commodities.

“It sounds like we are going to terminate the contract,” Jacob said yesterday in a board meeting in San Diego. “It’s just a matter of timing and the transition.”

The company remains committed to its work in San Diego, said Chris Moon Ashraf, a spokeswoman for Salient at Jennifer Connelly Public Relations.

“Should the board determine that a change in provider is in the best interest of its members, Salient will work to ensure a smooth and expeditious transition,” she said in a statement.

The pension board directed its staff to set the timing for terminating the contract with Salient. The board didn’t schedule a vote on ending the contract, or take action on hiring an internal investment chief.

SDCERA pays Salient Partners around $8 million a year. Board members have previously indicated that the salary for a new CIO would likely be around $260,000.

Yves Smith on AOI’s Hedge Fund Principles

This week, the Alignment of Interests Association (AOI) released a set of proposed changes in the way hedge funds do business with their investors, such as pension funds.

AOI, a group to which many pension funds belong, said that hedge funds should only charge performance fees when returns beat benchmarks, and that fee structures should better link fees to long-term performance.

The proposals can be read here.

Yves Smith wrote a post at Naked Capitalism on Thursday weighing in on some of the proposals. The post can be read below.

_______________________

By Yves Smith, originally published at Naked Capitalism

Admittedly, some of [AOI’s] ideas sound promising, such as requiring funds to disclose if they have in-house pools not open to outside investors, or if they are subject to non-routine regulatory inquiries. But their key proposals are around fees. As readers probably know from private equity, the devil for this sort of thing lies in the details.

One of this group’s Big Ideas is requiring funds to meet benchmarks before profit shares are paid out, meaning the famed prototypical 20% upside fees. And they do sensibly want those fees to be based on annual rather than monthly or quarterly performance (with more frequent fees, an investor could have a lot of performance fees paid out in the good periods more than offset by underperformance or losses in the bad ones, and not see a settling up until he exited the fund or it was wound up. Longer performance periods reduce the odds of overpayment for blips of impressive results). But private equity funds have long had clawbacks. Yet as we’ve discussed at length, those clawbacks are virtually never paid out in practice. One big reason is the way the clawbacks intersect with tax provisions that serve to vitiate the clawback. It would be perfectly reasonable for hedge funds to ask for provisions similar to those used by private equity funds, with those clever tax attorneys modifying them to the degree possible to make them work just as well, from the perspective of the hedgies, as they do for private equity funds.

Hedge fund investors also want management fees to scale more with the size of fund. Again, that exists now to some degree in private equity funds, with megafunds charging much lower management fees. But it isn’t clear how much the hedge funds investors will gain. Bloomberg reports that the average management fee in the second quarter of this year was 1.5% of assets. That’s lower than typical private equity fees, which according to Eileen Appelbaum’s and Rosemary Batt’s Private Equity at Work still averaged 2%, and for funds over $1 billion, 1.71%. And of course, the fact that hedge fund agreements are treated as confidential, just as private equity agreements are, impedes fee comparisons and tougher bargaining. If this group really wanted to drive a tougher bargain, they’d insist on having the contracts be transparent. That proposal is notably absent.

In keeping, the AOI also calls for better governance. We’ve seen how well that works from private equity land. “Governance” in private equity consists of an advisory board which is chosen by the general partner from among its limited partners. You can bet that the general partners choose the most loyal and clueless investors. The only way one might take oversight arrangements seriously is if these funds had far more independent boards, as is the case with mutual funds.

So while I would be delighted to be proven wrong, history says that there isn’t much reason to expect this effort to get tougher with hedge funds to live up to its billing. And with new investment dollars continuing to pour in despite mediocre performance (assets under management rose 13% in the last year, with roughly half the increase coming from new contributions/a>. As long as investors are putting more money into hedge funds despite dubious performance, there isn’t sufficient negotiating leverage to push for more than token reforms.

Photo by c_ambler via Flickr CC License

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