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Survey: 81 Percent of Pension Funds Looking to Bring More Investment Management In-House

CalSTRS recently announced its plans to eventually manage 60 percent of its assets internally. According to a recent survey, a majority of pension funds are beginning to think the same way.

A survey by State Street released this week found that 81 percent of pension funds are planning to bring more investment management duties in-house in the near future.

From BenefitsPro:

81 percent of funds are exploring bringing more management responsibilities in-house over the next three years.

Cost concerns are driving the trend, as 29 percent of funds said it is becoming more difficult to justify the fees paid to outside managers.

“Pension funds’ desire to deliver strong investment returns to their participants coupled with improved oversight and governance is leading to a need for more in-house accountability for asset and risk management,” said Martin Sullivan, head of asset owner sector solutions for North America.

The State Street data doesn’t suggest that outside management will become obsolete, but rather that pension funds are becoming more judicious about how they select and manage outside relationships.

The largest funds have the capacity to handle multi-asset management in-house, but they are in the minority, Sullivan noted.

“The majority of pension funds will need to make a choice about where to be a specialist and when a sub-contractor is needed,” he said.

The survey examined responses from 134 defined benefit and defined contribution funds around the globe.

The survey also found funds are willing to take on more risk:

While pensions funds re-examine their relationships with outside managers, 77 percent are also reporting a need to increase their risk appetite to boost lackluster returns.

That means a greater push into alternatives, as equities and fixed-income “may look pricey.”

“Pension funds are finding that a small allocation to alternatives is not sufficient to generate the required growth. This is forcing many of them to place bigger bets on alternatives,” according to the report.

The full report, called “Pension Funds DIY: A Hands-On Future for Asset Owners,” can be found here.

Pension Funds Push G20 Leaders to Regulate and Reform With Long-Term Investing in Mind

Pension funds and other investors participating in the Fiduciary Investors Symposium at Harvard University have written a letter to Australian Prime Minister Tony Abbott encouraging him and other G20 leaders to implement regulations and reforms that encourage long-term investing.

[The letter can be read at the bottom of this post.]

Australia is hosting the 2014 G20 summit.

From the letter:

There was a request to alert you to this support from the industry and to request action from G20 leaders on the following:

1. That we acknowledge the OECD’s definition of long-term capital in terms of being patient, engaged and productive.

2. That investor voices can play an important role in the discussion of those factors that are fundamental to the development of a sustainable financial system that delivers benefits to the economy, our societies and the planet, now and into the future.

3. That asset owners, including pension funds, sovereign funds and endowments have an interest to ensure that, in order to provide strong financial returns, and effective stewardship of assets as well as value creation, all the stakeholders in funds management need to be well informed about and active in pursuing a long term investment horizon. This requires a commitment to stronger direct engagement with companies and changes in reporting cycles and greater transparency.

4. That regulation can be enabling of long-term investment and we want to ensure that regulation does not inhibit long-term investment. We therefore encourage a deeper level of engagement between asset owners and investment managers with policy makers that relate to the evolving global financial, economic and social processes as they become more integrated and more complex and help design a regulatory framework that helps and does not hinder long-term investment.

Read the entire letter here, or below.

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Photo by G20.org

New Chicago Treasurer Makes Pension Funding His Priority

Chicago Treasurer Stephanie Neely is stepping down at the end of November.

Her replacement, Kurt Summers, said his priority will be fixing the city’s pension systems. From the Chicago Sun-Times:

The full City Council is expected to ratify the appointment of Kurt Summers at Wednesday’s meeting, but the incoming treasurer is not waiting for the vote before rolling up his sleeves and getting to work.

He’s already meeting with actuaries and pouring over the books of the four city employee pension funds.

They include the Municipal Employees and Laborers funds that have already been reformed and police and fire pension funds still waiting for similar action.

In 2016, the city is required by law to make a $550 million contribution to shore up police and fire pension funds with assets to cover just 29.6 and 24 percent of their respective liabilities.

Much of that money will have to come from Chicago taxpayers.

That’s because, unlike Municipal Employees and Laborers, police officers and firefighters do not get compounded cost of living increases.

The process of making the city’s pension funds healthy, he said, includes decreasing investment fees and increasing investment returns. In other words, “investing more efficiently and less expensively.” From the Sun-Times:

As a member of the board overseeing all four city employee pension funds, Summers said he can “make a dent” in the taxpayer burden by reducing investment fees and bolstering returns.

