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Video: Do The Dutch Have The Pension Problem Solved?

The Dutch pension system is in the news again after an extensive New York Times report that shined light on a pension system that is “scrupulously funded” and “brutally honest” about its pension liabilities.

In light of that report, we though it would be appropriate to re-visit this 2013 video by PBS, which can be viewed above.

From the video description:

As cities and states across the U.S. grapple with their pension programs, we travel to one country — The Netherlands — that seems to have its pension problem solved. Ninety percent of Dutch workers get pensions, and retirees can expect roughly 70% of their working income paid to them for the rest of their lives. Olaf Sleijpen of the Central Bank of the Netherlands says “I think what makes it successful is that you basically force people to save for their old age.”

Report: U.S. Pension System Ranks 13th Among World’s Largest Economies; Faces “Major Shortcomings”

Mercer has released its 2014 Melbourne Mercer Global Pension Index report, which ranks the pension systems of the world’s 25 most advanced economies.

The report grades pension systems on coverage, governance, investment performance, tax support and plan design, among other criteria.

The United States’ pension system ranked 13^th overall, which equates to a “C” grade.

The report included a brief summary of how the U.S. could improve their ranking:

The overall index value for the American system could be increased by:

– raising the minimum pension for low-income pensioners

– adjusting the level of mandatory contributions to increase the net replacement for median-income earners

– improving the vesting of benefits for all plan members and maintaining the real value of retained benefits through to retirement

– reducing pre-retirement leakage by further limiting the access to funds before retirement

– introducing a requirement that part of the retirement benefit must be taken as an income stream.

Here are the overall rankings:

Read the full report here.

CalPERS, Other Major Funds To Bid On Bankrupt Indiana Toll Road

CalPERS, the Canada Pension Plan Investment Board and other large funds from around the world are lining up to bid on an Indiana toll road that filed for bankruptcy last month.

The toll road is operated by a private company, ITR Concession Co LLC.

From Reuters:

The interest in the asset shows that infrastructure investors have not been fazed by the failure of one of the largest privatisations of U.S. infrastructure, even though any deal is expected to come at a significant discount to its original value.

Canada Pension Plan Investment Board (CPPIB) has teamed up with Ferrovial SA’s toll road operator Cintra and Canadian investment manager Brookfield Asset Management to make an offer, the people said this week.

Australia’s Hastings Funds Management has partnered with the California Public Employees’ Retirement System (Calpers) and Italian toll road operator Autostrade Meridionali SpA , the people said.

Spanish infrastructure operator Abertis Infraestructuras SA has teamed up with Borealis, which is the infrastructure investment arm of the Ontario Municipal Employees Retirement System, the people said. Australian infrastructure fund manager IFM Investors is also leading its own consortium, the people added.

The composition and number of the consortia could still change, the people said. Alberta Investment Management Corporation (AIMCo) and Abu Dhabi Investment Authority (ADIA) have considered joining the race but have yet to make a decision, some of the people said.

Sources told Reuters that the price tag will likely wind up somewhere between $4 billion and $5 billion.

Indiana leased the toll road out to ITR Concession Co for 75 years in 2006. In return, the state received $3.8 billion.

Corbett Says He’d Form Pension Commission If Elected To Second Term

We’re three weeks away from the gubernatorial election and incumbent Pennsylvania Gov. Corbett is trailing big in most polls.

The theme of his campaign has largely been pension reform, and he has been doubling down on that stance lately. On Wednesday, Corbett told a newspaper that, in addition to calling a special legislative session to address pension reform, he would also form a commission to study reform ideas.

From PennLive:

In an interview with PennLive’s editorial board on Wednesday, Corbett talked of forming a commission to study pension reform in advance of calling a special legislative session.

Corbett said he would establish a commission consisting of state and local government officials and union representatives to come up with some recommendations to address pension costs.

Those costs are growing in the state budget by $610 million annually until they plateau at $3.3 billion in 2017-18. Once the commission has completed its work and come up with some recommendations of what might work, he would call a special legislative session to focus on this issue.

