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CalPERS Sticking With Commodities After Considering Pullback

CalPERS is not exiting commodities, a fund spokesman said this week, although it had slashed its commodities portfolio earlier this summer. CalPERS’ complete pullback from hedge funds made some observers wonder whether other allocation shifts were on the horizon.

But for now, the fund says its commodities investments will continue as planned. From Reuters:

The $300 billion Calpers…has maintained a portfolio of commodity futures tied to the S&P GSCI since 2008.

[…]

“This [hedge fund] decision does not impact … commodities, or any other program, at Calpers,” he said in an email, referring to Calper’s decision to pull out of hedge funds entirely.

Some of the hedge funds on Calpers list may have commodities exposure and dropping them could indirectly affect sentiment in the sector, investment advisers said.

[…]

The Calpers’ commodities portfolio has fluctuated in value since its 2008 inception, due to both the performance of the S&P GSCI and portfolio adjustments made by Calpers.

From $1.4 billion at end-June 2008, it plunged nearly 60 percent in value over the next year to around $600 million after the financial crisis. After rising to $700 million in 2010 as commodity markets rebounded from the crisis, the portfolio suddenly rocketed in value, reaching a high of $3.2 billion at end-June 2012, apparently from new money channeled by Calpers.

But as commodity markets struggled again in 2013 and Calpers realized little earnings from the investment, it slashed the portfolio, bringing it to $1.3 billion by June this year, a preliminary report for 2014 showed. Much of the funds were diverted to inflation-linked bonds, Calpers data showed.

Reports had surfaced back in August that CalPERS was seriously considering cutting back its commodities investments. The Wall Street Journal wrote:

One of the more-dramatic moves under consideration is a complete pullback from tradable indexes tied to energy, food, metals and other commodities, according to people familiar with the discussions. Calpers began making such investments in 2007 as a way of diversifying its portfolio…

[…]

The discussions are taking place between the fund’s interim Chief Investment Officer Ted Eliopoulos and Calpers’s other top investment executives. The Calpers board hasn’t yet been informed about any possible changes and no final decisions have been made, the people said.

Obviously, CalPERS never pulled the trigger on a commodities exit. But the fund has shown a willingness to quickly shift its investment policy and a preference for low-cost investments.

Do Illinois’ Candidates For Governor Need A Pension “Reality Check”?

Pensions are one of many issues taking a prominent hold in the race for the Illinois governorship.

Both candidates, Pat Quinn and Bruce Rauner, recently sat down in front of the Chicago Tribune’s editorial board for an informal debate on, among other issues, how they would each handle the state’s pension crisis.

One member of the Chicago Tribune’s editorial board, Eric Zorn, listened to both sides. Now he says both Quinn and Rauner need to stop living in their “pension fantasies”.

On Quinn, Zorn writes:

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.

Zorn then shifts to Rauner and his plan to shift Illinois workers into a 401(k)-style system:

Rauner owes it to us to explain why his ideas — he admits they’ve yet to rise to the level of a plan — are any more likely to survive court challenges than the bipartisan reform law, which he strenuously opposed.

…When I asked if joining such a plan would be mandatory, spokesman Mike Schrimpf echoed word-for-word the dodge Rauner employed in his Tribune candidate questionnaire: “We need to wait to see the parameters of what the Supreme Court says in order to carefully craft a plan that will pass constitutional muster.”

Mandatory enrollment of current public employees into 401(k)-style accounts by which they will ultimately fund their own retirements would likely not pass that muster. They’re generally not as lucrative for employees as plans that guarantee monthly pension payments.

Rauner knows this. It’s why he’s promised to allow police officers and firefighters to keep their “special retirement” that includes a standard pension, and why he projects “billions” in savings.

Zorn also decried the administrative costs associated with 401(k) plans. You can read his full editorial here (subscription required).

Photo by Chris Eaves via Flickr CC License

Idaho Fund Increases COLAs, Lowers Contribution Rates After “Banner” Year

For the Public Employee Retirement System of Idaho (PERSI), fiscal year 2013-14 was a historic one. That’s because the fund returned 17.2 percent – not a staggering return (the S&P 500 returned around 30 percent over the same period), but still one of the best performances in the history of the fund.

The pension fund’s board has rewarded its members in light of the news. The reward includes a significant COLA boost for most retirees. From the Idaho Statesman:

The PERSI board approved a cost-of-living increase for retirees that includes the state-required 1 percent increase, an additional 1 percent increase and up to 2 percent more depending upon when pensioners retired.

