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Think Tank: Pennsylvania Lawmakers Need To Reform Pensions – Now

Katrina Anderson, a senior policy analyst and director of government affairs for the Commonwealth Foundation, has published an op-ed in today’s Patriot-News urging Pennsylvania lawmakers to “reform the [pension] system now”.

Ms. Anderson explains her support for a solution similar to Gov. Corbett’s plan, which would move new hires into a 401(k)-style plan. An excerpt from the op-ed:

The first step lawmakers need to take is changing state-level retirement plans for themselves and new teachers and government workers. This would not erase our $50 billion pension debt, but it would prevent the problem from getting worse while protecting families from higher taxes and preserving the system.

Our current pension system has a huge flaw: It’s too easy to boost benefits when times are good and skip payments when they aren’t.

Moving new employees to a well-designed 401(k)-style plan would prevent deliberate underfunding and make “kicking the can down the road” impossible.

Reform would also benefit employees. As workers change jobs—an average of 10 times in a career—retirement portability and personal ownership of investments have never been more important. Such flexibility simply can’t be found in the current system.

But flexibility is the hallmark of 401(k)-style plans, which are also always fully funded—meaning they carry no debt—and offer predictable costs.

Not only has most of the private sector already left the old system behind—including the Wolf Organizaiton, founded by Democratic gubernatorial candidate Tom Wolf—but many states have as well. Since 1996, 18 states have converted to plans which build on the 401(k) model.

There are several bills in the General Assembly that would address this crisis for new employees, including plans that combine aspects of the current system and 401(k)s into what’s commonly called a hybrid plan, as well as reforms addressing the municipal pension crisis.

Conventional wisdom says lawmakers won’t do anything significant shortly before an election. But many statesmen in the legislature are fighting on behalf of retired teachers like Bill Frye to address this issue now.

They should understand—as property tax payers already do—that the stakes are too high to play politics and ignore real reform.

Anderson points out that pension costs have risen more than $600 per household since 2008—and are projected to rise another $550 per household in the next five years.

Read the entire column here.

Some Pension Funds Are Interested In The Hedge Funds CalPERS Dropped

The CalPers Building in West Sacramento California. — The CalPERS Building in West Sacramento California.

CalPERS announced plans to phase out its $4 billion hedge fund portfolio last month. But other pension funds are now interested in the hedge funds CalPERS is getting rid of, according to a report from FinAlternatives:

The California Public Employees’ Retirement System already has potential buyers kicking the tires of its $4 billion hedge fund portfolio.

The pension, which last month announced it would take at least a year to “strategically exit” its hedge fund investments, has received indications of interest for some or all of its holdings from other state pension funds, reports Fortune, citing sources familiar with the situation.

The State of Wisconsin Investment Board, which has yet to meet its hedge fund investment targets, was identified by a source as one of those potential buyers.

A CalPERS spokesman told Fortune the pension will “evaluate all possibilities” with the portfolio, but would not confirm interest from other pension funds.

“Ultimately, we will exit those investments in a manner that best serves the interests of the fund,” said the spokesman.

Pension360 has covered the fact that, while CalPERS has exited hedge funds, not many pensions have followed in their footsteps.

Photo by Stephen Curtin via Flickr CC License

Roger Martin: CalPERS, Other Top Funds Could Undermine Capitalism

Roger Martin, Academic Director of the Martin Prosperity Institute at the Rotman School of Management and the world’s 3^rd most influential business thinker according to the Thinkers50 list, has written a thought-provoking column over at the Harvard Business Review.

The premise of the column is that the largest pension funds are monopolistic entities – and although Martin doesn’t think they’re doing a bad job, he is worried that, like most monopolies in history, they will “slowly but surely gravitate to serving themselves, not their customers.”

Here’s a few excerpts from the column:

The top 350 pension and sovereign wealth funds control just under $20 trillion of assets. They are the largest holders of securities in for-profit organizations competing in democratic capitalist environments.

[…]

If one looks carefully at these holders of competitive, capitalist company securities, one thing jumps out distinctly: they are not themselves competitive, capitalist organizations. Virtually all of them share a single form: a monopoly enforced by government regulation. As a Canadian, I have no choice as to where the pension contributions that are legally deducted from my paycheck go. Whether I like it or not they are sent to the Canadian Pension Plan Investment Board. CPPIB is granted a monopoly right by the Government of Canada to serve me (except in Quebec, where the relevant and equivalent monopoly body is the Caisse de Dépôt et Placement du Québec).