“The legislators aren’t experts [on pension reform] by any stretch of the imagination and I’m not disparaging the legislators. This is a very complicated issue. Let’s sit down. Let’s get this studied. And let’s be willing to have the political courage to do it,” he said.

Taking a shot at his opponent who has downplayed the severity of the pension issue, Corbett said, “That’s more than a problem. That’s a crisis.”

The commission would likely look something like New Jersey’s Pension & Health Benefits Review Commission.

See further coverage of Pennsylvania’s governor race here.

More Private Equity, Less Fixed Income For Germany’s Largest Pension Fund

Bayerische Versorgungskammer (BVK), Germany’s largest manager of public pension assets, indicated this week that some major allocation changes could be coming to the fund.

Among the changes: doubling its private equity investments (from 4 percent of assets to 8 percent) and trimming its fixed-income holdings (from 60 percent of assets to 50 percent).

From Bloomberg:

Germany’s biggest public pension fund plans to invest more in private equity and hedge funds and reduce its bond holdings as low interest rates curb returns.

“We started committing the first funds to private equity in 2007 and we are now beginning to reap the first rewards,” said Andre Heimrich, chief investment officer of Bayerische Versorgungskammer, in an interview in Munich. “There is still room for expansion and we could imagine doubling our share of private-equity investments.” BVK currently has about 4 percent of its assets committed to buyout funds.

[…]

“The current low interest rate environment will persist for some time,” said Heimrich, who took over as CIO from Daniel Just, now BVK’s chief executive officer, in February 2013. “In Germany, we even might not have reached rock bottom yet.”

As a result, BVK plans to reduce fixed-income holdings, such as government bonds and covered bonds, to about 50 percent of its investments from 60 percent at present, Heimrich said.

Heimrich also outlined his expectations for returns. From Bloomberg:

BVK invests in private equity through firms including Pantheon International Participations Plc, a British investor in leveraged buyout firms. The first investments have seen annual returns of more than 10 percent, Heimrich said.

That compares with an expected return of about 7 percent on infrastructure investments, where BVK has placed about 3 percent of its assets through specialized funds that hold stakes in the likes of airports, harbors, electricity meters and prisons.

“We would like to do much more, but there are way too few projects on offer,” Heimrich said. “It would be a perfect asset class for us due to its long duration and above-average returns.”

BVK expects an average return on investment of 4 percent this year, higher than the minimum needed to meet commitments to pensioners, currently at about 3.7 percent, Heimrich said.

Apart from investing in real estate funds, BVK has been providing direct lending to commercial real estate projects as banks left an opening in recent years. It provided about 190 million euros in financing for the so-called Silver Tower in Frankfurt in 2011, 300 million euros for Tower 185 in the same city in 2013 and 450 million euros for shopping center Mall of Berlin this year. Two global real estate investment trusts, in which BVK invested about 500 million euros this year, have returned more than 10 percent by the end of August, he said.

BVK manages $76.5 billion in assets for 12 of Germany’s public pension plans.

Three New Tax Hikes in Chicago As Emanuel Looks For Revenue To Pay Down Pension Debt

Chicago Mayor Rahm Emanuel is leaving no stone unturned in his search for revenue sources that could help pay down the city’s unfunded pension liabilities, which total over $25 billion.

Complicating the search is the upcoming election; Emanuel has said he will not touch property, sales or fuel taxes, all of which are politically unpopular.

In the past year, Emanuel has increased the “telephone tax” and cigarette taxes. This week, he added three more tax hikes to the list. From the Chicago Tribune:

Mayor Rahm Emanuel plans to raise taxes on drivers who park in garages, those who own luxury skyboxes at Chicago stadiums and companies that try to avoid city taxes by making purchases in the suburbs to balance next year’s budget, aides said Monday.

The three tax hikes would net the city $31.4 million as the mayor seeks to close an estimated $297.3 million budget gap without raising property, sales or gas taxes ahead of the Feb. 24 city election, when Emanuel will ask voters to give him a second term.