Summers noted that the firefighters and laborers pension funds are paying dramatically higher fees to their investment managers than the Municipal Employees and police pension funds.

“One fund is paying 80 percent more in fees. Another is paying 50 percent more. Yet, there’s one client: The city of Chicago. That’s real money. For fire, the value of that is about $2.5 million-a-year on $1 billion in assets,” he said.

“These kinds of things aren’t going to solve the kinds of holes we have. But any benefit we can find to invest more efficiently and less expensively is a benefit to taxpayers and retirees.”

Summers noted that the bill that saved the Municipal and Laborers Pension funds — by increasing employee contributions by 29 percent and reducing employee benefits — assumes an “actuarial rate of return” on investments of 7.5 percent-a-year.

That makes it imperative that the funds invest in the “right type of assets,” he said.

“If there’s market shock during that time that looks anything like what happened in 2008 — or even what we saw in July — then you end that period of fixed, graduated contributions with less funding than was modeled out in the legislation and there’ll have to be greater catch-up to get to 90 percent funding,” Summers said.

“We’ll have to have portfolio and asset allocation changes to protect our rate of return because ultimately, the taxpayers and retirees are relying on us to hit that number and, if we don’t, they have a bigger bill on the other side of the graduated payments structure.”

That doesn’t necessarily mean being conservative, he said.

“It’s a common misconception to say, `If I invest in the markets or fixed-income [instruments], we’re gonna be protected, but real estate, private equity or hedge funds are risky.’ That’s plain wrong,” Summers said.

“The reality is, you have just as much, if not more exposure to risk and volatility in the market with investments in basic public securities than you do with alternative products meant to mitigate risk and limit volatility. That’s the business I was in — trying to do that for clients around the world.”

As Treasurer, Summers would be a trustee of the city’s pension funds.

NYC Comptroller Explains Boardroom Accountability Project in Open Letter

New York City Comptroller Scott Stringer is pushing corporations to give their biggest investors – often pension funds – more power over corporate boardrooms.

Stringer says pension funds can use their leverage as large shareholders to rein in excessive executive compensation and make corporate boards more diverse.

From a piece written by Stringer in Wednesday’s Daily News:

In partnership with the city’s pension funds, recently launched the Boardroom Accountability Project, a national initiative designed to improve the long-term performance of American companies by giving shareowners the right to nominate directors using the corporate ballot — also known as proxy access.

Proxy access promises to transform corporate elections from rubber-stamp affairs, where one slate of candidates is listed on an official ballot determined entirely by current officeholders, to true tests of merit and independence.

Bringing accountability to the boardroom will have real benefits for the retirement security of millions of Americans, including the 700,000 municipal workers , retirees and their beneficiaries who rely on city pension funds.

A recent report by the CFA Institute, the world’s largest association of investment professionals, concluded that on a marketwide basis, bringing more democracy to the boardroom could increase U.S. market capitalization by up to $140 billion.

We have focused our initial list of 75 companies being targeted around three core issues: those with excessive CEO pay, those with little or no gender or racial diversity on their board, and many of our most carbon-intensive energy companies. They include Urban Outfitters, ExxonMobil, Abercrombie & Fitch and Netflix.

Excessive CEO pay is a problem in itself and can create perverse incentives for management to focus on short-term profits at the expense of long-term value creation. It is also often a sign of a captive board that puts the interests of management ahead of the interests of shareholders.

And while most agree that more diverse boards make better decisions, the pace of change is glacial. In 2006, women made up 11% of S&P 1500 board seats. By last year, that number had barely budged (to 15%), and also as of last year, 56% of S&P 100 companies had no women or minority-group members in their highest-paid senior executive positions.

That’s bad for business, investors and our economy, and we will use our leverage to change it.

Lastly, we know that transitioning the world’s energy production to low-carbon sources is essential if we are to stem the most extreme effects of climate change. But the CEOs of the world’s major energy companies have little incentive to make investments that may reduce earnings today to protect their companies’ long-term prosperity.

In corporate America, the buck stops with the board. As a result, the right of shareowners to nominate and elect truly independent directors that reflect a diversity of viewpoints is critical to ensuring that the interests of long-term shareowners triumph over the pressure for short-term gains that all too often drives decisions at our largest corporations.

Read the whole piece here.

Detroit’s Pension Problems Not Over Yet – As Costs Remain High, City’s Payments Remain Small

Judge Steven Rhodes approved Detroit’s bankruptcy plan last week. But he used the moment to re-iterate that Detroit isn’t out of the water yet.

