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Ohio Teachers Fund Selling Big Stake in Madison Avenue Skyscraper

The State Teachers Retirement System of Ohio (STRS) is selling a big stake in 590 Madison Avenue, the 1 million square foot New York City skyscraper owned by the pension fund.

The fund will sell a 49 percent stake in the property.

From The Real Deal:

The State Teachers Retirement System of Ohio has put a 49 percent stake in 590 Madison Avenue on the market. The building, which was originally developed as IBM’s headquarters, could fetch as much as $1.5 billion, according to Crain’s.

Ohio STRS will still keep a majority interest in the 43-story, 1 million-square-foot tower. The property on the corner of East 57th Street and Madison Avenue includes a large public plaza.

By selling a stake, the pension fund can capitalize on New York City’s rising real estate prices, according to Crain’s, while still keeping control of an asset that continues to bring in cash. IBM is the building’s largest tenant and occupies 120,000 square feet.

A STRS spokesman talked to Crain’s New York about the decision:

“It is a situation where we would be looking to gauge interest in selling a portion of the building, but we want to retain control,” Mr. Treneff said. Mr. Treneff said that selling a stake would allow the pension fund to capitalize on the city’s soaring real estate prices while still holding onto the majority of what has been a very profitable investment that produces strong cash flow and will likely continue to appreciate.

The skyscraper’s notable tenants include Bain Capital, Morgan Stanley, IBM, Bank of America and Citigroup.

Photo by Sarath Kuchi via Flickr CC License

Chart: Comparing CalPERS to the Endowment Index

The Endowment Index represents the asset allocation and returns of the world’s largest institutional investors.

The this chart [above], you can compare the asset allocation and 10-year returns of CalPERS to other massive institutional investors. This chart represents CalPERS’ allocation before its hedge fund exit, which is an ongoing process.

Dozens of Pension Funds Are Reviewing PIMCO Investments After Bill Gross Departure

The United States’ public pension funds have tens of billions of dollars invested with PIMCO. But dozens of funds have put PIMCO on their “watch” lists – if they haven’t exited PIMCO already. From Bloomberg:

Illinois’s teacher retirement system, with $3 billion invested with Newport Beach, California-based Pimco, has had the money manager on its watch list since February, when former Chief Executive Officer Mohamed El-Erian left, according to an article published today. Texas Municipal Retirement System put Pimco on watch after Gross’s departure.

Managers of New York City’s retirement systems are reviewing $7.08 billion in Pimco investments, while those overseeing plans in Michigan, Indiana and North Dakota are monitoring the situation, according to the article.

A San Francisco city and county plan’s committee this week will hear from a consultant about $82 million invested in Pimco’s Total Return Fund. (PTTRX) A termination would mark the first time it has eliminated an offering, according to the interview with Jay Huish, the system’s executive director.

Gross, 70, who co-founded Pimco more than four decades ago, left last month for Janus Capital Group Inc. (JNS) after deputies threatened to quit and management debated his ouster. His departure prompted investors to review their Pimco holdings and triggered $23.5 billion in redemptions in September from the $201.6 billion Total Return Fund, which he previously ran.

Gross’s new Janus Global Unconstrained Bond Fund received $66.4 million in subscriptions last month, according to Morningstar Inc.

The Florida Retirement Systems, one of the largest public funds in the country, announced last week it would cut its investments with PIMCO.

Kolivakis: Time To Face The “Brutal Truth” About Defined-Contribution Plans

Leo Kolivakis, the man behind the Pension Pulse blog, has long been a critic of replacing defined-benefit plans with 401(k)-style plans as a means of reforming public pension systems.

The Canadian Public Pension Leadership Council released a report last week arguing that converting large public DB pension plans to DC plans would be costly and ineffective. In light of that report, Kolivakis took to his blog to re-explain his aversion to the oft-considered reform tactic. From Pension Pulse:

I’m glad Canada’s large public pension funds got together to fund this new initiative to properly inform the public on why converting public sector defined-benefit plans to private sector defined-contribution plans is a more costly option.

