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PE Executive To Become First CIO of Japan’s Largest Pension Fund

Japan will appoint a private equity executive, Hiromichi Mizuno, to the newly created Chief Investment Officer post at the Government Pension Investment Fund, the largest public pension fund in the world.

Hiromichi Mizuno is a partner at private equity firm Coller Capital.

More details from the Wall Street Journal:

The appointment would put the 49-year-old from central Japan in control of the world’s biggest fund of its kind as it tries to boost returns with more aggressive investments.

Mr. Mizuno would be a big catch for the fund, which has struggled to attract outside talent because of low salaries and a small budget. Despite its size, the GPIF’s roughly 80 employees are squeezed into one floor of a 1970s office building in downtown Tokyo and most of its investments are managed by outside asset management firms.

Mr. Mizuno was educated in the U.S. and speaks fluent English, which addresses concerns of foreign investment firms that had trouble working with GPIF.

[…]

The GPIF is headed by its president, Takahiro Mitani, who has ultimate decision making power under the current law, but Mr. Mizuno would be de facto in charge of overseeing important investment decisions. Rather than make investments himself, Mr. Mizuno will spend more time choosing professional fund managers to oversee portions of the fund’s investments.

Mr. Mizuno joined the GPIF as an adviser and a member of its investment committee, an eight-member group that advises the fund part-time, in July. At a news conference last month, Mr. Mitani said described Mr. Mizuno’s expertise in private equity as “invaluable.”

The Government Pension Investment Fund manages $1.1 trillion in assets.

Photo by Ville Miettinen via Flickr CC License

Public Utility Company: We Can’t Afford Jacksonville’s Pension Reform Deal

A key part of Jacksonville Mayor Alvin Brown’s pension reform proposal was forcing the city to pay an addition $40 million every year for 10 years into the city’s Police and Fire Pension Fund.

But the question was always: where does the city get that money?

The solution, pushed for months by Brown, was to have JEA, a public utility company, make the payments.

But after further analysis, JEA says it simply can’t foot the bill.

From the Florida Times-Union:

In a closely-watched report completed with help from outside attorneys and financial consultants, JEA says it can’t afford Mayor Alvin Brown’s proposal to use the utility’s financial muscle to help pay off the city’s $1.65 billion Police and Fire Pension Fund debt, according to a draft copy of the document.

The report’s conclusion is a body blow to Brown’s efforts to pass his signature pension-bill, and it echoes skepticism some JEA officials have aired for months about the idea — which would have JEA pay an additional $40 million a year for 10 years on top of the more than $100 million it already contributes annually to the city’s general fund.

“JEA recognizes the challenges for our community resulting from very significant unfunded pension liabilities for the Police and Fire Pension Fund and General Employee Pension Plan, which includes JEA employees,” the report says. “However, at this time, we are unable to increase our contribution to the City of Jacksonville without increasing rates, and even with a rate increase an increase in contribution to the city threatens our bond ratings.”

JEA says that it has other challenges it needs to address, and shifting more money towards the pension system would hurt its credit. From the FTU:

The report details many of the financial challenges facing JEA: industry-wide declines in electric and water sales, impending federal regulations that could come with massive costs and billions of dollars of its own in existing debt.

Several City Council members quickly dismissed Brown’s idea earlier this year, saying it’s clear JEA has too much on its plate.

The nation’s major credit-rating agencies have cautioned JEA that increasing its city contribution — which historically has been higher than the industry average — to address Jacksonville’s pension crisis could hurt its credit.

Officials in surrounding Northeast Florida counties that also use services from the city-owned utility have said they’re wary about the plan if it means higher rates for customers.

JEA already contributes about $100 million to the city’s pension system.

Survey: Institutional Investors Often Driven Towards Short-Term Thinking

Previous surveys have shown that pension funds almost universally consider themselves long-term investors. But their investment decisions, by their own admittance, can often reflect short-term thinking.

A new survey sheds some light on the factors and pressures that cause pension funds to break away from long-term thinking.

Summarized by Chief Investment Officer:

Accounting demands, valuation models, and modern portfolio theory are driving institutional investors towards short-termism, Hermes Investment Management has claimed.

After conducting a survey of more than 100 European investors, the fund manager reported that 44% said external pressures were forcing them away from views in line with their long-term liabilities.

“The short-term factors driving the management of pension schemes require detailed attention,” said Saker Nusseibeh, CEO of Hermes Investment Management. “Schemes need to have the freedom to act and focus on longer term considerations to best serve their end beneficiaries, savers.”

