Pension360 | The Complete View of Public Pensions

NYU President Speaks About $800,000 Pension

New York University President John Sexton has been a polarizing figure the last few years, not only for the large exit bonuses he approved for outgoing staff but also for his own $800,000 pension.

He addressed his pension at a dinner and question-and-answer session last week with NYU students. On his pension, from NYU Local:

“After taxes, that’ll provide 400,000 dollars a year, which is a good income. I have about fifteen to twenty people that are depending upon me. And my one indulgence—you’ll notice if you look carefully that I don’t own a suit, and I wear TravelSmith or expandable waist pants—the one thing I do is try to travel to places and to try to extend that to not only my family but to others, and I’d like to have the latitude to do that. That doesn’t mean I will do it. It doesn’t prevent me from donating some of that salary.”

“It’s because I don’t have a savings account that I do need that money.”

“I’ve never asked for a particular salary.”

And on his retirement plans:

“Gordon [Brown] is the UN High Commissioner for Education. He’s spending his life, and he wants me to spend my life other than my teaching, trying to get education to the abjectly poor: slums of India, Haiti, sub-Saharan Africa. I think that’s probably what I’m gonna do.”

“I do these periodic reflections. I’ve done about eight or ten of them. They’re on my website. The one I’ve been working on [recently] is how you could create a system in the United States that found the most talented students, matched them with the right school, and made it possible for them to go there.”

The rest of the questions didn’t have anything to do with pensions or retirement, but his answers are worth reading nonetheless. Check out the story here.

Pension Staffers Are Highest-Paid Workers on Virginia Payroll

The Richmond Times-Dispatch recently obtained salary data for all workers on Virgina’s payroll. Who topped the list of the state’s highest paid employees? Two top investment staffers at the Virginia Retirement System.

From the Richmond Times-Dispatch:

VRS Chief Investment Officer Ronald D. Schmitz tops the list, with $786,596 in cash compensation thanks to a hefty bonus. And former CIO Charles W. Grant, now director of internal asset management, earned $670,811.

[…]

The top pair earned more managing the $66 billion Virginia Retirement System than the top pair of employees for California’s $302 billion state employee retirement system, the largest in the nation. They also took home more than the top two managers in other states with larger portfolios, including Texas, New York and North Carolina.

“We’re basically paying, if you compare it to New York, three times the salary for a fund that is one half of New York’s,” Michael W. Thompson, chairman and president of the Thomas Jefferson Institute for Public Policy, said of the top earners. “When you just look at the numbers, you can’t help but wonder why we are special. What puts Virginia in a position to offer that kind of compensation?”

VRS officials say they have a fair compensation package designed to attract and keep the best investors. VRS paid $4.5 million in bonuses to 42 of its investment staff members for exceeding performance benchmarks.

Its investors make far less than they would on Wall Street or working for a private endowment. But that’s true of most government jobs, which in Virginia historically lag behind private business wages. A state Department of Human Resource Management report from December said state workers would need a 21 percent raise on average to make them equal to the private market.

The VRS board aims to pay better than 75 percent of public pensions.

Like most public pension funds, the Virginia Retirement System must manage a delicate balancing act: paying salaries high enough to hire and retain strong talent while taking care to not waste taxpayer money.

The Joint Legislative Audit and Review Commission, the entity that has oversight over VRS, said concerns about the high compensation totals were “valid.” The Commission will “monitor the situation.”

Quinn: No Plan “B” On Pension Reform

Most experts agree that Illinois’ pension reform law, passed in December, currently stands on shaky ground after a July ruling from the Illinois Supreme Court extended constitutional protection to retiree health premiums.

But Illinois Gov. Pat Quinn isn’t ready to write off the law just yet. In recent interviews, he’s also been steadfast that he’s not ready to start drawing up a backup plan, either.

From the Associated Press:

Gov. Pat Quinn argued Friday that it makes no sense to develop a contingency plan.

The Chicago Democrat, who “fervently” believes the plan is constitutional, said in an Associated Press interview that he’d like to get feedback from the courts before proceeding despite Illinois’ urgent financial difficulties.

“You don’t exactly help your position before the court if you say, ‘Well I’ve got a plan b out here, maybe you could take that instead,’ and it’s not even passed by the Legislature,” Quinn said. “That’s a very bad strategic position …”

Quinn’s comments come as he faces a tough re-election challenge from Republican businessman Bruce Rauner (ROW-nur). He opposes the law Quinn signed in 2013.

After years of debate, lawmakers approved a plan that cuts benefits for most employees and retirees aimed reducing the state’s massive unfunded liability.

Unions sued over the law, saying it violates the Illinois Constitution.

