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Hawaii Pension Commits $105 Million to Non-Core Real Estate

The Hawaii Employees’ Retirement System approved three commitments Thursday to three real estate funds, totaling $105 million.

The pension system has worked with all three funds previously, and that familiarity played a role in the new commitments.

From IPE Real Estate:

The pension fund approved follow-on commitments of $40m each to Almanac Realty Investors’ Securities VII and AG’s Core Plus Realty Fund IV, as well as a $25m allocation to Prudential’s Senior Housing Partners V fund.

[…]

Hawaii Employees is one of the first pension funds to commit to Almanac Realty VII.

The fund had previously made a $20m commitment to Almanac Realty VI.

The manager, which declined to comment, is seeking a total capital raise of $1bn for the latest fund, according to industry sources.

Typically unleveraged, the fund will be backed by the manager with a 1% commitment of the total capital raise, or $10m.

With a targeted IRR of 12-14%, all of the capital will be invested in the US.

Almanac will look to provide growth capital for private real estate operating companies and public REITs.

Angelo Gordon will buy existing sub-performing office, retail and industrial assets for its Fund IV, placing a heavy emphasis on the top-15 US markets.

Hawaii had approved a $25m allocation to the manager’s Core Plus Realty Fund III.

Pramerica Real Estate Investors is seeking a $500m capital raise for Senior Housing Fund IV, which will invest in independent and assisted living and memory care.

Hawaii Employees had previously allocated $20m to Prudential Senior Housing Fund III.

Hawaii, which could make additional investments in non-core real estate funds, will be conducting an asset liability study next year, with the help of its investment consultant, Pension Consulting Alliance.

The outcome of this study could change its future target allocation for real estate from its current 7% allocation.

The Hawaii Employees’ Retirement System manages $12.7 billion in assets for 115,000 members.

Photo by grantzprice via Flickr CC License

Ontario Regulator Issues Draft of New Guidelines for Pensions Funds Investing in Derivatives

The Financial Services Commission of Ontario (FSCO), the regulatory body that oversees the province’s pension systems, has issued a draft of new guidelines for pensions investing in derivatives.

The guidelines call for “more precise and frequent” risk monitoring and increased documentation.

FSCO drafted the guidelines after “perceived concerns about the lack of understanding of the risks associated with investments in derivatives”, according to Osler Hoskin & Harcourt LLP, one of Canada’s largest business law firms.

Osler Hoskin & Harcourt LLP summarized the guidelines:

FSCO’s Note is framed as a set of expectations of those investing in derivatives and is intended to serve as a starting point for plan administrators. It contemplates a system for internal oversight of derivatives practices that is extremely broad in scope and will increase the costs to pension plans that invest directly in derivatives or that invest in pooled funds that use derivatives. The suggestion in the Note is that prudence might require more, but not less, rigorous practices.

FSCO’s Note sets out explicit expectations for documentation, risk mitigation and risk monitoring as follows:

– Documentation is expected to include more robust authorization regarding derivatives investment and collateral use in the Statement of Investment Policies and Procedures (SIPP) and to include risk monitoring practices (RMP) policies or guidelines relating to derivatives investments.

– Risk mitigation strategies for over-the-counter (OTC) derivatives should include an evaluation of pricing and other terms and conditions to ensure they are appropriate, and standardized netting agreements. Administrators should also consider appropriate collateral requirements for all derivatives, impose “specific and unambiguous” quantitative limits on a fund’s exposure to derivatives (including “soft limits, where positions must be analyzed, and hard limits, where positions must be liquidated”), and ensure compensation for staff involved in derivatives activities is set to avoid undue risk-taking.

– Risk monitoring for derivatives is expected to be more precise and frequent than for other investments, including monitoring of market risk, liquidity risk, counterparty risk, basis risk and operations and systems risk. Scenario analysis and stress testing are expected to be carried out.

A notable aspect of FSCO’s expectations regarding risk management and monitoring is the setting of a 10% limit on exposure to derivatives transactions with the same counterparty or associated counterparties. This is similar to the 10% diversification rule for investments under Schedule III to the Pension Benefits Standards Regulations, 1985, which is adopted in Ontario. FSCO’s expectation is that prudence may require a limit lower than 10% to be set. Such a rule would require new levels of monitoring of OTC derivative and repo contracts to ensure that they do not exceed this limit (or such other lower limit as is set by the administrator).