Hermes is owned by the UK’s largest pension, the BT Pension Scheme.

One of the major headaches for investors, the survey found, was quarterly results, with 44% demanding longer-term reporting. Pension accounting measures and triennial valuations were equally admonished by respondents.

This short-term thinking is also taking investors’ eyes away from their roles as good shareholders. Some 37% told the survey they thought focus on short-term investment performance acted to disconnect them from “their responsibilities as owners of actual companies”.

Additional questions were asked about innovation in the asset management industry. Some 42% said they wanted greater innovation around outcome-focussed investing, while 32% wanted better ways to reduce volatility.

More than half—56%—said they wanted innovation around the disclosure of costs.

The survey was conducted with 100 institutional investors from across Europe.

Photo by Santiago Medem via Flickr CC

Chart: Chicago’s Pension Debt, Visualized

Among the country’s largest cities, Chicago’s pension debt is unmatched — in a bad way. Check out the chart above to see just how much pension debt Chicago is shouldering compared to other large cities.

Here’s how Chicago’s unfunded liabilities broke down by system as of 2012, according to the city’s website:

– Municipal Employees’ Annuity & Benefit Fund of Chicago (MEABF): $8.2 billion
– Laborers’ & Retirement Board Employees’ Annuity & Benefit Fund (LABF): $0.9 billion
– Policemen’s Annuity & Benefit Fund (PABF): $7.0 billion
– Firemen’s Annuity & Benefit Fund (FABF): $3.1 billion
– Chicago Teachers Pension Fund (CTPF): $7.1 billion
– Park Employees Annuity and Benefit Fund (PEABF): $0.4 billion

Pension Insurer Deficit Hits Record High of $61 Billion

The Pension Benefit Guaranty Corporation (PBGC) said Monday its deficit had ballooned to $61.7 billion for fiscal year 2014.

The PBGC is a government agency that guarantees pension benefits to members of private defined-benefit pension plans.

Oklahoma Labor Group Pushes For COLA Boost In Wake of Pension Funding Improvement

Since 2010, the aggregate funding ratio of Oklahoma’s state-level pension systems has risen from 58 percent to 74 percent. Meanwhile, unfunded liabilities have declined by over $6 billion.

Now, a labor group is pushing lawmakers to boost public employee cost-of-living adjustments. The state froze COLAs in 2008.

From the Associated Press:

Representatives of Oklahoma’s public retirees who have not had a cost-of-living adjustment, or COLA, since 2008 say the time has come to boost their pension incomes now that the state’s underfunded pension systems are regaining their financial strength.

Managers of some of Oklahoma’s biggest retirement systems say they are financially stronger than they were just four years ago. Unfunded liability has declined by $6.5 billion and the funded ratio of the systems has improved from 58 percent four years ago to 74.4 percent.

The turnaround has emboldened officials at the Oklahoma Public Employees Association to make COLAs for the state’s pensioners a top priority when the 2015 Legislature convenes in February.“We have made sacrifices to make sure our system is stronger,” OPEA Executive Director Sterling Zearley said. “I think it’s time that we start looking at allowing COLAs.”

But some lawmakers expressed hesitancy and called a COLA re-instatement “premature”. From the AP:

State officials responsible for overseeing the financial health of Oklahoma’s pension systems say that while their improved financial condition is good news for the state, they may still not be financially strong enough for COLAs.

“I would caution and suggest that it’s maybe still a little bit premature to be having that conversation,” said Preston Doerflinger, director of the Office of Management and Enterprise Services and Gov. Mary Fallin’s secretary of finance, administration and information technology.

[…]

Rep. Randy McDaniel, R-Edmond, who has authored many pension overhaul bills, said he favors postponing consideration of pension benefit increases until pending litigation that is challenging one of the measures is resolved.

The lawsuit challenges legislation adopted this year that would end the traditional pension system for newly hired state workers in favor of a 401(k)-style retirement plan beginning in November 2015. It alleges the transition could cost Oklahoma taxpayers millions of dollars in lost revenue returns and reduced employee contributions

State Treasurer Ken Miller cautioned that the turnaround was fueled in part on income from the investment of pension funds that has been “exceptional yet unsustainable.”

“If you look at the long term average of the stock market, 20 percent returns are extraordinary but not sustainable,” Miller said.