One thing in particular worries Judge Rhodes, who said his “greatest concern…arises from the risks that the city retains relating to pension funding.”

Retirees have accepted benefit cuts, but pension problems still linger. Among them: Detroit’s unwillingness to make full payments to its pension systems. From the New York Times:

Documents filed with his court show that Detroit plans to continue its past practice of making undersize pension contributions in the near term while promising to ramp them up in the future. This approach is by no means unusual; many other cities and states do it, on the advice of their actuaries. Detroit’s pension fund for general city workers, now said to be 74 percent funded, is scheduled to go into a controlled decline to just 65 percent by 2043; the police and firefighters’ fund will slide to 78 percent from 87 percent. After that, the city’s contributions are scheduled to come roaring back, bringing the plan up to 100 percent funding by 2053.

This will work, of course, as long as the city has recovered sufficiently by then. The state’s contribution to the grand bargain lasts until 2023, with the foundations and the art museum continuing to kick in until 2033. Eventually the payouts will begin to shrink some as current retirees fall off the rolls. Active workers have already shifted to a hybrid pension plan, and they will start to bear most of the new plan’s investment risk. But the city faces decades of payments for retirees under the old plan.

“The city has the potential to be saddled with an underfunded pension plan,” warned Martha E.M. Kopacz, the independent fiscal expert Judge Rhodes hired to help him determine whether Detroit’s exit strategy was feasible.

Ms. Kopacz, a senior managing director with Phoenix Management Services, did find it feasible, but expressed many reservations, especially about pensions.

“The city must be continually mindful that a root cause of the financial troubles it now experiences is the failure to properly address future pension obligations,” she said in her report. Judge Rhodes said on Friday that he agreed.

Despite benefit cuts, the city’s pension costs are still high. Since the city isn’t paying full contributions, even more pressure will be put on investment returns to cover costs. From the Times:

Even after the benefit cuts, the city’s 32,000 current and future retirees are entitled to pensions worth more than $500 million a year — more than twice the city’s annual municipal income-tax receipts in recent years. Contributions to the system will not be nearly enough to cover these payouts, so success depends on strong, consistent investment returns, averaging at least 6.75 percent a year for the next 10 years. Any shortfall will have to ultimately be covered by the taxpayers.

Judge Rhodes’ full opinion can be read here.

New Orleans Pension Reform Task Force Begins Work

Last month, New Orleans created a pension reform task force to recommend “fundamental” changes to the city’s Fire Fighters Relief & Pension Fund. On Tuesday, the task force met for the first time. The meeting was covered in the video report above.

The task force consists of:

– New Orleans Chief Administrative Officer Andy Kopplin

– Councilwoman Stacy Head

– Timothy McConnell, superintendent of the New Orleans Fire Department

– Paul Mitchell, Jr., deputy director of the pension board

– Thomas F. Meager, III, secretary and treasurer of the firefighters’ pension board

– Nick Felton, president of New Orleans Fire Fighters Association, Local 632

– Hardy Fowler, an accountant and the former managing partner of KPMG in New Orleans

– Scott Jacobs, an insurance and risk management professional

– Greg Rattler, Sr., a vice president at JPMorgan Chase & Co.

Atlanta Wins Case Over Employee Pension Contributions

A key portion of Atlanta’s 2011 pension reforms have been upheld in court, the city said Tuesday.

In 2011, the city increased employee contributions to the pension system by 5 percent – a move which workers said violated their contracts. But a judge has sided with Atlanta on the matter.

From Governing:

A Fulton County Superior Court judge has upheld Mayor Kasim Reed’s historic 2011 pension reform, siding with the city in a class-action lawsuit brought by employee unions, the mayor’s office announced Tuesday.

A handful of union workers representing Atlanta fire, police and city employees sued the city last November, claiming the pension reform that forced employees to pay 5 percent more toward their retirement benefits was in violation of their contract and, therefore, unconstitutional. Such an increase, the employees argue, must also increase their pension benefits.

But Reed and city officials argued — and Judge John Goger agreed in his ruling — that the change is allowed under Georgia law. The mayor, who championed the reform in his first term, has long said overhauling the employee retirement benefits program was critical to the city’s financial stability, and will help Atlanta pay off a $1.5 billion unfunded pension liability.

Without increasing contributions, the city can’t afford to pay the full benefits eventually owed to workers, city leaders argue.

Reed and City Attorney Cathy Hampton are expected to hold a press conference on the issue Wednesday.