Read the draft of the guidelines here.

The FSCO is seeking public comment on the draft until November 24.

What Tom Wolf’s Win Means For Pennsylvania Pensions

Tom Wolf and Tom Corbett had two very different visions for Pennsylvania’s pension system. If newly-elected Governor Wolf attempts to reform the state’s retirement system, it will look very different than what Pennsylvania residents have experienced over the last few years under Corbett.

If Corbett had won, he would have pushed the legislature adopt a “hybrid” pension plan that incorporates qualities of a defined-benefit plan and a 401(k) plan.

Described by Institutional Investor:

In the 2013 legislative session, Corbett sought to pass pension reform as part of a package of three initiatives (the other two involved privatizing state liquor stores and a state transportation funding plan). Corbett’s pension plan would have enrolled future employees in a defined contribution plan and lowered future defined benefit payouts for current employees. Corbett’s office estimated that these changes would save the state $12 billion in employer contribution costs and $40 billion in plan costs over the next 30 years.

[…]

Corbett’s pension proposal did not pass the legislature. This June Representative Mike Tobash, a Republican, proposed a hybrid pension plan in which new employees would be enrolled in a combined defined benefit, defined contribution fund. This would start the state on the road to a DC system but lessen up-front costs by not shuttering the DB plan.

[…]

Almost immediately, Corbett came out and said he was in “full support” of Tobash’s plan. If reelected, Corbett says, he will call a special session of the General Assembly to tackle the pension problem. Opponents of the plan have taken to calling the plan the Corbett-Tobash pension plan.

But Tom Wolf doesn’t support the hybrid plan. What will the pension system under Wolf look like? He hasn’t offered much in the way of specifics, but he staunchly supports the state’s defined-benefit system. From Institutional Investor:

According to his campaign, Wolf “absolutely opposes changes to current employees’ pension plans, and he believes that a defined benefit retirement plan is the most effective tool for ensuring that our public workers have a financially secure retirement.” Wolf believes that to attract workers and create good private sector jobs, Pennsylvania must offer an attractive and competitive compensation package, which includes a defined benefit pension.

If elected, Wolf has said he will work with the legislature to find a solution to the pension-funding problem. But exactly what that solution might look like, with a governor so “absolutely opposed” to benefit cuts, remains to be seen. The General Assembly is likely to remain Republican, meaning the most probable scenario is a legislature favorable to benefit reform and a governor who is not. Unable to find a solution under four years of a pro-reform governor, a different approach maybe can work.

Pennsylvania’s pension systems are 63.9 percent funded, collectively. Pension liabilities have been the subject of several credit rating downgrades for the state.

New Jersey Lawmaker Wants to Reduce Pension Tax to Keep Retirees From Leaving State

In light of a recent poll that found 25 percent of New Jersey residents are “very likely” to leave the state when they retire, one lawmaker wants to reform the way the state taxes pension benefits.

The goal is to keep middle-class retirees in New Jersey.

More details from the Burlington County Times:

New Jersey Senate President Stephen Sweeney says he’s interested in changing the way the state taxes pension income to help keep retirees from leaving New Jersey for less expensive states.

New Jersey does not tax Social Security or military pensions, but requires residents to include pension income when they file their income tax returns.

Residents age 62 or older can qualify for a pension tax exclusion of up to $20,000 of their income for couples or $15,000 for individual filers, provided their gross income doesn’t exceed $100,000.

Speaking to seniors during a telephone town hall meeting hosted by AARP-NJ, Sweeney said he was interested in reforming the pension tax to help entice residents to remain in New Jersey during their retirements.

“We’re looking at raising the threshold to keep people in New Jersey,” Sweeney, D-3rd of West Deptford, said Tuesday.

[…]

The issue of seniors fleeing New Jersey has prompted several lawmakers to propose repealing the state’s inheritance tax or raising the state’s threshold for paying an estate tax from $675,000 to the federal level of $5.34 million.

Sweeney didn’t dismiss those proposals during the town hall, but said he also wanted to pursue changing the pension tax because it would assist more middle-class retirees.