Kolivakis Weighs In On South Carolina Pension’s Search For Smaller Hedge Fund Managers

Last week, South Carolina treasurer Curtis Loftis said the state’s pension system was looking to work with smaller hedge fund managers.

Loftis told emerging hedge fund managers to “come show up” at pension meetings and to “shake hands…pass out cards.”

Data exists that supports investing with smaller, newer hedge funds.

Leo Kolivakis, who runs the blog Pension Pulse, weighed in on Loftis’ decision:

I’m glad Curt didn’t hand over his seat and think he’s on the right track bringing light to the excessive fees South Carolina’s pension fund is doling out. The guy who said there is no uniform reporting guidelines in fees is partially right but there should be, especially in alternatives like private equity where many state funds are getting bullied into remaining mum on fees and terms.

As far as focusing on emerging managers, there too, I think he’s on the right track. Smaller hedge funds have withered but the irony is they typically outdo their elite rivals. Why? Because their focus is primarily on performance, not asset gathering (2% management fee really kicks in when managing billions, just ask Ray Dalio, Bill Ackman and other oversized hedge fund egos that now figure among the richest Americans).

Are there pitfalls to investing in smaller funds? You bet there are and I warn Curt and others taking this approach not be be penny-wise and pound-foolish. There are a bunch of charlatans in Hedgeland that know how to talk up their game but they’re pure cons. And many smaller hedge funds stink, just like most of their larger rivals. There is also the big issue of scalability, which most smaller players don’t offer or are not set up for.

I’m not a fan of funds of funds but when it comes to identifying and selecting emerging managers, you need to be cautious and find true alpha generators that will offer you a lot more than just performance (knowledge leverage is critical!). Talking to Tom Hill at Blackstone or Jane Buchan at Paamco is a very good idea but make sure you get the terms and fees right when dealing with funds of funds.

South Carolina’s pension system allocated 17 percent of its assets towards hedge funds as of June 30.

In Kansas, Pension System Prepares To Be Target of Spending Cuts

Kansas lawmakers will need to cut almost $300 million in spending to balance the 2014 budget, and even steeper cuts are being predicted for 2015.

History shows that states consistently look to one place for “easy” cuts: annual payments to pension systems.

Kansas pension officials are now being asked by lawmakers how decreased state payments would alter the system’s liabilities.

From the Lawrence Journal-World:

New concerns were raised Monday that those gains could come undone if Kansas lawmakers decide to cut back on the state’s contributions to the pension system to address a looming $715 million revenue shortfall.

Sen. Laura Kelly, D-Topeka, asked KPERS officials Monday to come up with projections about what that would do to the system’s unfunded liability.

“Those of us who have been around here long enough know that when tough times come, we have either reduced or eliminated our KPERS contributions,” Kelly said during a meeting of the Legislature’s Joint Committee on Pensions and Investments.

Last week, state budget officials released new revenue projections showing lawmakers will need to cut $279 million in spending to balance this year’s budget. And for the next fiscal year, which begins July 1, they will need to carry those cuts forward and make another $435.7 million in spending cuts.

Some lawmakers vocally opposed cutting payments to the pension system:

Republican leaders on the panel said there is little chance of cutting back on KPERS contributions to make up for the revenue shortfalls, although they left open the possibility that the funding may have to come from money other than the state general fund.

“We need to keep those commitments,” said Sen. Jeff King, R-Independence, who chairs the panel. “I am always open to suggestions — what we’ve seen from other states; new proposals to more efficiently make those commitments we’ve made — but keeping the commitment to paying down the unfunded liability is vital.”

The Kansas Public Employees Retirement System manages $14.4 billion in assets.

Photo by TaxRebate.org.uk

Alabama Pension Gets $21 Million in Securities Fraud Settlement Deal

The Retirement System of Alabama (RSA) has a $21 million check heading its way after the state reached a settlement deal with Greg Aziz, who was charged with 11 counts of securities fraud stemming from a loan given by RSA to Aziz’s company, National Steel Car Limited.

From the Times-Daily:

The settlement requires Aziz, 66, to pay $21 million in damages to the Retirement Systems of Alabama and to reimburse about $1 million to the Alabama Securities Commission and the Colbert County District Attorney’s Office for investigative costs associated with the case, according to authorities. The charges against Aziz were dropped.

“I wouldn’t have agreed to anything without the agreement of the Retirement System and the Securities Commission,” Colbert County District Attorney Bryce Graham Jr. said. “They were OK with the agreement, and we moved forward with it.”