The same rules hold in the home of the brave and the land of the free. California state employees, Texas teachers, and New York City workers have zero choice. They are served by government-regulated pension fund monopolies. In fact, 19 of the top 25 U.S. pension funds, with $2.1 trillion of assets under management, are government-regulated monopolies. The other six, with $500 billion of assets, are corporate-run monopolies in which employees have little or no ability to opt out.

Capitalism has broad support because of a general belief in the power of competition, free entry to industries, and customer choice to produce increasing productivity and high levels of innovation. However, the ownership of those actively competing companies is increasingly in the hands of organizations that face zero competition, no threat of entry, and have customers who are forced to use them.

Why is putting the economy in the hands of regulated monopolists a good idea? Obviously, many of those monopolists are doing a good job. I don’t begrudge sending my pension deductions to CPPIB because it is well run and does a nice job for me with my pension savings, and I have to applaud California Public Employees’ Pension Fund (America’s second largest pension fund with about a quarter of a trillion dollars of assets under management) for making the bold and brilliant decision to eliminate hedge fund investments from its holdings.

But the broad history of regulated monopolies is not inspiring. Without the forcing mechanisms of competition, entry, and choice, monopolies slowly but surely gravitate to serving themselves, not their customers.

[…]

If we really believe in competition and choice, then a big question we should all be asking ourselves today is what should be done about our monopolistic pension system?

You can read the rest of the piece here.

Photo by Dave Rutt via Flickr CC License

London Mayor Wants Pension Funds to Invest In UK Infrastructure

London Mayor Boris Johnson wants to merge the country’s 39,000 public sector pension plans into one scheme, which would invest in building and updating the UK’s roads, airports, railroads and other infrastructure.

The Mayor says the plan would give pensioners great returns while improving the infrastructure of the country. From the Daily Mail:

A single fund could be used to create a ‘Citizen’s Wealth Fund’ to boost the economy and improve roads, rail and airport links.

Mr Johnson argued in the Daily Telegraph that incomes from tolls on new roads, passengers on new railways and airport charges would help create returns of up to 8 per cent for pensioners who invested with them.

He calculated local authority pension funds alone could hold assets of more than £180billion, while combining all public sector pensions would yield ‘hundreds of billions’.

Mr Johnson said: ‘There are more than 39,000 public sector pension funds in this country – each with its own trustees, managers and advisers and accountants. The waste is extraordinary.

‘Think of all those advisers and investment managers taking their fees – their little jaws wrapped blissfully around the giant polymammous udder of the state. Think of the duplication.

‘But it is worse than that – because this country is missing a huge opportunity, and one that is being exploited by more sensible governments around the world.’

Mr Johnson said: ‘The little pension funds will fight for their independence; they will make all sorts of spurious arguments about the need for “localism” in managing this dosh, when of course the advice is all subcontracted to the same legion of investment managers, and when what they really care about is their fees and their tickets to Wimbledon…and their golf-club bragging rights.

‘The vested interests must be ruthlessly overridden. It is time for Britain to have its own Citizens’ Wealth Fund, deploying our assets in a useful way, helping us to bolster pensioners and cut pointless public expenditure at the same time.’

Pension funds from other countries, such as Canada, have invested in British infrastructure already.

The Mayor originally proposed his plan in an op-ed yesterday in the Telegraph, which can be read here.

Photo By Andrew Parsons/ i-Images

New York’s Sole Pension Trustee Faces New Competition In Election

Two-term New York Comptroller Thomas DiNapoli is the sole trustee of New York’s largest pension funds, but he’s now facing competition from an unlikely source: a local auditor named Robert Antonacci who claims he is more qualified than DiNapoli.

From The Associated Press:

Democratic New York Comptroller Thomas DiNapoli, chief financial officer for the state, faces an election challenge from a little-known accountant and lawyer who does similar work for Onondaga County and says he’s more qualified.

Robert Antonacci said the power of the checkbook is the key to whether state programs — such as economic development projects — are delivering. The 49-year-old Republican also said that following the flow of money through politics is how you clean up corruption.

“You can really get into the engine of government from the experience I have,” Antonacci said. “We’re going to look at everything in terms of what makes New York state tick.”

State economic development efforts, seeding proposed business expansions with tax breaks, funding or other support in return for promised jobs, will be a big initiative if he’s elected, Antonacci said. The Cuomo administration’s Start-Up New York program is one place the comptroller should be looking and verifying data, he said.