“It really hits the middle class hard,” he said.

New Jersey taxes pension benefits at a rate of 3.6 percent; that number has grown from 3.1 percent since 2000.

But it’s not the only reason retirees are thinking about leaving. The state’s housing costs for seniors are the highest in the country, and healthcare costs are the third-highest.

Unions Expect Battle Over Pension Benefits to Intensify In Wake of Election

Unions and other labor groups say they expect the fight over retirement benefits, specifically public pensions, to intensify as the election saw Republican make gains in many state-level legislatures and governor’s offices.

From Reuters:

Defenders of public pensions say they will be particularly focused on Colorado, Florida and Nevada, where they expect moves to reform pensions will gain steam after Republican gains on Tuesday.

“This fight is not going away,” said Jordan Marks of the National Public Pension Coalition, a national union-funded group that seeks to protect public pensions. “There are a number of states, including Colorado and Nevada. We are looking at next year.”

[…]

In Nevada, Republicans wrested control of both the state assembly and senate from Democrats. Lawmakers reconvene in February.

A Republican bill to switch Nevada’s pensions to a hybrid system was killed by Democrats in 2013. Analysts expect Republicans to reintroduce the measure next year.

In Rhode Island, Gina Raimondo, the state treasurer who spearheaded pension reform measures in 2011, was elected governor despite union opposition. Wisconsin’s Governor Scott Walker, an avowed enemy of unions after taking them on in 2011, was re-elected.

In California, an effort to get a measure on the 2016 ballot that would give local governments more leeway to cut public pension plans will also be renewed, according to the outgoing mayor of San Jose, Chuck Reed, the measure’s main proponent and a rare Democratic advocate for pension reform.

Victory for Reed’s successor in San Jose, Democrat Sam Liccardo, another vocal pension reformer, means a fight between police and the city over retirement benefits will continue unabated.

Labor leaders identified Colorado as another key state in the battle over pensions. Democrats control the House, but control of the Senate is still up in the air.

Audit Coming for Pittsburgh Pensions

Pennsylvania Auditor General Eugene DePasquale and Pittsburgh Mayor Bill Peduto announced on Wednesday plans to audit the city’s municipal pension funds.

DePasquale said the audit was routine and not triggered any suspicions in particular.

Part of the audit’s purpose will be to see whether the pension systems implemented recommendations made during the city’s previous audit in 2011.

From WESA News:

In an effort to ensure the pension plans for police, firefighters and municipal employees do not become a financial liability, Pennsylvania Auditor General Eugene DePasquale has launched an audit of those plans. Peduto joined the auditor general for the announcement, saying it’s time to dig deep into Pittsburgh’s numbers.

“Get a true and accurate accounting of where we are, make it available so the public can see it, then do what we do in Pittsburgh — solve the problem,” Peduto said.

The overall goal of the audit is to determine if the pension fund is administered in compliance with applicable state laws, regulations, contracts and local ordinances and policies and to determine if municipal officials took appropriate corrective action to address the findings contained in a prior audit report. The prior audit report, covering 2010 and 2011 made several recommendations to address the underfunding of municipal pension plans.

Pittsburgh’s pension systems are among the least-funded of any city in the state. From the Pittsburgh Post-Gazette:

With assets of about $675 million and liabilities of about $1.2 billion, Pittsburgh’s funds for retired police, firefighters and other municipal employees is considered “moderately distressed” by the state Public Employee Retirement Commission.

Pittsburgh’s pension went from nearly 62 percent funded in 2013 to 58 percent in 2014, Mr. DePasquale said, partly due to market conditions and partly because of a reduced expected rate of return pushed through by outgoing Mayor Luke Ravenstahl’s administration late last year. Though lowering the rate of return may have been prudent, not budgeting money to account for the gap was not, Mr. Peduto said.

“We basically shorted our pension fund under the guise of good government,” he said.

In Pennsylvania, Pittsburgh’s unfunded liability of $485 million is second only to Philadelphia’s, which is $5.3 billion.

The audit is expected to take one to two months.

Photo by Sakeeb Sabakka via Flickr CC License

CalPERS Commits $80 Million to Californian Private Equity

CalPERS announced Wednesday it had committed $80 million to a private equity fund focused on Californian companies. The commitment is part of the pension fund’s California Initiative program.