Employees who retired between July 1, 2010, and July 1, 2014, will get a 2 percent increase.Employees who retired between July 1, 2008, and June 30, 2010, will get a 2.08 percent increase. Employees who retired before July 1, 2008, will get a 4 percent increase.

The increase is contingent upon a likely 2 percent increase in the consumer price index, which is to be released Wednesday. If it’s less than 2 percent, the PERSI COLA may be slightly adjusted.

Both employees and employers are now looking at lower contribution rates, as well. From the Idaho Statesman:

The PERSI board also voted Tuesday to eliminate two future planned contribution rate increases for active employees and the Idaho government agencies that employ them.

This means employees do not have to worry about a reduction in take-home pay, employers will avoid an increase in their PERSI costs and the contribution rates stay at a lower percentage of pay than 15 years ago, PERSI officials said.

[…]

The PERSI board voted to lower firefighter fund contributions from 17.24 percent of payroll to 5 percent because the fund, which has been closed to new members since 1980, has reached 110 percent of its anticipated benefits. That means the 22 firefighter departments will collectively save $7.75 million every year.

PERSI members since 2007 had been limited to 1 percent cost-of-living increases.

You’ve Heard of Minimum Wage. What About a Minimum Pension?

Minimum wage laws are designed, in theory, to give every worker a livable wage and a decent standard of living. But what if the same concept was applied to retirement savings?

Third Way, a moderate think tank, has proposed just that: a minimum, mandatory “pension” that all employers would give their employees based on hours worked.

From the proposal:

We propose a minimum pension law—a requirement that employers contribute a minimum of 50 cents per hour worked, for every worker, into a retirement plan. A minimum pension would provide all workers with the opportunity to create their own personal wealth—providing for a more secure retirement and a reduction of the current wealth disparity in our country. With improved access to simple investment vehicles and tax breaks that aid small businesses, employers would largely benefit too.

And from International Business Times:

“A minimum pension sounds like a minimum wage, and it is,” David Brown and Kimberly Pucher, the authors of Third Way’s report, wrote. “The minimum pension requires that, in addition to wages, employees must receive at least 50 cents an hour in retirement contributions.”

That’s a minimum contribution of $1,000 a year to full-time, full-year workers, to be indexed for inflation.

Third Way drafted the proposal, in part, because of a recent barrage of statistics suggesting many Americans aren’t nearly as ready for retirement as they’d like. From International Business Times:

The public sector and most private sector companies offer retirement plans, but about 30 percent of non-retired Americans have no money saved for retirement, the Federal Reserve reported last month. Most workers who aren’t saving for retirement have lower incomes and two-thirds of them work for companies that don’t offer a retirement savings plan, according to Boston College’s Center for Retirement Research. Many of those who are saving aren’t saving enough, so though Americans pay $140 billion each year subsidizing retirement accounts, millions are nearing retirement with little or nothing saved.

You can read the entire proposal here.

Photo by 401kcalculator.org

Is Now the Time For Pension Funds To Push Back On Fees?

CalPERS cut ties with hedge funds because, among other reasons, the fees associated with those investments.

Some money managers and pension fund staff are saying that now is the perfect time for other pension funds to speak up about their aversion to fee-heavy investments. The managers told Reuters:

“Pension funds and everyone else would be remiss not to push on fees now,” said Brad Balter, Managing Partner of Balter Capital Management, which invests in hedge funds and is now offering its own liquid alternatives fund that mimic hedge fund performance with a lower fee structure.

[…]

Joelle Mevi, who has long been arguing for lower fees, first as chief investment officer at New Mexico’s pension fund and now as executive director and CIO at the City of Fort Worth’s pension plan, agreed that Calpers’ move could be a wakeup call.

“Top hedge fund managers could see that this is a trend and it could strike fear in their hearts,” she said.

Hedge funds reached by Reuters declined to comment. But the industry has in the past rebuffed criticism over fees and performance by saying returns tend to outperform when markets fall. It has also pointed to strong demand: hedge funds which manage $3 trillion attracted $30.5 billion in new money during the second quarter alone.

Stephen Nesbitt, who runs consulting firm Cliffwater LLC and works with prominent pension funds, said hedge fund performance, like stock performance, can vary greatly – underscoring the need for investors to make careful choices.