“We’re going to start with the governor and the Legislature, not the village of Podunk,” he said, referring to the mission of the comptroller’s office to audit government entities small and large.

[…]

“When you talk about getting at the underbelly of how governments run, as a CPA I have 30 years of experience of understanding how business operates,” he said. “The data is the key, and when you’ve got a CPA looking at a financial statement it’s a lot different than somebody who doesn’t have that experience.”

Both candidates have addressed the state’s pension system, as managing the fund’s investments is a large part of the comptrollers job. From AP:

[DiNapoli’s] stewardship has helped New York’s pension fund for public workers rebound from the 2008 national recession and grow to a record $181 billion, with state and municipal contribution rates declining for 2015 and 2016, he said.

[…]

As for the state’s $180 billion pension fund, Antonacci said his goal will be maximizing the return to taxpayers and not shareholder activism.

DiNapoli, as the pension fund’s sole shareholder, has sponsored shareholder resolutions at large corporations calling for more complete disclosures of their political activities, environmental practices and workplace standards at the overseas factories of suppliers. DiNapoli said those measures help protect shareholders, their investments and the companies from potential risks.

The election will be held Nov. 4.

Photo by Awhill34 via Wikimedia Commons

San Diego Pension Trustees React To Retainment of Controversial CIO

The San Diego County Employees Retirement System (SDCERS) voted 5-4 last week to retain its controversial CIO, Lee Partridge.

The vote was close, and nearly every trustee had something to say about the decision. From Bloomberg:

“All the sudden we found out we have $22 billion in exposure,” [trustee Dianne] Jacob said by telephone prior to the vote. “That should have never happened. The process is flawed. The hiring of Partridge in the beginning was flawed. Let’s get back to basics.”

[…]

“This is an exorbitant amount of taxpayer dollars being spent and is unprecedented in any other county in California,” [County Treasurer and trustee] McAllister said by e-mail before the vote. “I have strongly opposed the adoption of an outsourced government structure.”

McAllister went on, according to the San Diego Union-Tribune:

“The CEO, Brian White, has put SDCERA in the spotlight for all the wrong reasons,” said County Treasurer Dan McAllister, who serves on the pension board as part of his elected duties. “This is not the behavior we should expect from the CEO of one of the largest public pensions in the state.”

Those trustees were echoing the sentiment of city employees, many of whom had shown up to previous board meetings or written the trustees to express their insecurity with the pension fund’s investment strategy. From the San Diego Union-Tribune:

“You have a responsibility to represent hard-working San Diego County employees,” county employee Tracey Carter, a member of Service Employees International Union 221, told the board prior to the vote. “We have done our due diligence. We have separated headlines from facts. It is time to change direction with the management of the fund.”

But the majority of trustees voted not to fire Partridge. From the San Diego Union-Tribune:

“For those who continue the fear-mongering, shame on you,” said [trustee and board vice-chairman David] Myers.

More of Myers’ reaction from Bloomberg:

“Going forward with the contract is in the best interest of this organization and its members — it saves money,” David Myers, the board’s vice chairman, said at a Sept. 18 meeting. “The dysfunctionality of what is going on right now is, in my opinion, a breach of our responsibility to this organization.”

Salient Partners LP, the firm that employs Partridge, released this statement to Bloomberg:

“ [We] delivered $4.4 billion to SDCERA plan members at a lower cost and with less risk than 80 percent of similarly sized pension plans,” said Chris Moon Ashraf, a spokeswoman for the company at Jennifer Connelly Public Relations. “The average SDCERA plan beneficiary realized more than $111,000 in gains under Mr. Partridge’s stewardship for a total fee over five years of $414.”

The fund’s investment strategy was controversial because the CIO was allowed to use up to 500 percent leverage on certain parts of its portfolio, without seeking approval from the board or the fund’s director.

SDCERS returned just over 13 percent in 2014.

Florida Pension Continues Search For Senior Fixed Income Manager

The Florida State Board of Administration (SBA), the entity that manages investments for the Florida Retirement Systems, has re-posted a job listing looking for a senior portfolio manager to manage fixed income investments.

The SBA appears to have increased the top range of the position’s potential salary, from $140,000 to $180,000. The job pays, at minimum, $120,000. The listing reads:

Responsibilities

50%. Research and analysis of economic and market information to support the Internal Fixed Income investment process. Shape the interest rate view and contribute relative value ideas. This will involve, but not be limited to; analyzing written publications and conversing with economists and strategist regarding individual country or global economic conditions and prospects, researching, understanding and explaining the implications of economic projections on the current structure of internal portfolios, researching, analyzing and presenting relative value opportunities for internal portfolios and constructing, explaining and presenting trade ideas to capture relative value opportunities.