From a press release:

The California Public Employees’ Retirement System (CalPERS) has committed $80 million with GCM Grosvenor (Grosvenor) in a California-focused private equity fund. The new commitment will be deployed through a direct investment vehicle starting by the end of the current year.

The new fund will be known as California Mezzanine Investments and is the third phase in CalPERS’ California Initiative program. It will be managed by Grosvenor’s Private Markets team.

“CalPERS is committed to California,” said Ted Eliopoulos, CalPERS Chief Investment Officer. “It’s great to have a hand in stimulating job creation and economic growth in our home state as we seek the best risk-adjusted returns for the portfolio.”

The fund will seek to invest in Californian companies using mezzanine debt financing to assist in supporting their growth and expansion.

The California Initiative was established by the CalPERS Investment Committee in 2001 as a $1 billion private equity investment vehicle that invests in private companies in traditionally underserved markets, primarily, but not exclusively, located in California. The objective is to generate attractive financial returns. As an ancillary benefit, the California Initiative was designed to create jobs and promote economic opportunity in California.

Grosvenor is one of the world’s largest independent alternative asset management firms, with approximately $47 billion in assets under management. It manages multiple emerging manager programs for large institutional investors, including public pension plans and corporate plans. Grosvenor and its predecessors have been managing private equity investment portfolios since 1999.

CalPERS manages $300 billion in assets. The fund has a $31 billion private equity portfolio.

CalPERS, New York Pensions Lead Push To Give Largest Shareholders More Control Over Corporate Boardrooms

Pension funds are often among a corporation’s largest shareholders, a position that gives them unique ability to influence corporate decision-making and governance.

But a handful of the nation’s largest public pension funds are leading a push for more oversight over corporate governance – namely, the ability to hire and fire a company’s director.

From the New York Times:

Weary of what they see as a dysfunctional dynamic, a band of institutional shareholders is mounting the first push ever at 75 United States companies to allow investors to hire and fire directors directly. The plan is intended to bring greater accountability to corporate boardrooms and eliminate some of the “clubby” aspects for which they have been criticized.

Leading the drive is Scott M. Stringer, the New York City comptroller and a Democrat, who oversees five municipal public pension funds with $160 billion in assets — much of it invested in the kinds of companies his effort will target. His office will submit a proposal at each of the 75 companies, asking the company to adopt a bylaw allowing shareholders who have owned at least 3 percent of its stock for three years or more to nominate directors for election to the board.

Among the 75 companies targeted by Mr. Stringer are eBay, Exxon Mobil, Monster Beverage and Priceline. None of the companies commented on the comptroller’s shareholder proposal.

[…]

“The bottom line is, friends still put friends on boards,” Mr. Stringer said in an interview Wednesday. “My job as a long-term investor is to make sure that these companies truly represent the interest of share owners.”

The effort by the New York City pension funds will focus on companies that have been unwilling to change practices in three areas: board diversity, climate change and executive compensation. Companies with no women as directors or those with little or no ethnic diversity were identified, along with companies whose shareholders had recently expressed dissatisfaction with executive pay practices but had done nothing to address them. On climate change, more than a third of the companies identified by the shareholder group are in the energy industry.

The proposals will be put to shareholder votes at the companies’ annual meetings in the coming months. While the companies would not be required to adopt the bylaw even if a majority of shareholders voted for it, advocates say the boards would be more likely to go along with the idea if it won strong support from shareholders.

Scott Stringer is leading the charge, but he has other powerful pension funds on board, including CalPERS. From the NY Times:

Working with Mr. Stringer’s office to drum up support are officials at the California Public Employees’ Retirement System, the nation’s largest public pension fund. Calpers said it would hire a proxy solicitor to discuss the proposal with other institutional shareholders. “We view this as a five-year project and will be back again and again as needed,” said Anne Simpson, senior portfolio manager and governance director at Calpers. “But making the commitment and getting an alliance formed on this issue is so important.”

Public pension overseers in other states, including Connecticut, Illinois and North Carolina, are also supporting the effort.

Pension360 covered last week how CalSTRS, CalPERS and New York’s largest pension systems were upset over governance changes at Bank of America.

