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Washington Pension Board Declines to Divest From Fossil Fuels

The Washington State Investment Board (WSIB), the entity that handles investments for the state’s pension systems, at its latest board meeting weighed whether to divest from fossil fuel-based companies.

The Board ultimately decided against divestment. But the members said they would continue to evaluate whether climate change posed any risk to pension investment returns, and would use their power as major shareholders to push companies for transparency about financial risks posed by climate change.

The WSIB has major stakes in oil and coal investments.

Further details on the board’s decision, from the Olympian:

When evaluating a future investment, the SIB said it will consider whether climate change poses any financial risk to its expected returns.

It should not stop investing in lucrative but controversial energy projects. That would expose the board to potential legal action over its failure to produce as much value as possible.

Outgoing SIB Chair Jim McIntire, who is also the state Treasurer, proposed a more responsible strategy for showing sensitivity to environmental issues. He said the SIB should press companies for greater transparency about the risk from climate change, and how they are mitigating that risk.

A large institutional investor such as the state of Washington can use its leverage to change company policies. McIntire said that’s the SIB’s preferred approach.

[…]

The SIB’s legal mandate is to make money for the pension funds it manages. Its fiduciary duty is simply to get the best return possible for the individuals who will someday depend on those pensions.

But setting investment policy is more complex than that. The SIB members are responsible for examining the short- and long-term risks of its investments. And that requires assessing both internal and external factors that might influence an investment’s return.

The WSIB presents an argument many pension funds have made over the past few months: divestment isn’t as effective as lobbying for change as a major shareholder.

No public pension funds in the U.S. have yet divested from fossil fuel companies on the grounds of climate change.

Pulitzer Prize Winner: Hedge Funds Not Worth The Risk For Pensions

David Cay Johnston, former Pulitzer prize-winning reporter for the New York Times and lecturer at Syracuse University, has written a column calling for pensions to stop risking assets with hedge funds.

He says the nature of hedge funds make the investment “not suited” for pension funds. First, he takes hedge funds to task for their fee structure. From the piece, published on Al-Jazeera:

Hedge funds charge hefty fees. Many hedge funds charge what is known in the trade as 2 and 20. That is for a 2 percent annual management fee, or $20,000 per $1 million, and 20 percent of all gains. Julian Simon’s Renaissance Technologies charges a 5 percent base and 44 percent of gains. From 1982 through 2009, when it averaged extraordinary 35 percent annual returns after expenses, that was a great deal, but since then, Simon has underperformed the market.

Compare these numbers with the very well-managed ExxonMobil pension fund, which its latest disclosure reports show has overhead charges of less than $1,200 per $1 million. Vanguard 500 investors pay as little as $500 annually to manage $1 million.

To get a better sense of the numbers, consider a year when the market return is 5 percent and a hedge fund earns that. On a $1 million investment, after a 2 percent management fee and a 20 percent profit performance fee, the hedge fund investor will be ahead by $19,200, or less than 2 percent; the Vanguard investor will be ahead by $49,950, or almost 5 percent.

The other facet of his argument is that hedge funds, while not necessarily a bad investment for other entities, are not a “prudent” investment for pension funds to make. From the editorial:

Hedge funds simply are not appropriate for taxpayers and public-sector workers. They are, rather, for wealthy speculators willing to take big risks in the hopes of earning big rewards while being able to tolerate the chance that an investment will shrivel or even be wiped out.

Pension money should be invested prudently. “Prudent” comes from the word “provident,” meaning to prepare for the future. And while its origins are in religious concepts, failing to prudently handle earthly money can turn the end of life into hell.

Given survivor benefits in pension plans, these pools of money should be treated as widows-and-orphans money. Under ancient and well-tested principles, the money of such vulnerable people must be invested with exceptional care to safeguard from loss. That means investment-grade bonds (more on that below) and either blue chip stocks or broad indexes.