25% Supervision of and backup for Portfolio Manager

10%. Preparation for and participation in weekly group strategy meeting.

15%. Assist the Sr. Investment Officer-Fixed Income with special projects and perform other duties as delegated.

Qualifications

(Re-advertisement – Previous applicants will be considered and need not re-apply)

A bachelor’s degree from an accredited college or university in computer science, MIS, accounting, finance, business, communication, public information, marketing, economics, mathematicis, statistics, or management and five years of related professional experience, three years of which must have been at a supervisory level or higher;

Or, a master’s degree or MBA from an accredited college or university and three years of related professional experience, two years of which must have been at a supervisory level or higher.

Professional related experience will substitute for the required college education.

Preference will be given to candidates with a Chartered Financial Analyst (CFA) designation.

The application period closes on October 10.

View the listing by clicking here.

Photo by Nathan Stephens via Flickr CC License

San Diego Fund Votes 5-4 To Retain Controversial CIO

After a “tense” five-hour deliberation, the Board of the San Diego County Employees Retirement Association (SDCERA) voted 5-4 to retain its outsourced chief investment officer.

The pension fund and its CIO, Lee Partridge, have made headlines in recent months due to their high tolerance for risk and extensive use of leverage.

From Chief Investment Officer Magazine:

The board of the San Diego County Employees Retirement Association (SDCERA) declined to terminate its contract with outsourced-CIO Salient Partners at a meeting on Thursday.

As predicted by those close to the $10 billion fund, the vote came down to the wire. After nearly five hours of discussion, a motion brought by trustee Dianne Jacobs to fire Salient was blocked by five trustees, including Chairman Skip Murphy, and backed by four.

Several stakeholders presented formal recommendations about the action before the board’s vote. The majority of these representatives urged the fiduciaries not to reverse their course—a risk-parity oriented portfolio overseen and invested by Salient.

“We believe your board is at a serious juncture,” said Susan Mallett, president of the county’s retired employee association. “You are suddenly and unexpectedly considering a reversal from an investment strategy you had agreed on after years of considered discussion. As a representative of thousands of members who absolutely depend on their pensions, I have received as many worried letters about leverage as I have about the actions of this board.”

Though the majority of trustees opted not to vote for a firing, the minority was very vocal during the meeting. From the San Diego Union-Tribune:

“The CEO, Brian White, has put SDCERA in the spotlight for all the wrong reasons,” said County Treasurer Dan McAllister, who serves on the pension board as part of his elected duties. “This is not the behavior we should expect from the CEO of one of the largest public pensions in the state.”

Dianne Jacob, chairwoman of the Board of Supervisors, made a motion to terminate the Salient contract early in the meeting.

“It’s time to steer things back to the basics of simplicity and common sense not because we have received criticism but because it’s the right thing to do for retirees and taxpayers,” Jacob said.

Jacob received the support of only three of her colleagues on the nine-member SDCERA board — Samantha Begovich, Mark Oemcke and McAllister. Five votes were required to terminate the contract.

Begovich, a prosecutor who recently joined the board, used the strongest language against the consulting firm, saying it has taken advantage of the pension system and has a stranglehold on more than $10 billion of public funds. She said supporters of the firm for years have presented one-sided information about the wisdom and soundness of its investment approach. She called the firm poisonous for San Diego County.

The Board did express the desire to gradually unwind its contract with the CIO and directed its staff to come up with some options for taking control out of the hands of Lee Partridge.

Those options will likely be presented at next month’s board meeting.

Photo by Keith Ivey via Flickr CC License

Video: Funding Shortfalls and the Politics of Pensions

Here’s a short segment that dives into public pensions with Adrian Moore, vice president of policy at the Reason Foundation.

The video touches on assumed rates of return, New Jersey’s funding shortfall and the politics of pension payments.

The Reason Foundation is a libertarian-leaning think tank based in California.

Montreal Unions Will Fight “Unjust” Pension Reform Bill

A union coalition representing 65,000 workers has announced workers may strike for 24 hours in protest of the proposed pension reforms contained in Bill 3. Additionally, the union spokesman said a legal challenge could be in the works.

Bill 3 would increase pension contributions and eliminate COLAs for many workers.