Under Emanuel’s plan, the tax on parking in public lots would rise 2 percentage points, to 22 percent on weekdays and 20 percent on weekends. The city expects to collect $10 million from the increase in 2015, mayoral spokeswoman Kelley Quinn said.

As part of his first budget, Emanuel added a $2-a-day fee on cars parked in public lots on weekdays. And in 2013, Emanuel pushed through the City Council a switch from a flat parking tax of $5 to a percentage parking tax, which the mayor said would cost more for parkers in “premium” garages like those at hotels but potentially lower costs for people parking in economy garages.

The city estimates it would make $4.4 million by ending a 1995 “amusement tax exemption” on the cost of renting skybox suites at sporting events and concerts.

And the Emanuel administration says $17 million would flow into the city’s coffers next year by closing a loophole in the use tax charged to Chicago businesses that buy certain goods outside the city.

A breakdown of the city’s unfunded pension liabilities by system, from the City of Chicago website (data from 2012):

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

Former Illinois Attorney General Pushes For “Plan B” On Pension Reform

In all likelihood, a judgment on the constitutionality of Illinois’ 2013 pension reform law will in the next six months.

Former Illinois attorney general Ty Fahner doesn’t want the state to be blindsided by the result. If the law is overturned, he says, there needs to be another plan in place.

Fahner is asking lawmakers from around the state to start developing alternate reform ideas. From the News-Gazette:

“I still hope and expect, I truly do, that the court may find Senate Bill 1 constitutional. Whether that’s a false hope or not, I need to make the point that even if they do, after all of that, we’re still in terrible shape as a state,” Fahner said. “If they overturn it, there will be incredible hardship, which is what we are trying to get people to focus on now, not because it will change their decision, but I think there has to be a debate, a discussion, right now, because if you wait until the spring when the court finally rules, it’s going to be a little bit too late.

“They’re going to be in the middle of the budget at the end of the session. Whether it’s Quinn or Rauner, they’re going to have a difficult time. I think they need to talk now.”

He’s encouraging candidates for governor and the Legislature to address the question, and wants voters to ask them about it.

“That’s all we’re trying to do with this,” said Fahner, whose group is pushing what it calls a “What If?” initiative. “It’s so profound and the damages could be so terrible that people have to think about it now and not just give a political reaction later that, ‘We’ll have to sort it out.'”

State Rep. Adam Brown, R-Champaign, said he was “more than happy to be a part of the conversation” about an alternative pension plan.

“But at this point, there are just too many unknowns,” he said.

[…]

[Senate President John] Cullerton’s spokesman John Patterson advised patience.

“It has been a long struggle to get a law through the General Assembly and now a case to the courts,” he said. “Given the complexity of the issue and the difficulty in gettting to this point, we should now see what the courts have to say. There are a lot of people with a lot of opinions, but they aren’t on the Illinois Supreme Court, and it is the justices who will ultimately tell us what can and cannot be done.

“At this point the case is still before the trial court, so it seems a bit premature to already be predicting its demise. Let’s let the judiciary do its job.”

As for Republican gubernatorial candidate Bruce Rauner’s proposal that state employees be moved into 401(k)-style, Fahner said, “The idea of a 401(k) is great, but I’m not sure it would work in the current situation.”

Fauher also questions whether the reform law goes far enough. From the News-Gazette:

“[The law] only scratches the surface of the state’s problems. We also have to look at what drives jobs from the state. We’ve got to do a lot to make this a more jobs-friendly state.”

This year, he said, 26 percent of the state budget is devoted to pension payments. By 2024, pension payments would eat up a third of the budget.

He said that would lead to higher property taxes, fewer teachers and less money for social services.

“A lot of people say this isn’t a problem, all you do is just raise more taxes. This goes back to the jobs issue. We could raise taxes again, but we already know what the job losses have been,” Fahner said. “We’re losing jobs because it’s a very hostile work environment with regulations and everything else. If you have less jobs, you have less people to pay the taxes which fund all of these needs, and that’s what is happening to us.”

