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New Mexico Pension Grants Staff Authority to Pull Trigger on Some Alternative Transactions

The pension fund that manages assets for New Mexico’s teachers and professors disclosed this week it has given investment staff a bit of new authority: the ability to execute transactions on alternative secondary markets.

Reported by Pensions & Investments:

New Mexico Educational Retirement Board, Santa Fe, delegated general, ongoing authority to the staff to execute transactions on the alternative investment secondary markets “when it is deemed appropriate by staff and the asset class consultant,” said Bob Jacksha, chief investment officer of the $11.2 billion pension fund, in an e-mail.

This is blanket authority across all non-publicly traded asset classes, Mr. Jacksha said.

“Secondary transactions are difficult to execute in the traditional committee approval structure/timetable,” Mr. Jacksha wrote. “This authority is in recognition of that fact. It is expected to be used sparingly.”

The authority is not attached to any one specific transaction, Mr. Jacksha said.

The pension fund had $271 million in private real estate and $849 million in private equity as of June 30.

The New Mexico Educational Retirement Board manages $11.2 billion in assets for 132,000 members.

Teacher Group: Illinois Pension Reform Is “Direct Violation” of Lawmakers’ Oath of Office

Last week, the Illinois State Journal-Register published a piece by Ty Fahner exalting the state’s pension reform law and detailing the consequences that would face Illinois in the wake of a court rejection.

Now, the newspaper has published a rebuttal from Bob Pinkerton, president of the Illinois Retired Teachers Association.

The letter reads:

“What if pension reform is rejected?”

These words were written by Ty Fahner, president of the Civic Committee of the Commercial Club of Chicago, sometimes referred to as the Millionaires’ Club.

The question should be, “What happens when the Supreme Court reminds us what the Illinois Constitution says in Article 13, Section 5, ‘… benefits, of which, cannot be diminished or impaired?’”

What does the legislature do when it is forced to acknowledge the pension reform lawmakers voted for is in direct violation to their oath of office?

Mr. Fahner writes, “A decade ago, only a small fraction of state revenues went to fund the pensions.”

This is the problem. Over the years, the legislature violated the laws they passed by skipping or reducing pension payments so they could afford new projects.

The state cannot expect retirees to fill the pension gap left by irresponsible lawmakers. It is not right that the legislature is now attempting to reduce benefits to pay for the past negligence of the state.

Over the years, no one complained when new programs were implemented without new revenues because stealing from the pensions seemed harmless to them at the time and these were available dollars already allotted in the state budget.

The bill is coming due for all those years of pension holidays. Illinois has the fifth-largest economy in the country. I believe we can figure out a way to pay our bills.

Read Ty Fahner’s original column here.

Are Pensions More Important To Retirement Security Than Data Shows?

Alan L. Gustman, Thomas L. Steinmeier and Nahid Tabatabai have authored a paper exploring the possibility that the importance of pensions, and the financial support they provide retirees, is understated in retirement income data.

The paper, titled “Mismeasurement of Pensions Before and After Retirement”, was published in the Journal of Pension Economics and Finance.

From the paper:

There are a number of reasons why the value of pensions after retirement may be underestimated, especially if evaluation is based on sources of income realized in retirement. First, not all pensions are in pay status, even after the person leaves the pension job. When a pension is not in pay status, it is commonly ignored in questions related to pension incomes. Even when a pension is in pay status, a survey may not include income from the pension. For example, as pointed out by Anguelov, Iams and Purcell (2012), CPS data on pension incomes in retirement count only annuitized income, but not irregular income from pensions, such as periodic withdrawals from 401k accounts. This is an important problem because funds in DC pension accounts often are not claimed until the covered worker reaches age 70, when withdrawals are mandated. Indeed, a disproportionate amount of benefits may not be withdrawn until even later.

The paper provides further reason that survey data may not accurately portray pension benefits received by retirees:

Another factor is that actual benefit payments may be reduced from the pension called for by the simple benefit formula advertised by the firm when an annuity is chosen that differs from the single life annuity emphasized by plan. For example, the annuitized benefit will be reduced when, as required by law, a spouse or survivor benefit is chosen. The reduction will depend on the ages of each spouse and on whether the survivor benefit is half the main benefit, whether it is two thirds as in Social Security, or whether the annual benefit will remain unchanged upon the death of the covered worker. There may be further reductions if the retiree chooses a guaranteed minimum payout period.

To be sure, these differences in payout due to actuarial adjustments do not create actual differences in the present value of benefits. But one must know the details of the respondent’s choice as to spouse and survivor benefits and other characteristics of the annuity, and adjust using appropriate life tables. That is, a proper analysis would not just consider the annual pension payment, but would also consider the value of payments that will be made in future years to the surviving spouse. Typically these details are not available on a survey and no such adjustment is made.