Only with the rise in the last six decades of modern portfolio theory — investing in many different arenas to spread risk — have we gotten away from the idea that for widows, orphans and pensioners, only high-grade corporate bonds and a few blue chip stocks paying big dividends are appropriate investments.

The rest of the piece can be read here.

Gina Raimondo Suddenly Pulling In Union Endorsements

Heading into the primary that took place earlier this month, Rhode Island’s democratic candidate for governor Gina Raimondo had notoriously little union support.

That was due to the 2011 pension reforms she spearheaded. Unions, aside from disliking the policy, thought they never got a fair shake during negotiations.

But now Raimondo is pulling in union endorsements by the dozen. Her stance on pensions hasn’t changed. So how is she doing it? The Providence Journal asked the same question:

What did Raimondo tell these unions to win their support?

Neither Raimondo, the state’s general treasurer, nor her Republican opponent, Cranston Mayor Allan Fung, has been willing to make public their written answers on any candidate questionnaires they submitted in pursuit of endorsements.

Why not? They won’t say.

[…]

Gina Raimondo is on a roll, with a new endorsement almost every day this past week.

In the last week alone, the Democratic nominee for governor has picked up glowing endorsements from the International Brotherhood of Electrical Workers Local 99 and an arm of the Service Employees International Union that represents “nearly 1,000 contracted janitors at office buildings in R.I.”

A week earlier, she netted the endorsement of the separate wing of the SEIU that won the right to unionize at-home child-care workers.

Raimondo has now picked up endorsements from 15 unions.

Unions have vocally opposed Raimondo’s 2011 reform efforts for years.

But it could be that they see her as the lesser of two evils; unions could have reason to believe they’d have better luck with Raimondo in office than her Republican challenger, Allan Fung.

But without the release of the questionnaires, we won’t know for sure.

Russia’s Pension Put-Off Could Have Consequences

Since 2013, Russia has diverted more than $30 billion worth of pension contributions to plug holes elsewhere in the country’s budget.

Pension360 covered a brief, abrupt press conference earlier this month where Russia’s Economy Minister hinted the country could take money from the pension fund to assist companies hurt by Western sanctions.

Now, that has come to fruition – Russia will withhold over $8 billion from its pension fund, and much of that money will go to a “reserve fund” to aid state-owned companies affected by sanctions.

But there are consequences to this decision, writes Mark Adomanis, a Forbes contributor. From his editorial in the Moscow Times:

Rather than long-term improvements to Russia’s economic competitiveness, this money will be spent, in business parlance, “just to keep the lights on.”

…The costs [of withholding pension payments] will grow exponentially more severe the longer they are incurred.

Due to demographic changes that have seen the number of young adults halved, one of two things will happen: Russia’s pension system will need a lot more money, or pensions will become a lot less generous. There is simply no other way to make the math work. Maybe there is a better example of the tension between the short and long terms, but I can’t think of a more illustrative example than raiding the pension fund to give a bunch of money to Rosneft.

Russia can get away with such short-term-focused policies for a while. As Adam Smith noted, there is a lot of ruin in a nation, and even with all of the mounting difficulties Russia will likely find a way to stumble through. But in mounting such a panicky and reactive response to U.S. and EU sanctions, Russia is setting itself up for some really serious difficulty a few years down the line.

Earlier this year, a decision by Russia to freeze its pension contributions caused “deep disagreement” among government officials. The money was used to plug budget holes elsewhere.

Georgia Candidate Wants Pension Funds to Invest In Start-Ups

Jason Carter, Georgia’s Democratic candidate for governor, released his economic plan this month, and in it there’s an idea of particular interest to pensions: Carter wants to make it easier for the Teachers Retirement System of Georgia to invest in Georgia-based start-ups.

From the Atlanta Journal-Constitution:

The Democrat argues in his economic pivot that he wants teacher pensions to be able to pump funds into local startups “so long as we’re making sure that we can manage the risk in ways that make sense.” He sees it as a way to boost a state-backed effort to invest in venture capital firms that, as you’ll see in today’s AJC, has lagged.