Skeptics will claim that this new association is biased and the findings of this paper support the continuing activities of their organizations. But if you ask me, it’s high time we put a nail in the coffin of defined-contribution plans once and for all. The overwhelming evidence on the benefits of defined-benefit plans is irrefutable, which is why I keep harping on enhancing the CPP for all Canadians regardless of whether they work in the public or private sector.

And while shifting to defined-contribution plans might make perfect rational sense for a private company, the state ends up paying the higher social costs of such a shift. As I recently discussed, trouble is brewing at Canada’s private DB plans, and with the U.S. 10-year Treasury yield sinking to a 16-month low today, I expect public and private pension deficits to swell (if the market crashes, it will be a disaster for all pensions!).

Folks, the next ten years will be very rough. Historic low rates, record inflows into hedge funds, the real possibility of global deflation emanating from Europe, will all impact the returns of public and private assets. In this environment, I can’t underscore how important it will be to be properly diversified and to manage assets and liabilities much more closely.

And if you think defined-contribution plans are the solution, think again. Why? Apart from the fact that they’re more costly because they don’t pool resources and lower fees — or pool investment risk and longevity risk — they are also subject to the vagaries of public markets, which will be very volatile in the decade(s) ahead and won’t offer anything close to the returns of the last 30 years. That much I can guarantee you (just look at the starting point with 10-year U.S. treasury yield at 2.3%, pensions will be lucky to achieve 5 or 6% rate of return objective).

Public pension funds are far from perfect, especially in the United States where the governance is awful and constrains states from properly compensating their public pension fund managers. But if countries are going to get serious about tackling pension poverty once and for all, they will bolster public pensions for all their citizens and introduce proper reforms to ensure the long-term sustainability of these plans.

Finally, if you think shifting public sector DB plans into DC plans will help lower public debt, think again. The social welfare costs of such a shift will completely swamp the short-term reduction in public debt. Only economic imbeciles at right-wing “think tanks” will argue against this but they’re completely and utterly clueless on what we need to improve pension policy for all our citizens.

The brutal truth on defined-contribution plans is they’re more costly and not properly diversified across public and private assets. More importantly, they will exacerbate pension poverty which is why we have to enhance the Canada Pension Plan (CPP) for all Canadians allowing more people to retire in dignity and security. These people will have a guaranteed income during their golden years and thus contribute more to sales taxes, reducing public debt.

Read his entire post on the subject here.

Photo by TaxCredits.net

World’s 4th Largest Pension Fund To Cut Alternatives, Load Up On Domestic Equities

The South Korean National Pension Service (NPS), which manages $500 billion of assets, announced plans to reduce its alternatives, real estate and infrastructure investments to make way for a big increase in allocation to local stocks.

From Chief Investment Officer:

Next year, the NPS will build up its holding of local stocks to more than KRW 100 trillion (US$93 billion), around a fifth of its entire portfolio, according to a paper submitted the country’s National Assembly, the Korea Times reported.

This shift would move 16 percentage points more of its overall portfolio into equities. An additional KRW 60 billion would be held in foreign stocks while real estate and infrastructure allocations are to be reduced, the newspaper said, in order to build equity exposure.

The fund—which receives significant annual cash inflows—said it would also bring down its new spending on both international and local fixed income products.

However, last year, CEO Choi Kwang said he intended to boost the fund’s allocation to overseas assets to 30% over the next five years.

“NPS is working to overcome the limitations of the Korean market,” the annual report stated. “NPS is gradually expanding overseas investments in consideration with its role concerning incumbent effects on foreign exchange markets. It is also sharpening its in-house fund management capabilities through strategic alliances with other pension funds and global asset management companies.”

So far this year, the Korea Stock Exchange’s KOSPI Index is down 4.31%. Over a 12-month period, it is down 3.77%.

NPS’ is planning to allocate 20 percent of its portfolio to domestic stocks; if that target is reached, it would be its largest allocation ever towards local equities.

Russia To Use Pension Money To Aid Companies In Midst of Sanctions

Russia is planning to take billions from its pension fund and use the money to aid banks and other companies that have been targeted by Western sanctions.
From BusinessWeek:

During flush years of high oil prices and economic growth, Russia salted away more than $80 billion in a sovereign wealth fund to ensure the long-term health of the country’s pension system. Now the Kremlin is raiding the fund to bail out Russia Inc.