The paper delves much deeper into this issue – read the full paper here.

Photo by www.SeniorLiving.Org

Survey: Pension Funds Disagree on Time Horizon of Long-Term Investing

The results of a new survey from IPE magazine reveal that the world’s pension funds agree they are long-term investors. But there is disagreement about what “long-term” actually means.

From Investments & Pensions Europe:

One-quarter of respondents to the Focus Group survey for the November issue of IPE said 3-5 years constituted a ‘long-term’ view, while nearly 78% of respondents considered themselves to be long-term investors.

Only one respondent rejected the label outright.

One UK pension investor pointed to the need for a long-term approach based on long-term liabilities, while an Austrian pension fund argued that it was important to take a generational view – at least when managing the assets of beneficiaries up until 45.

There was less agreement among the 36 European respondents, managing nearly €290bn in combined assets, as to what constitutes ‘long term’ when investing in public market assets.

More than one-third of pension investors said taking a 7-10 year view was long term, whereas nearly 14% believed the better definition was considering investments over the course of a business cycle.

One-quarter of funds said a 3-5 year time horizon was adequate, and 17% argued in favour of a generational view, spanning 15-25 years.

One respondent, a UK local authority scheme, said the long-term perspective manifested itself in asset allocation decisions, pointing to the development of emerging markets over the course of a generation.

The fund added: “Stock selection does tend to take a shorter view, and this is probably dysfunctional.”

A second UK corporate fund questioned whether the idea of long-term investing in public markets was compatible.

“The idea that long-term investment should be public market inherently seems to be at odds with long-term investing,” it said.

“Public markets are driven by short-term liquidity and [mark-to-market] ideology, which is anathema to long-term investing, which is about long-term, sustainable cash flows.”

Despite this, nearly half of respondents did not see a problem in finding external public market asset managers “willing and able” to invest for the long term, and only 9% rejected the notion out of hand.

One-quarter of respondents said asset managers could be found, but only for certain asset classes.

A Swedish investor blamed the regulatory environment, not asset managers.

“[The] main hassle is the short-term view of the regulator and new regulations where you value your liability against a short-term model,” it said.

A second Swedish investor concurred.

“If anything,” it said, “regulation is a problem – in particular, its tendency to change radically every 5-10 years.”

When asked which factors prevented long-term investing, 24% cited the regulatory environment and 21% the maturity of their liabilities.

Only 20% said the asset management industry’s unwillingness or skill was at fault.

One respondent cited the career risk of misguided long-term investments.

For more, see IPE’s analysis here.

International Organization Raises Questions About Governance, Oversight of UN Pension Fund

Last week, the Coordinating Committee of International Staff Unions and Associations (CCISUA) raised concerns to the UN General Assembly about governance problems at the UN pension fund.

The remarks were delivered by Ian Richards, President of CCISUA, a group composed of UN system staff unions and associations.

Concerns included the weakening of the methods by which pension staff can report fraud and abuses, the possible harassment of whistleblowers and other managerial issues.

The remarks from Ian Richards:

Let me end with a common system issue of great concern to us, the management of the pension fund, an item you are also considering today.

We welcome the decision of the fund’s board that it should continue to be administered by the UN Secretariat, ensuring that the necessary management controls can be maintained.

But we are concerned that the management team at the Fund is actively seeking waivers to four important elements of the staff regulations. If approved, we foresee reduced opportunities for qualified pensions experts in your countries to work at the Fund and a weakened ability of OHRM to check abuses of authority.

Firstly, management has requested exemption from the UN mobility policy as its functions are specialized. Yet, as you are aware, having passed the mobility policy in April, mobility already exempts specialized posts; this matter is moot.

Secondly, management wants discretionary authority to keep some staff beyond retirement, citing an IT project. Such discretion will remove incentives for workforce and succession planning and does not make strategic sense. The Fund’s new IT system will need to be implemented by staff who can stay on for years to come in order to manage and maintain it.

Thirdly, management wants to promote certain colleagues from the G to P categories without passing through the exam, an issue on which you may well have an opinion.

Finally, management has asked for the right to laterally assign staff in contravention of your own instructions, reiterated on many occasions, that all vacancies be advertised externally.

Distinguished delegates, all this is taking place in a UN department whose management recently issued a directive forbidding staff from reporting fraud to OIOS. We have also received reports of alleged threats against suspected whistleblowers. With $51 billion at stake, this is alarming. As Member States, ultimately responsible for the fund’s finances. I therefore trust that you will seriously examine these risks to the Fund.