Governor Pat Quinn has said he doesn’t have a “plan B” in place if the law is deemed unconstitutional.

Cutting Investment Fees – A Key To Secure Retirement?

Charles D. Ellis wrote a thoughtful article in the Financial Analysts Journal recently about the hard choices that people– and institutions – must face sooner than later regarding retirement and pension systems.

One of the main facets of the article’s thesis:

We need to make hard choices on how much to save, how long to work, how to invest, and how much to draw from our savings for spending in retirement.

The article is full of great discussion on these points. After someone stops working, a big part of their financial security stems from controlling costs – not just living expenses, but investment expenses, as well.

From the article:

Most investors somehow believe that fees for investment management are low. Fees are not low. Here’s why: By convention, fees are shown as a percentage of the assets, say, just 1%. But that’s seriously misleading. The investor already has the assets, so the manager’s fee should be stated as a percentage of the benefit (i.e., returns).

If returns are 7%, then the same fee in dollars is 15% of returns. And because index funds deliver the full market return with no more than the market level of risk for a fee of 0.1%, the real cost of active management is the incremental cost as a percentage of the incremental benefit of active management. That’s why the true cost of active management is not 1% or even 15%. Because the average active manager falls short of his chosen benchmark, the average fee is more than 100% of the true net benefit.

Increasingly, investors are learning that one way to reduce costs—and increase returns—is to save on costs by using low-cost index investments, particularly with their 401(k) or other retirement plans.

How your retirement funds are invested is important because many of those dollars are invested for a very long time—20, 40, even 60 years.

The article, titled “Hard Choices: Where We Are”, is available for free from the Financial Analysts Journal.

Photo by 401kcalculator.org

Chart: CalPERS’ Real Estate Returns Since 2000

CalPERS announced last week plans to increase its real estate investments by 27 percent. This graph [above] shows the performance of the pension fund’s real estate portfolio since 2000.

As the graph indicates, the fund’s real estate investments have generally performed well, consistently netting returns of 15 percent or more.

But 2009 and 2010 were disastrous, and CalPERS lost $10 billion on real estate investments over that period.

CalPERS’ latest foray into real estate will be marked by investments in properties with “established demand”, according to the fund’s CIO, Ted Eliopoulos. Such investments include apartment complexes in cities and fully leased office buildings.

Graph credit: The Wall Street Journal.

Raimondo, Fung Fight Over Pension Funding, Fees

Allan Fung, Rhode Island’s Republican candidate for governor, released an ad last week slamming his opponent Gina Raimondo for paying “high fees” for “poor returns” on pension investments.

[The ad can be viewed above.]

Raimondo’s campaign issued the following statement refuting Fung’s claims and accusing Fung of mismanaging Cranston’s pension system:

“Allan Fung is recycling the same tired, misleading attacks on Gina that Rhode Islanders have already rejected. Everything Gina has done as Treasurer is to protect workers’ pensions. The fact is, Gina’s investment strategy is working and is providing strong returns with less risk.”

“In contrast, as mayor, Fung has failed to make full payments to the Cranston pension system and is proposing that we actually default on a debt the state owes. That’s reckless, risky and will hurt taxpayers,” she said of his stance on the 38 Studios bonds.

She cited annual financial reports indicating that the city never paid more than 87 percent of its required pension contribution the first four budget years Fung was mayor.

Fung’s spokesman responded to that attack with a subsequent statement:

“Cranston’s locally administered pension plan had been severely underfunded for years before Allan was elected mayor. … He increased contribution levels and negotiated a responsible pension reform plan,” and is “proud of the fact” the city budgets have had enough money to make full payment the last two fiscal years.

The Raimondo campaign has previously acknowledged that the pension system’s investment fees totaled $70 million in fiscal year 2012-13. Around $45 million of those fees were from hedge funds.

The Raimondo campaign has also clarified that the pension system’s hedge fund investments returned 8.8 percent in 2013. The system’s overall portfolio, meanwhile, returned 15 percent.

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