Russian companies and banks are lining up for aid as Western sanctions, capital flight, and the plummeting ruble curb their ability to invest and repay debt. Finance Minister Anton Siluanov told the Itar-TASS news agency last month that state-controlled oil giant Rosneft (ROSN:RM) and private gas company Novatek (NVTK:RM), both headed by close associates of President Vladimir Putin and hit by sanctions, could get as much as $4 billion apiece from the fund, whose current balance is $83 billion.

Although the exact amount of aid to the two companies hasn’t been confirmed, Vice Premier Arkady Dvorkovich said today that the government is ready to use the fund to support both public and privately owned energy companies. “The funds will be provided for a long term,” he told Itar-TASS.

Russia has diverted $30 billion from its pension fund since 2013 to plug holes in its general budget.

Russia’s Economy Minister indicated last month that taking money from the country’s pension fund to shield ailing companies from U.S. sanctions was a distinct possibility.

Pension Funds Need To Stay Out of the “Bargain Bin” When Shopping For Hedge Funds

More than ever, pension funds are negotiating fees with hedge funds in an effort to lower the expenses associated with those investments.

That sounds like a wise course of action. But a new column in the Financial Times argues that pension funds need to stop shopping in the “bargain bin” for hedge funds—because the hedge funds that are willing to negotiate fees are also the ones who deliver lackluster returns.

From the Financial Times:

With many pension funds facing deficits, and needing investments that will generate high returns, the promise of hedge funds has an obvious appeal.

The problem is, like the star chef, the small number of hedge funds that have made staggering amounts of money for their investors over several decades already have too many clients and are closed for business.

Among these are Renaissance Technologies’ Medallion Fund, founded by the mathematician James Simons, which has long been all but shut to new money, and Seth Klarman’s Baupost Group, which last year returned $4bn to clients and has a highly select number of investors.

At the same time investors in hedge funds, such as pension managers, are loath to pay high fees for their services, and must enter into tough negotiations to bring these fees down. This makes sense.

But few of the handful of truly top tier hedge funds have any need to lower their fees for new investors and tend to politely show such requests to the door.

Mediocre hedge fund managers on the other hand cannot afford to be so dismissive, and are more than happy to gather more assets to play with.

The outcome is that many pension funds end up forcing themselves to shop in the hedge fund equivalent of the reduced aisle in a supermarket. They should stop. At the root of this problem is the flawed thinking that a large number of investors have been either seduced into, or institutionally obliged to believe in: the idea that hedge funds constitute an “asset class” all of their own, distinct from other types of active fund management.

[…]

Wholesale shopping for hedge funds is a bad idea. Instead of deciding to bulk invest in hedge funds as a questionable means of diversification (the HFR index shows the majority of hedge funds have underperformed the S&P 500 while being correlated to it), investors should only seek out the select few.

And if the best are closed to new investment they must find something else to do with their money.

The author puts the situation in context by comparing hiring a hedge fund to hiring a caterer. From the column:

You are planning a party and have decided to hire a caterer. A trusted friend has recommended two of the best in the city. One is a famous chef who has won numerous awards for his cooking, and another is a younger caterer who previously worked for one of the best restaurants in the world.

You call them both, only to have second thoughts. The first, the famous chef, is simply too busy with existing work to help you.

The other is unbelievably expensive, costing at least double what a regular caterer would charge. But you need your guests to be fed, so you look for an alternative option. You find a cheaper company on the internet and book them.

Come the party the food arrives late. When you taste it, the hors d’oeuvres are stale and the wine tastes like biro ink. Embarrassed and enraged, you mutter under your breath about the money you have wasted, vowing to never hire a caterer ever again.

This flawed thinking resembles the way too many institutional investors select hedge fund managers.

Pension360 has previously covered studies that suggest problems with the way pension funds select managers.

Photo by Gioia De Antoniis via Flickr CC License

Changing the Conversation About Pension Reform

Keith Ambachtsheer, Director Emeritus of the International Centre for Pension Management at the University of Toronto, wants to change the conversation around pension reform from “dysfunctional” to “constructive”.