The full remarks, which include a discussion of retirement age, can be read here.

They can also be seen starting at around the 31:30 mark of the following video:

Public Pensions Outperformed Endowments in Fiscal Year 2014

For the second year in a row, U.S. public pension investment returns outpaced endowment funds.

Endowment funds on the whole returned 15.8 percent, while public pension portfolios returned 16.86 percent.

From Chief Investment Officer:

US university endowments returned an average 15.8% in the fiscal year ending June 30—more than 100 basis point less than the typical public pension fund, two studies have shown.

Public pensions rode their large equities allocations (averaging 61%) to 16.86% gains, Wilshire Associates reported in August. Funds larger than $1 billion did even better, returning 17.44% for the fiscal year.

Endowment portfolios, in contrast, held an average 30% of the best-in-class performing asset, according to preliminary data from the annual NACUBO-Commonfund study. For the 129 institutions evaluated, domestic equities generated 22.6% returns while international stocks gained 19.6%.

“Smaller endowments, which typically have the largest allocations to traditional asset classes, benefited from the strong performance of liquid domestic and international equities beginning in 2009,” said Commonfund Institute Executive Director John Griswold.

“But,” he added, “the greater diversification practiced by the largest endowments and their emphasis on a variety of sources of return, both public and private, tends to result in higher long-term investment performance.”

[…]

A number of the nation’s most high profile, elite universities have, in recent weeks, revealed FY2014 performances far in excess of the average large endowment’s 16.8% gain.

Yale University earned 20.2%, Princeton 19.6%, MIT 19.2%, and Columbia returned 17.5% on its $9.2 billion portfolio.

But the largest, most-watched endowment of all once again failed to enter the winner’s circle. Harvard University disclosed its sub-par 15.4% returns for FY2014 just hours before announcing the replacement for outgoing CEO Jane Mendillo. Managing Director and Head of Public Markets Stephen Blyth is set take over the $36.4 billion fund on January 1, 2015.

To see a breakdown of endowment funds’ returns by asset class, click here.

CalPERS Collects $249 Million in Bank of America Lawsuit

Pension360 has previously reported that CalPERS was due to receive a substantial sum of money from a settlement with Bank of America, stemming from a lawsuit over failed mortgage securities the bank sold investors.

This week, the dollar figure was solidified: CalPERS has announced it will receive a $249.3 million payout from the bank.

Phoenix Lawmakers Weigh In On Proposition 487

When Phoenix voters go to the polls today, they will decide the fate of one of the most controversial ballot measures in the country: Proposition 487.

The measure would close of the city’s defined-benefit system to new hires and shift them into a 401(k)-style plan.

Public safety workers are excluded, but unions say death and disability benefits could still be reduced.

The Arizona Republic asked city leaders from both sides of the aisle to weigh in on the bill:

“In 2013, I was proud to co-chair the city’s pension reform committee that successfully passed $700 million in savings. That reform passed the right way — considered by a citizen panel and approved with more than 80 percent of the vote. Prop. 487 was written and funded by dark, out-of-state money, with no local consideration or feedback. If it passes, it will undo all the work we did last year, and the city estimates that it will cost taxpayers more than $350 million. Phoenix should vote no on Prop.487.”

— Daniel Valenzula, District 5, parts of west and central Phoenix

“Assumption of risk has been largely ignored except for Bob Robb’s recent analysis. The pension of former City Manager David Cavazos illustrates the importance of this issue. Although I voted against his large salary increase, council action raised his pension to approaching $250,000 per year for life, starting at age 53. If the economy goes bad, if an emergency arises, the city still owes approximately $250,000 per year. Another individual would need about $5million set aside (never to be spent because of an economic downturn, a family emergency or anything else) earning 5 percent every year to match that pension.”

— Jim Waring, vice mayor (District 2), northeast Phoenix

“Voting yes on Prop. 487 brings fiscal accountability back to the city of Phoenix. Our city is in a financial crisis. Pension costs are cutting into services and causing new tax increases. Phoenix is short more than 500 police officers, and the politicians imposed a new water tax to pay for increasing pension costs. Prop. 487 stops the financial bleeding. Without Prop. 487, you will see more cuts in service and higher taxes. We could add 150 new police officers if we just stopped pension spiking alone. Pension spiking costs you more than $19 million per year. Please vote yes on Prop.487.”