“The things that concern the teachers is to make sure you’re stewarding the pension appropriately. So it’s crucial to make sure that we are managing the risk in ways that works,” he said. “But we shouldn’t have those pension funds losing out on higher growths and higher returns just because of artificial caps on what it can do.”

Georgia lawmakers cleared the way for pension funds to invest up to 5 percent of their assets in alternative investments, such as venture capital firms, that had at least $100 million on the books. But the law excluded the Teachers Retirement System of Georgia, the state’s largest public pension with nearly $59 billion in assets.

North Carolina and other nearby states allow their teachers’ fund to invest in startups, but Gov. Nathan Deal and other Republicans have raised red flags. Lawmakers signaled they were reluctant to include the teachers fund in the 2012 legislation because the group’s board hadn’t approved the changes.

Critics are wary of the risk attached to investing in unproven companies. Other critics say it would open the door for cronyism and make pension investments increasingly political.

A 2012 state law enabled most Georgia pension funds to invest in alternatives for the first time. But the law prohibits alternatives from making up more than 5 percent of total assets.

Lagerkvist: Here Are the Seven Deadly Sins of the New Jersey Pension System

New Jersey’s pension system is shouldering $51 billion of unfunded liabilities. How did it get that way?

In an editorial in the Philadelphia Inquirer, investigative reporter Mark Lagerkvist goes through what he calls the “seven deadly sins” of the state’s pension system. Excerpted from the article:

#1 – Retirement shams

A New Jersey Watchdog investigation revealed state attorneys general rehired 23 of their own retirees as investigators and supervisors. More than half of those law enforcement officials “retired” for only one day before they went back to work for the state.

The rehired retirees collected $3.77 million a year — $1.56 million a year in pension pay plus $2.21 million in salaries. Such costly personnel maneuvers have happened so often that state officials even have a name for it — “resignation pickup.”

#2 – Full pensions for part timers

The loophole, exclusive to the Public Employees Retirement System, is open to a wide range of part-time elected and appointed officials from New Jersey’s 565 municipalities, 590 public school districts, 21 counties and other governmental entities.

The list includes state legislators, county freeholders, mayors, councilmen, school board members, prosecutors, judges, town attorneys, tax assessors and many others who work for public entities covered under PERS, the largest New Jersey retirement fund.
#3 – Double-dippers and triple-dippers

Eighty percent of New Jersey sheriffs — elected in 17 of the state’s 21 counties — collect pensions as law enforcement retirees in addition to their six-figure salaries. Their payrolls include 29 undersheriffs who also double-dip. Overall, those 46 top county cops rake in $8.3 million a year – $3.4 million in retirement pay plus $4.9 million in salaries.

#4 – Disability pension abuses

5,500 retired police officers in New Jersey receive more than $200 million a year in disability pensions. They have been judged “totally and permanently disabled” by the state Police and Firemen’s Retirement System or State Police Retirement System.

“I’d say 95 percent of the disability applications are questionable,” said John Sierchio, former chair of the PFRS Board of Trustees. “It’s people who don’t want to work anymore.”

#5 – Ill-advised health benefit costs

If you think a $51 billion pension deficit is bad, here’s something worse.

The New Jersey state retirement system also faces a staggering $53-billion shortfall in funding retiree medical benefits, according to a report released by state actuaries last month.

#6 – The deadbeat state

From fiscal 2006 through 2011, New Jersey shortchanged its pension funds by more than $10 billion. Instead of contributing the expected $13.1 billion to the retirement accounts during that period, the state only pitched in $2.3 billion, according to a report by Common Sense Institute of New Jersey.

#7 – The $100,000 Club

New Jersey’s $100,000 Club of retired public officials has ballooned by 75 percent in the past three years. It is growing at a faster rate than the state’s pension deficit.