But in a separate case on retiree health care, the Illinois Supreme Court in July ruled a law requiring retirees to pay more for health insurance was unconstitutional. The decision centered on the constitution’s strong protections for retirement benefits.

Quinn has drawn criticism for the lack of backup preparations. Last week, a columnist for the Chicago Tribune wrote:

Gov. Pat Quinn says he doesn’t need a “Plan B” to address the problem because he believes the Illinois Supreme Court will uphold the pension reform law he signed in December.

[…]

Quinn’s faith in the Illinois Supreme Court is farfetched. In July, the court issued a thumping 6-1 ruling striking down a previous legislative effort to cut health care subsidies to state retirees and employing language that seemed to serve as a funeral oration for the pension reform law.

Addressing the state’s “but we can’t afford to provide the benefits we promised!” argument, the majority wrote that the unequivocal pension protection clause in the Illinois Constitution “was aimed at protecting the right to receive the promised retirement benefits, not the adequacy of the funding to pay for them.”

Even if Quinn genuinely has hope that the court will gymnastically OK the pending law nevertheless, he still owes it to us to reveal what he proposes to do when — I mean if — those hopes are dashed.

As Pension360 has covered, pensions are becoming a bigger part of the race for Illinois governor in light of the July court ruling that opened the door for reworked reform measures.

Study: Investors Think Pension Liabilities Are “Systematically Undervalued”

When it comes pension liabilities, investors are skeptical of the numbers they’re being presented with. That’s according to a study released today by Llewellyn Consulting that examined how investors react to the stated liabilities of corporate defined-benefit plans.

The study comes from the UK, but it has great relevance to the United States, where watchdog groups believe pension liabilities are chronically under-reported.
From Financial Times:

The study, to be published on Monday, found company valuations were being significantly impacted by investors taking a more sceptical view on the risk of defined benefit pension schemes, which remain a large and volatile component of corporate balance sheets.

“The implication is that reported pension liabilities are regarded by markets as being systematically undervalued; that markets give larger weight to pension liabilities than to pension assets; and/or that a higher level of liabilities is viewed as representing a higher risk,” said the report.

[…]

The report, conducted by Llewellyn Consulting, a London economics advisory, in conjunction with academics at Queen Mary University, is the first-in depth analysis to quantify the weight that investors put on DB pension scheme risk.

Researchers matched company financial and DB-pension-related data taken from FTSE 100 company statements from 2006-2012 with corresponding stock market performance and company valuation data.

The report found that FTSE 100 companies with the largest DB pension schemes were penalised “most heavily” by the market, even when the scheme was reported as fully funded, and regardless of the stated recovery plan.

The financial watchdog group Truth In Accounting believes that the United States is under-reporting its unfunded pension liabilities by $980 billion.

Photo by www.SeniorLiving.Org

A Step Toward Pension Transparency in Boston

As part of recent contract negotiations, the Massachusetts Bay Transportation Authority (MBTA) has agreed to disclose more of its pension data to the public.

The MBTA retirement fund is among the most tight-lipped public pension funds in the country, due to laws that exempt it from following public records laws.

The MBTA will now release its members’ monthly pension benefits to the public. It will also improve its annual financial reports to include more information.

Reported by the Boston Globe:

Under the contract, the Boston Carmen’s Union adopted language to require the $1.6 billion T retirement fund to disclose members’ pension benefits to the MBTA at least monthly. The MBTA in turn will post them on the state website that discloses all public employee pensions, Open Checkbook.

In addition, the union agreed that fund trustees will improve the annual report to meet the standards of the Government Finance Officers Association.

The fund’s annual report for years has left out essential elements, prompting warnings from auditors. The fund also failed to disclose a $25 million loss on a hedge fund investment in 2012, until the matter was reported by the Globe last year. Currently, the loss is posted on the pension fund’s website.

The union, which also won a 10 percent pay increase over the next four years, approved the pension and work agreements last weekend. The Massachusetts Department of Transportation affirmed the $94 million accord Wednesday.

The T pension fund, partially supported by taxpayers, is organized as a trust and not required to follow public records laws. That position was upheld by the state Supreme Judicial Court in 1993.

Transparency advocates didn’t get everything they wanted, however. The fund is still refusing to disclose documents related to investment losses associated with certain hedge funds.

Photo by Truthout.org via Flickr CC License

Indiana Pension Fund Assets Hit Record High

Recent data revealed that assets of the Indiana Public Retirement System (INPRS) hit at all-time high of $30.2 billion in 2014.

Fund officials attribute the record to “great” investment returns. The fund returned 13.7 percent in fiscal year 2013-14, which ended June 30. That number falls well short of what the S&P 500 returned over the same period, but the INPRS improved its funding ratio because of a confluence of factors, including employers making full contributions into the system.