“There are many investors who are happy with the results. It works for some and it has to do with implementation,” he said.

It’s not out of the ordinary for pension funds to negotiate with hedge funds on the matter of fees. The Massachusetts Pension Reserves Investment Management Board (PRIM) was doing exactly that even before the CalPERS news came out. From Reuters:

Massachusetts, which invests roughly $5.6 billion with hedge funds, is pushing to move some of that money into separately managed accounts and may even invest, at a lower cost, in liquid alternative strategies.

“Moves by the big leading pensions like Calpers only reaffirms liquid alternatives are the wave of the future,” said Brad Alford, chief investment officer at Alpha Capital Management, which has put money into hedge funds and also now offers liquid alternative funds.

“Smart investors are no longer willing to pay these high fees for single digit returns,” Alford said. “High fees, little transparency, limited liquidity, light regulation plus hard to measure risk from leverage and derivatives are not a good investment solution.”

The Los Angeles Fire & Police Pension System chose to drop hedge funds long before CalPERS made headlines; they made the move early this summer when they removed $550 million from hedge funds.

Photo by www.SeniorLiving.Org

Video: Fixing the Kentucky Retirement Systems

Watch the above video for an in-depth discussion on the problems and politics surrounding the Kentucky Retirement Systems and potential solutions to the funding woes that plague the system, in particular the “non-hazardous” portion of the system.

The interviewee is Jim Carroll, who runs the Facebook group Kentucky Government Retirees and has taken an active role in raising awareness among citizens and pushing lawmakers for change.

As Carroll points out in the video: “There aren’t any good answers to this [funding shortfall].”

There are, however, options to improve the system’s health – although none are particularly pleasant.

The KERS non-hazardous plan is among the unhealthiest in the country. The system is only 23 percent funded and is one market downturn away from complete insolvency.

Rhode Island, Raimondo Defend Hedge Fund Position After CalPERS Pullout

Rhode Island’s pension fund invests nearly $2 billion in hedge funds, or 14 percent of its overall portfolio.

In light of CalPERS high-profile pullback from hedge funds, The Providence Journal asked Gina Raimondo, Rhode Island’s Treasurer, for her thoughts on CalPERS’ decision and the fate of hedge funds in Rhode Island’s portfolio:

State Treasurer Gina Raimondo sees no immediate reason to pull Rhode Island’s pension money out of hedge funds, just because the largest public pension fund in the U.S. – the California Public Employees Retirement System – has announced plans to do so over the next year.

[…]

Asked Tuesday if Rhode Island would take its cue from Calpers, Raimondo chief of staff Andrew Roos said: “We will continue to learn from best practices around the country and will look closely at the CalPERS decision.’’

But he said: “Rhode Island’s pension fund is less than 3% the size of Calpers and has very different funding and cash-flow needs. Given our fund’s different characteristics, we will continue to pursue strategies that pursue the best outcomes for Rhode Island pension participants.’’

Roos acknowledged that the state’s hedge-fund-heavy strategy brings loads of fees. He also admitted that the hedge funds have under-performed in 2013 compared to the rest of the pension fund’s portfolio. But he stood by the investments. He told the Providence Journal:

“Every action the State Investment Commission has taken during this administration has been to promote retirement security and ensure funds will be available to pay pension checks to our retirees,’’ he said.

“After the financial collapse of 2008-2009 when the fund lost over $2 billion dollars, the SIC reviewed its policies and unanimously adopted a plan to reduce volatility while continuing to pursue strong long-term returns … As a part of the strategy to reduce volatility while maintaining strong long-term returns, the SIC improved the pension fund’s diversification, which included making allocations to hedge funds….’’

“This strategy is working,’’ Roos said. “Over the last three years we have reduced the volatility of this portfolio by 50% and achieved strong returns (1 year: 15.12%; 3 year: 9.05% as of June 30, 2014) … [But] like every other investment the state makes, the SIC and staff are constantly evaluating and making adjustments to the hedge fund allocation to ensure it is performing as intended.’’

Rhode Island’s pension fund paid $70 million in investment fees in the 2012-13 fiscal year. Meanwhile, the state’s hedge fund investments returned around 8.8 percent in 2013-14, while the pension fund’s overall portfolio returned 15 percent over the same period.

Maryland Fund Looking For New CIO

The Maryland State Retirement and Pension System is looking to hire an executive search firm to hire the fund’s next chief investment officer.

