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New York Common Fund Gives $2 Billion to Goldman Sachs

The New York State Common Retirement Fund announced today it plans to give $2 billion to Goldman Sachs Asset Management to invest in global equities.

Reported by Bloomberg:

It’s the first time the $180.7 billion fund has formed such a partnership, Comptroller Thomas DiNapoli, the pension’s sole trustee, said today in a statement. In addition to investing the funds with equity managers, the unit of Goldman Sachs Group Inc. (GS) will also provide advice across the pension’s remaining $98 billion equity portfolio.

“Identifying new opportunities is key to the continued growth of the fund’s long-term value,” DiNapoli said. It will give the pension “full access to world-class global equity investment opportunities and the nimbleness to take advantage of them on a timely basis.”

New York joins public pension funds including New Jersey, New York City and the Teacher Retirement System of Texas in making big allocations of capital to investment managers that can be deployed more quickly and across different strategies. Such separately managed accounts offer cheaper fees and more control for investors, who in turn agree to commit large sums for a decade or more.

[…]

Timothy O’Neill and Eric Lane, global co-heads of the investment management division at Goldman Sachs, said the partnership is a “landmark assignment” for the firm.

“We are excited to provide customized access to our broad open-architecture platform, due diligence expertise and portfolio construction capabilities,” they said jointly in the e-mailed statement from DiNapoli.

Thomas DiNapoli is New York State’s Comptroller, but he is also the sole trustee of the New York State Common Retirement Fund.

Audit Estimates Legal “Pension Spiking” by CalPERS Members Could Cost State $800 Million

The California Controller released an audit on Tuesday that found a particular brand of “pension spiking”, although perfectly legal, could cost California $800 million over the next 20 years. From California Healthline:

Dozens of public agencies that contract with CalPERS have engaged in a legal form of pension spiking, putting the state on the hook for nearly $800 million over the next 20 years, according to an audit released Tuesday by the State Controller’s Office, AP/KPCC’s “KPCC News” reports (“KPCC News,” AP/KPCC, 9/9).

The legal practice involves employers withdrawing commitments to cover employees’ pension costs in their final year of work and instead adding the value of the payment to the employee’s salary. The practice was legal under a 1993 law but has since been prohibited for new employees.

The audit found that 97 agencies that contract with CalPERS have amendments allowing them to engage in the practice.

The amendments increased CalPERS members’ compensation by $39.1 million in pensionable pay annually, which could result in as much as $796 million in such compensation over two decades.

The audit found that CalPERS doesn’t have the resources to audit the 3,000 agencies with which it contracts. CalPERS said it has hired more staff recently to combat that issue, but it’s not enough. From California Healthline:

The pension fund also has insufficient resources for auditing all of the 3,100 public agencies with which it contracts. For example, the audit found that a local government contracting with CalPERS would only be audited by the pension fund every 66 years. Since the audit was performed, CalPERS has hired more staff, but the agency is still only capable of performing audits on a contracting entity once every 33 years, according to the controller’s office.

In a release, Controller John Chiang (D) said the prevalence of such issues “invites abuse” and that the pension fund “must be more vigorous in protecting taxpayers from this form of public theft.”

View the Controller’s entire audit here.

Photo credit: Lending Memo

Video: Pennsylvania Lawmakers Host Town Hall On Pension Reform

State Reps. Seth Grove (R-Dover Township) and Mike Tobash (R-Schuylkill/Berks) hosted a town hall meeting on state pension reform in early August.

But the video has just recently hit YouTube, and it’s worth watching if you’re interested in the various proposals currently sitting in the Pennsylvania legislature.

Tobash is a legislative appointee to the Public Employee Retirement Commission; he is also sponsoring a pension reform bill that would switch new hires into a hybrid-style 401(k) plan.

Pension360 covered Tobash’s reform proposal last week.

Funding Status of Largest Plans Falls in August

The funded ratios of the largest pension plans in the country collectively fell during the month of August, according to a Milliman report. Reported by Pensions & Investments:

The funded status of the 100 largest U.S. corporate pension plans fell to 84% in August, down from 84.8% in July, said the latest Milliman 100 Pension Funding index.