Contra Costa Pension Commits $240 Million to Real Estate

It’s been a busy week for real estate investments at the Contra Costa County Employees’ Retirement Association (CCCERA) – the system has committed $240 million to four funds.

From IPE Real Estate:

The fund made commitments of $75m to Torchlight’s Debt Opportunity Fund V, alongside two $65m allocations to Angelo Gordon’s Realty Fund IX and Oaktree’s Real Estate Opportunities Fund VII and a $35m commitment to Invesco’s US Value-Add Fund IV.

Torchlight is looking to raise $1bn for the fund, which will be focused on the commercial mortgage-backed securities (CMBS) market and target a net 13-15% IRR.

[…]

Angelo Gordon’s IX opportunity fund typically buys distressed and/or under-performing assets from owners that lack the capital or expertise to improve the assets, grow cash flows or create value.

The vast majority of the transactions for the fund will be in the US, with a 25% allowance for deals in Europe or Asia.

Oaktree is looking to raise $3.5bn for Fund VII, to which it will commit $20m, or 2.5% of total commitments.

The fund is looking to invest in distressed real estate assets in the US and Europe.

CCCERA said borrower recapitalisation was one strategy for the fund, particularly in the UK.

The strategy may result in a greater percentage of non-US investments – though still operating within similar non-US allowances as those of previous Oaktree funds.

Invesco Real Estate is seeking a $500m capital raise for Fund IV.

The manager will make a $10m co-investment in the fund, which has a targeted 13-15% gross IRR and 9% preferred return.

The manager will invest in broken core assets in primary markets and inefficiently priced commodity assets in non-core US markets, across all major property sectors.

CCCERA manages $6.4 billion in assets.

Phoenix Pension Measure Voted Down, But City Leaders Say Reform Debate Not Over

On Tuesday, Phoenix residents handily voted down Proposition 487, the ballot measure that would have shifted most new hires into a 401(k)-style retirement plan.

The Mayor was an opponent of the measure and called it “too extreme”; but some Phoenix leaders, even the ones that didn’t support Prop 487, are determined to continue the conversation on pension reform.
From the Arizona Republic:

Mayor Greg Stanton called the victory one of the greatest comebacks in Phoenix history. The group advocating for Prop. 487 had a major lead in the beginning, according to polling by both sides, and outspent the city unions, but city workers took to the streets and seized on concerns it could negatively impact public-safety workers.

However, other city leaders said the outcome must not signal the end of the pension-reform conversation. They said the city still has work to do to address rising costs that add to its budget shortfalls, setting the table for a debate over alternative reforms in the coming months.

“If the fiscal problems are not fixed, you will continue to see more cuts in service and higher taxes and fees,” said Councilman Sal DiCiccio, a vocal supporter of the initiative. “It’s making it harder and harder to deliver quality services.”

[…]

Taxpayers’ tab for the city pension system, not including police officers and firefighters, soared to $129 million this year, up from $27.8 million in fiscal 2002. At the same time, the city raised taxes and fees and cut employee compensation to balance its budget deficits.

And the city will likely face another budget deficit heading into the next fiscal year. Its costs for all employee pensions increased by more than $18 million this year alone. City leaders expect that trend will continue, at least in the near term.

“Now it’s time for us to step forward and do some reforms,” said Councilwoman Thelda Williams, who opposed Prop. 487. “I just never believed that (ballot measure) was the mechanism for us to do it.”

But there are obstacles to pushing through a new reform measure, especially since the city passed one as recently as 2013. From the Arizona Republic:

Any efforts for additional reform could face push-back from some City Council and labor leaders who contend the city addressed the problem with a 2013 ballot initiative.

In 2013, voters passed a requirement that municipal workers hired after July 1 of last year split pension-fund contributions 50-50 with the city and work longer before retiring, moves expected to help save $596 million over 25 years, according to the city.

The city also took steps to combat the practice of “pension spiking,” generally seen as the artificial inflation of a city employee’s income toward the end of a career to boost retirement benefits.

Phoenix’s new contracts with its employee unions end the controversial practice of spiking for police officers and firefighters but only cap it for other city workers, saving taxpayers an estimated $233 million over 25 years.

Prop 487 was shot down by voters by a margin of 56-44.

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