The fund has put the Request for Proposal on their website. The document can also be found at the bottom of this post. According to Pensions & Investments, the proposals are due by September 22 at 2 pm Eastern Time.

The fund’s previous CIO, Melissa Moye, left the fund recently to work for the US Treasury Department. Pensions & Investments reported at the time:

[Moye] is leaving at the end of August to become a senior policy adviser with the U.S. Treasury Department’s office of state and local finance. Deputy CIO Robert Burd will serve as acting CIO. The board has not begun the search process yet, spokesman Michael Golden said.

At the Treasury Department, Ms. Moye will focus on public sector pensions for the office, which was created in May to coordinate efforts to oversee developments in state and local financial markets, including public pension fund liabilities. Maryland pension board chairwoman and state Treasurer Nancy Kopp said in a statement that while the board will miss Ms. Moye’s leadership, “we are thrilled with the opportunity Dr. Moye will have to apply her wealth of knowledge and experience at the national policy level.”

Ms. Moye became CIO in September 2011 after serving as acting CIO since October 2010. Before that, she was deputy treasurer for financial policy and a trustee of the state pension system. Mr. Burd started with the retirement agency in 2001 as an assistant director of externally managed investments and was named managing director of private markets in 2008.

The RFP:

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Video: CalSTRS CIO On Sticking With Hedge Funds

In the above video, we get to hear the Chief Investment Officer of CalSTRS, Christopher Ailman, weigh in on CalPERS’ decision to divest from hedge funds. The gist: CalPERS did what was right for them, but CalSTRS is sticking with hedge funds.

“CalPERS’ decision does not change our mind or our opinion,” Ailman said during the interview.

CalSTRS made its first hedge fund seed investment earlier this year when it committed $200 million to Legion Partners Asset Management LLC. Bloomberg reported back in May:

CalSTRS, based in Sacramento, California, pledged $200 million to Legion in February and took a 30 percent minority stake, investment officer Philip Larrieu, who oversees the pension’s allocations to activist managers, said in an interview last week at the SkyBridge Alternatives Conference in Las Vegas.
The pension system, which has about $4.6 billion with activist managers including Trian Fund Management LP and Relational Investors LLC, is weighing additional investments in the strategy, especially in managers such as Legion that invest in small- and mid-cap companies. Activist investors take stakes in companies and then push for changes aimed at increasing value.

[…]

The pension system will consider additional seed investments for the ability to take minority stakes in funds and early allocations for concessions on fees, according to Larrieu. CalSTRS’ other activists include Blue Harbor Group LP, New Mountain Capital LLC, Starboard Value LP, Cartica Capital LLC and Knight Vinke. CalSTRS commits a minimum of about $100 million to each fund and prefers to be the sole investor in a pool, also known as a fund-of-one structure, Larrieu said.

Detroit Retiree Committee Explains Decision to Support Pension Cuts

When Detroit initially announced its plans to cut back worker pensions earlier this year, the Detroit Retiree Committee took a hard line: the cuts were unconstitutional and the Committee wouldn’t support them.

But the Committee eventually backed down, and retirees easily approved the pension cuts at the ballot box.

What caused the Committee to reverse course? Today, during testimony at Detroit’s bankruptcy trial, we got a glimpse of the behind-the-scenes decision-making that led to the change in sentiment. From the Detroit Free Press:

“Part of the test of whether Detroit’s plan would be successful was whether Detroit could be able to revitalize itself,” [Committee member Ron] Bloom said. “Anything we put forward, we had to feel in good faith was consistent with Detroit being able to revitalize itself.

“The city was dysfunctional. We didn’t like what they had to say often, but we felt their commitment to revitalization was sincere.”

[…]

The Retiree Committee agreed to endorse the plan ahead of a July vote by retirees. Retirees and workers voted in support of the plan.

Early on, the committee “had a pretty vigorous disagreement with how we thought the case should go,” Bloom said, adding that the retirees were never treated like favored insiders among the city’s creditors.

But as realities of the case set in, and it became clear pension cuts could be worse if retirees rejected the plan, the committee decided to back the plan.

“We believe that we received enough,” Bloom testified.

The restructuring plan, eventually endorsed by the Committee and approved by retirees, eliminated COLA increases and cut pensions by 4.5 percent.

Photo Credit: Mikerussell – Own work. Licensed under Creative Commons Attribution-Share Alike 3.0 via Wikimedia Commons

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