A total of 1,731 retirees collected $100,000 a year or more from state pensions last year, an increase of 739 pensioners since 2010, according to a New Jersey Watchdog analysis of Treasury data.

Mark Lagerkvist is an investigative reporter at the watchdog group New Jersey Watchdog.

There’s much more in the way of explanation over at the article, here.

Pennsylvania Candidate Wolf Doubles Down on Pension Stance

Pension reform has been a center-stage issue since May in the race for Pennsylvania governor.

During an interview this week with the Philadelphia Public School Notebook, Democratic candidate Tom Wolf forcefully doubled down on his position that pension reform isn’t the state’s fiscal priority. The exchange:

Q: How is the escalating cost of pensions impacting school financing in Pennsylvania, and what do you think should be done about it?

A: Our current pension situation is the direct result of almost 10 years of leaders in Harrisburg kicking the can down the road and the state paying less than its fair share. What we’re seeing from Gov. Corbett is more political games – he is pushing a plan that creates no immediate savings for taxpayers.

As governor, I will let Act 120 [a 2010 law reducing pension benefits to new employees] work and create innovative solutions that are fiscally responsible and fair and beneficial to taxpayers and future employees.

A further explanation of how the two candidates differ on the issue of pensions, from the Times-Herald:

Corbett says the burgeoning cost of Pennsylvania’s public pensions is a crisis that requires prompt, decisive action. Wolf argues that it’s a problem that can be resolved in the years ahead.

Corbett wants to scale back pensions for future school and state employees as a meaningful step toward savings. He says the taxpayers’ share of the pension costs for current employees — $2.1 billion this year — is crowding out funding for other programs and helping drive up local property taxes.

Wolf contends that the pension problems are partly the result of the state contributing less than its fair share of the costs for nearly a decade and that a 2010 law reducing pension promises to future employees and refinancing existing obligations needs more time to work.

Act 120 was a 2010 law that reduced pension benefits for some employees but kept intact the current defined benefit system. Wolf has been adamant that the law needs time to work.

Corbett wants to shift new workers into a 401(k)-type plan.

Photo Credit: “TomWolfYuengling” by Tom Wolf. Licensed under Creative Commons Attribution 2.0 via Wikimedia Commons

Exploring Defined Benefit Distribution Decisions By Public Employees

When public workers with defined benefit plans leave their jobs, they are usually given the option to either withdraw their accrued retirement savings as a lump sum or keep their retirement account open, to be redeemed upon retirement.

If the employee elects to go the lump-sum route, they can roll that money over into an IRA or simply accept it as taxable income and pay the associated penalty for early withdrawal.

Employees around the country make this decision every day. But it’s one with significant retirement implications, and there’s little understanding as to what drives people to decide one way or the other.

In a paper recently published in the Journal of Public Economics, Robert L. Clark, Melinda Sandler Morrill and David Vanderweide explore the decision-making process.

The basic findings of the paper:

Using administrative data from the North Carolina state and local government retirement systems, we find that over two-thirds of public sector workers under age 50 separating prior to retirement from public plans in North Carolina left their accounts open and did not request a cash distribution from the pension system within one year of separation.

Furthermore, the evidence suggests many separating workers, particularly those with short tenure, may be forgoing substantial monetary benefits due to lack of knowledge, understanding, or accessibility of benefits. We find no evidence of a bias toward cash distributions for public employees in North Carolina.

More detailed findings from the paper:

We find that fewer than one-third of all terminating public employees requested a LS [lump sum] within one year of separation, despite the finding that for over 70% of terminations, the LS was larger than the estimated PDVA. These results indicate a low probability of leakage from retirement funds, although many workers are seemingly forgoing the possibility of higher retirement income possible from rolling over funds to an IRA.