Atlanta City Hall, as well as Fulton Superior Court, was closed on Tuesday in observance of Veterans Day.

An attorney for the public safety unions said he hasn’t had time to review Goger’s decision. Lee Brigham said it is premature to comment on the case and whether his clients are likely to appeal.

Read more about Atlanta’s pension changes here.

Photo Credit: “Atlanta skyline” by AreJay at en.wikipedia – Licensed under Creative Commons Attribution 2.0 via Wikimedia Commons

Chart: Retirement Benefits Are Most Important Job Feature For Majority of Public Sector Workers

Public sector workers were asked what characteristics or features of their jobs are most important to them. Job security, salary and health insurance were all extremely important; but for teachers and public safety workers, retirement benefits trumped everything.

Even among the public workforce at large, retirement benefits were rated as “extremely important” by over 60 percent of respondents.

Chart credit: 2014 Retirement Confidence Survey

Report: Pension Funds Agreed To Risky, “Unusual” Contract Clause When They Invested in Vista Private Equity Fund

Vista Equity Partners has written an “unusual” clause into their contracts with limited partners, which include some major pension funds.

When pension funds invest with private equity firms, they sign “limited partnership” agreements. But a Reuters report says a certain clause included in Vista contracts is “atypical” for the industry, and potentially shifts more risk onto limited partners.

Details on the clause, from Reuters:

Vista Equity Partners has worked in an unusual clause in its contracts with private equity fund investors that gives it more financing flexibility and a leg up in leveraged buyouts, but also carries more risks for it and its investors, according to people familiar with the matter.

The agreement allows Vista to temporarily finance large corporate buyouts just with the cash from its $5.8 billion fund, as against using both debt and equity to buy companies. Under the right circumstances, this flexibility allows Vista to be nimble in auctions and secure the best possible debt financing after it has clinched a deal.

Two months ago, Vista used the clause in one of the largest private equity deals of the year, committing to fund the $4.2 billion takeover of TIBCO Software Inc with equity. One day later, it secured debt commitments from JPMorgan Chase & Co and Jefferies LLC for the deal, reducing its equity exposure to $1.6 billion.

The maneuver helped it not only outbid rival Thoma Bravo LLC in the TIBCO auction, but also use JPMorgan and Jefferies, which where were originally backing Thoma Bravo during the auction and were offering better financing terms, the sources said.

Investors in the Vista fund, known as limited partners, include some of the largest U.S. public pension funds, including the New Jersey State Investment Council and the Oregon Public Employees Retirement Fund. These funds do not disclose to their members and retirees all the risks they undertake, because the agreements with Vista and other private equity firms are confidential. The revelations highlight how important aspects of the investment of public money in private equity are shrouded in secrecy.

Industry insiders told Reuters that the clause is “highly atypical”:

Several pension fund investors, private equity placement agents and lawyers interviewed by Reuters said Vista’s terms are highly atypical and not widely known even within the private equity industry. Most firms have caps – usually around 15 to 20 percent of the fund – on how much equity they can commit to a particular deal. Private equity funds also rarely make all-equity commitments for such deals, preferring to tie up debt financing ahead of time. When they do make such all-equity commitments, the equity checks tend to be much smaller.

The reason is that doing so poses the risk that investors see their entire capital tied up in one investment, potentially hurting returns and denying them the benefits of diversification, these industry sources said.

Such a situation can arise, for example, if the debt market conditions were to suddenly sour, as it happened in the summer of 2007 before the financial crisis. In the TIBCO deal, Vista’s financial liabilities are capped at $275.8 million. But if the banks walk away before the deal closes, TIBCO can try to force Vista to close on the deal with its fund.

“It’s a bit like walking on a wire without a net,” said Alan Klein, a partner at law firm Simpson Thacher & Bartlett LLP.

Public pension funds that have invested in Vista funds include the Oregon Public Employees Retirement Fund, the Virginia Retirement System, the Michigan Retirement System, the Arizona Public Safety Personnel Retirement System and the Indiana Public Retirement System.

Photo by Juli via Flickr CC License

CalSTRS Aims to Bring More Investment Management In-House

CalSTRS recently completed a restructuring of its investment staff, which including appointing its first chief operating investment officer.

The restructuring had a purpose: the fund is planning to move a significant portion of investment management duties in-house.

CalSTRS currently manages 45 percent of its portfolio internally. The fund wants to bring that number up to 60 percent, according to a CalSTRS press release.