In a recent article in the Financial Analysts Journal, Ambachtsheer explains how the reform conversation can be “re-framed” and become more productive. He writes:

The sustainability of traditional public sector defined benefit (DB) plans has become front-page news and the subject of acrimonious debates usually framed in stark terms of DB versus DC (defined contribution). This either/or framing is unhelpful: It simply perpetuates the strongly held views of the defenders and critics of these two opposing pension models. Moving the pension reform yardsticks in the right direction requires that we stop this dysfunctional either/or framing and move on to a more constructive conversation about what we want our pension arrangements to achieve and what that tells us about how to design them.

[…]

So, how do I propose to change the conversation about pension reform from dysfunctional to constructive? By reflecting on the implications of five pension design realities:

1. All good pension systems have three common features.

2. All pension systems have embedded risks that must be understood and managed.

3. Some of these risks have an intergenerational dimension.

4. Pension plan sustainability requires intergenerational fairness.

5. Achieving this fairness has plan design implications.

The three design features common to all good pension systems are:

1. inclusiveness—all workers are afforded a fair opportunity to provide for their retirement;

2. fitness-for-purpose—the system is purposefully designed to start paying a target pension for life on a target retirement date; and

3. cost-effectiveness—retirement savings are transformed into pension payments by “value for money” pension organizations.

Surely, no rational person would disagree with these three features. So far, so good.

Ambachtsheer goes on to talk about the failings of DB plans in recent years – but says it would be a “tragedy” to scrap them for DC plans:

Remember how we talked ourselves into a “new era” paradigm as the last decade of the 20th century unfolded? As it ended, most DB plan funded ratios were well over 100%. Did we treat these balance sheet surpluses as “rainy day” funds to see the plans through the coming lean years? We did not. Predictably, we spent the surpluses on benefit increases and contribution holidays. After all, was this not a new era of outsized economic growth rates and stock market returns? Was taking on more risk not synonymous with earning even higher returns?

A decade later, we know that the answers to these turn-of-the-century rhetorical questions are no and no. On top of these stark economic realities, red-faced actuaries are now confessing that they have been underestimating increases in retiree longevity for quite some time.

Given the current poor financial condition of many public sector DB plans, it should come as no surprise that people on the far right of the political spectrum want to do away with this type of pension arrangement altogether. Doing so would be a tragedy. I agree with Leech and McNish that none of these weaknesses need be fatal if we repair them now.

But how to repair DB plans? Ambachtsheer offers the idea of defined ambition (DA) plans. He writes:

It seems to me that ditching the dysfunctional DB/DC language is the best way to start these repairs. Political leaders in the United Kingdom, the Netherlands, Denmark, and Australia have already done so. They now speak of defined ambition (DA) pension plans. Vigorous debates on how best to design and implement DA plans are taking place in all four countries.3 In my view, a good DA pension plan has six critical features:

1. A target income-replacement rate—how much postwork income is needed to maintain an adequate standard of living?

2. A target contribution rate—given realistic assumptions about working-life length, longevity, and net real investment returns, how much money needs to be set aside to achieve the pension target?

3. Course correction capabilities—the plan provides regular updates on progress toward targets and offers course correction options when needed.

4. Fully defined property rights and no intergenerational wealth shifting—the plan design is tested for intergenerational fairness and clear property rights.

5. Long-horizon wealth-creation capability—the pension delivery organization can acquire and nurture healthy multi-decade cash flows (e.g., streams of dividends, rents, tolls) through a well-managed long-horizon investment program.

6. Payment-certainty purchase capability—plan members can acquire guaranteed deferred life annuities at a reasonable price.

The entire article, which contains more analysis than excerpted here, can be read here.

Photo by AJC1 via Flickr CC License

Chart: The Cost of Rhode Island’s Underperforming Investments

The chart above illustrates how Rhode Island’s pension fund returns stack up against the typical plan – Rhode Island has underperformed relative to the national median in three of the last four years.

The chart below illustrates the actual cost of that performance:

Chart credit goes to the International Business Times.

Illinois Loophole Lets Teacher Union Leaders Boost Pensions After Leaving Classroom

A Washington Times investigation has uncovered an interesting legal quirk in Illinois that lets retired teachers continue to build pension credit after retirement. The law allows teachers who later become union leaders to credit their union salaries towards their pension.