— Sal DiCiccio, District 6, Ahwatukee and east Phoenix

“If Prop. 487 passes, Phoenix would be the only government employer in Arizona and one of the few in the nation that does not offer a defined benefit plan. This presents a disadvantage in attracting quality employees and will deter current public employees in considering Phoenix as an employment option. The public sector already faces challenges due to less competitive wages. One of our attracting factors is pension benefits. Our city is additionally disadvantaged since we increased our retirement eligibility rule of 80 to 87, and research shows that lowering our pension benefits will be yet another detriment to the employment packages we offer.”

— Michael Nowakowski, District 7, southwest Phoenix and parts of downtown

“Voters considering Prop. 487 should make no mistake: This measure will cost the city millions of dollars we don’t have, and every dollar spent on this shoddily drafted ballot initiative is a dollar taken away from the other priorities of the city: flood control, better streets, hiring new police officers, and other vital city services. Reasonable minds can disagree about Proposition 487 on many levels, but in the short-term, the evidence is clear: Proposition 487 is expensive. Our city is in a very difficult financial situation, and we simply cannot afford Prop. 487.”

— Kate Gallego, District 8, southeast Phoenix and parts of downtown

See Pension360’s previous coverage of Proposition 487 here.

New York Teachers Pension Invests $140 Million in Retail, Office Properties

The New York State Teachers Retirement System (NYSTRS) has committed a total of $140 million to three real estate funds that invest in retail, office and apartment properties.

From IPE Real Estate:

The [New York State Teachers Retirement System] has committed $40m to the Edens Investment Trust alongside $50m allocations to Madison Realty Capital’s Debt Fund III and Rockpoint’s Core Plus Real Estate Fund.

The pension fund said Edens, which invests in retail properties in US Southeast and East Coast regions, is attractive due to its focus on grocery-anchored necessity retail, a sub-sector more economically resistant to market conditions.

“Our decision to provide additional growth capital is a reflection of Edens’ deep, seasoned development/redevelopment team with a proven track record over multiple cycles,” NYSTRS said.

The pension fund has now invested $447m in Edens, in which it holds a 30% stake.

Madison Realty Capital, meanwhile, is targeting a total equity raise of $600m for its Debt Fund III, with a hard cap of $700m.

The real estate manager will co-invest up to $5m in the fund, which has a targeted 16% net IRR.

Debt Fund III will seek to originate and acquire senior-secured loans, mezzanine loans and preferred equity investments collateralised by commercial real estate.

NYSTERS was one of the last investors to go into Rockpoint’s Core Plus Fund, for which $965m was raised.

[…]

NYSTRS said its previous experience with Rockpoint was one of several reasons for going into the fund.

The Core Plus Fund, focused on office and apartment properties in the East and West Coasts of the US, is targeting a 9-10% net IRR, with a significant component from current cash flow.

The NYSTRS has $95 billion in assets.

Video: Why Did Pension Reform Fail in Ventura County?

Above is a video recapping the state of pension reform in Ventura County, California — and why County voters won’t find a pension reform measure on their ballot today.

Disclosure: the Reason Foundation is a libertarian research organization. Referenced in the video is a report produced by Reason that claims Ventura County could have saved $460 million over the next 15 years if the reform measure was enacted. The report was commissioned by the Committee for Pension Fairness, the group that sponsored the pension reform initiative.

From the video description:

On Tuesday, voters across the county will venture to polling stations for the midterm elections. In Ventura County, California, residents will be able to have their say on a variety of local issues, but there is one initiative they won’t be able to cast their ballot for—that measure is pension reform.

Like so many retirement systems across the country, Ventura has seen it’s pension fund go from having a healthy surplus to being over a billion dollars in debt. To avoid having their county become the next Stockton or Detroit, the Ventura County Taxpayers Association crafted a reform measure that would move the county from a defined benefit to a defined contribution system.

But shortly after it was approved to appear on the ballot, a local judge preemptively ruled the measure illegal and ordered it stricken from the 2014 election—thus ending Ventura’s hopes to change their costly pension system.

According to the judge’s ruling, even though voters elected to create a pension fund decades ago, the law provides them no way to exit the system through a vote. Reformers would have to either repeal or amend the law through state legislation to change their costly pension programs.

The decision was a setback for the VCTA, who had hoped a midterm victory could expedite change to VCERA’s growing mountain of debt. Taxpayers pay $153 million per year to the pension system—that’s triple the number they paid out over a decade ago. In the next five years, that number is expected to climb to $226 million.

“When you look at compensation and pensions…we’re right up there if not higher than anybody else,” states Bill Wilson, a member of the VCTA who has also served on the county retirement board for over 16 years.

The reform would have enacted a defined contribution plan whereby the county would contribute four percent for general county employees and 11 percent for public safety workers. The measure would have only applied to new employees hired after July 2015.

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