5 Potential Outcomes Of CalPERS’ Hedge Fund Pullback

The last week has seen a flurry of debate of what CalPERS’ hedge fund divestment actually means in the bigger picture.

Is this an instance of just one fund shifting its investment strategy? Or is it emblematic of a larger, accelerating trend?

At FinAlternatives, the founder of a hedge fund marketing firm has weighed in on the potential outcomes of CalPERS’ decision. Don Steinbrugge writes:

Agecroft Partners believes we will see the following 5 outcomes:

1. Continued pressure on hedge fund fees for large mandates

Over the past 5 years there has been a strong trend of hedge funds increasingly offering fee breaks for large pension funds and the clients of institutional consulting firms. These fee breaks began with a discount on management fees only, but now often includes performance fees. Fee breaks vary by manager, but for a typical hedge fund with a 2 and 20 fee structure the discount is often 25% off standard fees…

2. Pension funds will continue to increase their allocation to hedge funds

The average public pension fund will continue their long term trend of increasing their allocation to hedge funds in order to enhance returns and reduce downside volatility of their portfolio…

3. More focus on smaller hedge fund managers

In a study conducted from 1996 through 2009 by Per Trac, small hedge funds outperformed their larger peers in 13 of the past 14 years. Simply put, it is much more difficult for a hedge fund to generate alpha with very large assets under management…

Steinbrugge writes much more over at the link, here.

Steinbrugge is the Founder and Managing Partner of Agecroft Partners, a global hedge fund consulting and marketing firm.

CalSTRS Doubles Down On Clean Energy Investments

At least one pension fund is seeing the potential for “green” (read: big money) in clean energy investments.

CalSTRS announced plans to significantly ramp up investments in the “green” sector from $1.4 billion to $3.7 billion over the next 5 years. AP reports:

CalSTRS CEO Jack Ehnes says the pension fund is seeing more opportunities in low-carbon projects and technologies. The fund is hoping also to help push for stronger policies aimed at fighting climate change, Ehnes says.

If policies are adopted that impose a price on carbon emissions to discourage pollution, the fund could increase its investments further, to $9.5 billion.

The fund has a $188 billion portfolio.

The clean energy and technology investments will be made through holdings in private equity firms, bonds, and infrastructure as suitable investments come available, the fund says.

The move comes on the heels of calls in recent years for pension funds to divest from fossil-fuel dependent investments. From the Financial Times:

At least 25 cities in the US have passed resolutions calling on pension fund boards to divest from fossil fuel holdings, according to figures from 350.org, a group that campaigns for investors to ditch their fossil fuel stocks.

Three Californian cities, Richmond, Berkeley and Oakland, urged Calpers, one of the largest US pension schemes, with $288bn of assets, and which manages their funds, to divest from fossil fuels. Calpers has ignored their request.

Calpers said: “The issue has been brought to our attention. [We] believe engagement is the best course of action.

No pension funds have yet divested from fossil fuel-dependent investments for social reasons, including CalSTRS.

But you can expect pension funds to go where they think the money is; in the case of CalSTRS, they are seeing “green” in clean energy going forward.

Photo: Paul Falardeau via Flickr CC License

San Diego Fund To Consider Firing Risk-Keen CIO

The San Diego County Employees Retirement System (SDCERS) is by now notorious for its risky investment strategies, which include heavy use of leverage.

Pension360 has covered the pension fund’s board meetings this month, during which some trustees wondered aloud whether the fund should dial back risk.

Now, the board is considering another item: whether the fund’s chief investment officer should keep his job. Reported by the San Diego Union-Tribune:

The county pension board voted Thursday to formally consider firing their Texas investment consultant.

The decision on the future employment of Salient Partners of Houston was set for Oct. 2, one day after the last of the county’s in-house investment staff was scheduled to go to work for the investment firm as part of a years-long outsourcing push.

In the meantime, Chief Investment Officer Lee Partridge of Salient will no longer be permitted to risk up to five times the amount of San Diego County’s pension money invested under his “risk-parity” strategy.

The board considered yesterday the idea of allowing higher amounts of leverage in pension fund investments. But that idea was voted down by a measure of 5-2.

Now, the board has suspended its CIO’s ability to use any leverage at all until the board votes on the CIO’s future. That vote will be held in early October.

Photo by dktrpepr via Flickr CC

Dallas Fund Loses Nearly $200 Million On Real Estate Ventures

The Dallas Police and Fire Pension System knew that its real estate losses were bad, but they didn’t learn the exact figures until a Thursday board meeting.

Trustees of the $3.3 billion pension fund learned Thursday that it has lost $196 million on real estate investments made in 2005 and later. Those losses were a big reason why the fund’s overall portfolio in 2013 returned just 4.4 percent.