We offer several potential explanations for why the distributional choice from a public pension plan is more complex than a simple wealth comparison at a point in time. First, separating participants in TSERS qualify for retiree health insurance from the State Health Plan with no premium as long as they are receiving a monthly annuity from TSERS…Despite the difference in coverage of retiree health insurance in the two systems, we do not see a large difference in the distributional choices between separating workers that will qualify for retiree health insurance and those that will not.

Second, we consider the likelihood that terminated participants may plan to return to public employment. The expectation of returning to public employment might make maintaining the account the optimal choice for these individuals…

…workers are not responding to incentives of outside investment options. We do find that when the state unemployment rate rises, individuals are significantly less likely to withdraw funds. This could be due to selection into who is separating employment, or it may be that individuals more heavily rely on defaults in times of economic turmoil.

The final explanations we consider for why public sector workers in North Carolina do not withdraw funds at a higher rate are financial literacy, peer effects, and inertia. The default is to leave funds in the system. The behavior we observe is consistent with many individuals accepting the default option and forgoing potentially more valuable benefits.

The paper, titled “Defined benefit pension plan distribution decisions by public sector employees”, can be read in full here.

Photo by www.SeniorLiving.Org

Europe’s Largest Pension Is “Extremely Happy” With Hedge Funds

Eduard van Gelderen, the newly appointed CIO for ABP, Europe’s largest pension fund, yesterday gave his first interview since taking the job.

ABP is the pension fund for Netherlands’ public workers and controls over $360 billion in assets.

In the interview, van Gelderen addressed the trend of some pension funds scaling back their hedge fund allocations – and said his fund will have no part in it. From Chief Investment Officer:

“No,” says Eduard van Gelderen, the man overseeing investments for ABP, Europe’s largest pension fund. “No. Absolutely not. We are extremely happy with them [hedge funds].”

[…]

“[For us], hedge funds are taken care of by New Holland Capital”—an independent holding that span out of APG almost a decade ago—“and we are extremely pleased with the track record they have shown over the last years.”

At the end of 2013, ABP had assets of around €288 billion, of which it had a 5% strategic allocation to hedge funds, according to its annual report. This allocation outperformed its benchmark by 619 basis points last year and van Gelderen—who took over as CIO from Angelien Kemna on September 1— is resolute that hedge funds will remain a part of the portfolio APG manages for Europe’s largest pension.

ABP’s hedge fund portfolio is more than four and a half times larger than CalPERS’ portfolio was before it pulled out of the asset class.

Read the full interview here.

Photo credit: “EU-Netherlands” by NuclearVacuum. Licensed under Creative Commons Attribution

Quebec Stays Course on Pension Reforms In Face of Mounting Protests

Protestors are flooding Montréal streets in opposition of Quebec’s Bill 3, a measure that would freeze COLAs for retirees and increase employee contributions.

But the government isn’t willing to reverse course on their plan to lower the costs of the province’s pension system. Bill 3 is expected to pass within a month. From the Montreal Gazette:

The provincial government won’t budge on the proposed reform of municipal pension plans, Municipal Affairs Minister Pierre Moreau said Tuesday, three days after the largest protest yet against Bill 3 was held in Montreal.

“We are not in a bargaining situation,” he said. “The government and experts have said, in a report that was welcomed by everyone in the National Assembly, that there was an urgency to act to save those pensions. That’s what we’ve done.”

The minister said the government is done consulting interested parties, including union leaders, retiree representatives and the Union des municipalités du Québec, and has moved on to drafting the bill. Union leaders called the hearings a “farce.”

[…]

The government won’t necessarily wait for actuarial reports on the health of the pension plans to be published next month before passing the bill, Moreau added.

“Having the numbers doesn’t change anything,” he said. “It doesn’t change anything for the pensions that are totally under-financed.

“For example, even if I don’t know your weight, if you’re overweight I know you’re in precarious health.”

Bill 3 is part of a larger austerity plan to cut government costs and pay down a deficit of nearly $4 billion.

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