Aziz was charged in November 2013 with 11 counts of securities fraud. Under the settlement, the charges will be dropped.

Graham said Aziz did not plead guilty to anything. He said the $21 million already has been paid back.

“We’re happy to be able to return the money back to RSA,” Graham said. “It was a good settlement for all parties concerned.”

David Bronner, CEO of the Retirement Systems of Alabama, told the TimesDaily in a telephone interview from his home Friday, “I think it was good for the state to get something out of him. We did about as good as we could possibly do.”

“It’s hard to sneeze at $21 million,” Bronner said. “It’s good to get this behind us and move on. This lets people know you can’t just rip off the Retirement Systems and get away with it.”

More background on the loan that eventually led to charges being filed:

According to the indictment and the settlement agreement, RSA granted Aziz a three-year loan of $350 million to construct a railcar plant in Colbert County.

Aziz was to have paid interest to RSA on the loan at 9 percent.

The nearly mile-long plant in the Barton Riverfront Industrial Park was supposed to employ 2,200 people and was, at the time, thought to be a major industrial development project for the state. At the conclusion of the construction, Aziz was to obtain long-term financing through an alternate source.

The workforce at the plant never reached 200 under National Steelcar Limited.

To induce RSA to make the loan, court documents show, Aziz represented that he could build the plant for $350 million, that he owned a railcar manufacturing company in Canada worth more than $200 million that was debt free, that he had access to an unused line of credit of $100 million and that he owned the unencumbered rights to the patents necessary to build numerous types of railcars in Alabama.

According to court documents, Aziz failed to disclose to RSA that before he spent any of the original loan proceeds he knew the plant would cost well in excess of $350 million or that his company had incurred over $100 million in long-term debt, no longer had the $100 million line of credit, and had granted liens on the railcar patent rights, which would have required him to get permission from a third party to build the railcars in Alabama.

As a result of Aziz’s failure to notify RSA of these events, RSA said it was required to expend an additional $215 million to complete the railcar plant and in 2010 took over ownership of 100 percent of the stock in the plant from Aziz.

Alabama’s state-level retirement systems have combined assets of $28 billion.

University of California Considers Raising Tuition As Pension Liabilities Mount

The University of California is considering a plan that would raise tuition by 5 percent each of the next five years.

If the plan is approved, the extra revenue will go, in part, towards paying down billions in unfunded liabilities associated with the University’s pension plan.

From the Sacramento Bee:

When the University of California Board of Regents on Wednesday debates a plan to raise tuition by up to 5 percent annually over each of the next five years, they will focus on how the revenue could benefit the university’s academic mission: expanded course offerings, more support services, 5,000 more slots for California students.

But UC officials say the system also needs the money to help rescue its pension fund – neglected for two decades and facing $7.2 billion in unfunded liabilities – and to cover the growing cost of retiree health benefits.

“They’re going to have to ramp up contributions considerably over the next few years in order to maintain the financial health of the system,” said Adam Tatum, a retirement systems specialist at California Common Sense, a nonpartisan policy research organization. “What is certain is that the UC needs more money to pay off these unfunded liabilities – if not now, then in the future. That’s inevitable.”

This year, UC will pay about $1.3 billion to the pension fund, about 5 percent of its overall operating budget.

The University has asked the state to cover a portion of the school’s payments into the system. But California hasn’t taken the school up on their offer. From the Bee:

UC officials want the state’s general fund to pick up nearly a third of the payment, which would cover the university’s portion of pension contributions for faculty and other employees who are paid from state funds.

“Frankly, if the state were to pay that, we would not be proposing a tuition increase,” said Nathan Brostrom, UC’s chief financial officer. “That is money that could go to other resources.”

UC notes that the state covers the costs of employer pension contributions to CalPERS for other state agencies, including California State University. “This is money we’re paying out of our own resources that the state is providing to every other state agency,” Brostrom said. “It’s just a matter of equity. Why do they not take any action to help us with it?”

Gov. Jerry Brown’s administration maintains that UC, with a good deal of governing autonomy and its own retirement system, should cover the costs. H.D. Palmer, spokesman for the Department of Finance, said the state’s taxpayers aren’t obligated to help UC cover its liabilities. He said the state has increased UC’s general fund allocation so the university could determine its own fiscal priorities.

“They have an independent system,” Palmer said. “We don’t have any input on the structure of the system. We don’t have any input on the level of benefits.”

The UC Retirement Plan is 76 percent funded.

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