[…]

During the same period, investments returned 1.92%, the second best monthly return of the year, Mr. Wadia said, surpassed only by February’s 2.3% return. Assets rose to $1.47 trillion in August from $1.45 trillion in July.

If the pension funds achieve a median 7.4% annual return and the discount rate remains at the current 3.89%, the funded status would increase to 84.9% by the year’s end, still a 3.4-percentage point drop from 88.3% in December 2013, according to Milliman.

“The reason (the funded status) hasn’t fallen more (year-to-date) is because of positive asset growth,” Mr. Wadia said. Assets have returned 7.5% year to date Aug. 31.

The largest corporate defined-benefit plans, on the other hand, improved in August, as funded status improved from 88.3 percent to 88.4 percent.

California Unveils Finance Data Website; Pension Data To Be Added Later

California has launched ByTheNumbers.sco.ca.gov, a website designed to give citizens easy access to financial data for every city and county in the state.

The website, launched by Controller John Chiang, will eventually contain data for all of the more than 100 pension funds in California. That data will include investment returns, administrative costs, assets and liabilities.

From the Fresno Bee:

ByTheNumbers.sco.ca.gov allows taxpayers to track revenues, expenditures, liabilities, assets, fund balances and other information provided by more than 450 cities and the 58 counties statewide. The data runs from fiscal year 2002-03 through 2012-13.

Controller John Chiang, who is running for state treasurer, said in a statement that the website is moving government information “out of the analog dark ages into the digital era.”

The website allows users to download raw figures, convert them into charts and share the information freely. Chiang’s office said the data will be refreshed each year with updates sent in by local governments.

Chiang is a member of the boards of both major California pension funds, CalPERS and CalSTRS.

Zimbabwe Looks To Attract American Pension Funds

Zimbabwe is hoping the latest re-vamp of its stock exchange settlement times will attract traders from around the world – including American pension funds. Reported by All Africa:

ZIMBABWE is hoping for an increase in foreign traders on the local bourse following the launch of the Central Securities Depository which will reduce settlement time frames on trades.

Chengetedzai Depository Company CEO Mr Campbell Musiwa told a Press briefing yesterday that the launch of the CSD will heighten foreign participation from the current range of 60-70 percent boosted by the anticipated participation of US pension funds.

Mr Musiwa said American pension funds are not allowed to invest in any country where there is no CSD.

“Now that we have a CSD, American pension funds are going to invest in Zimbabwe. It’s interesting to note that 60-70 percent of our trades in Zimbabwe are actually coming from the foreigners,” said Musiwa.

“So by the implementation of the CSD we are hoping that there’s going to be an increase in terms of the trades that are going to happen on the stock exchange coming from the foreigners,” he added.

The launch of the CSD is a plus as it reduces settlement time frames. The country has set a target to operate at T+3 settlement time frame on trading of securities by June next year from the current T+7.

The T stands for transaction date denotes the day the transaction takes place while the number symbolises how many days after the transaction date the settlement or the transfer of money and security ownership takes place.

“Foreign investors look at Zimbabwe and when they see manual processes they say it’s not efficient. The CSD will bring efficiency,” said Mr Musiwa.

Zimbabwe officials called the faster transaction time a “historic” step, and officials indicated they will soon be working toward making transactions on cell phones.

Time To Blow Up the 401(k)? These Researchers Think So

A recent white paper by Russell Olson and Douglas Phillips, investment officers at the University of Rochester endowment, argues that its time to blow up the 401(k) plan and replace it with a new system—“Trusteed Retirement Funds”.

From Main Street:

The researchers say it’s time to simplify the system, noting that over 40 years more than 14 variations of employer-sponsored defined contribution (DC) retirement plans have evolved, including 401(k)s, 403(b)s, SEP IRAs, SIMPLE IRAs, Roths, Keoghs and more.

“Their proliferation has been complex and bewildering. Each has its own deduction or contribution limits, distribution restrictions, and nondiscrimination rules, and there are many variations of each vehicle,” Olson and Phillips write. “Some are available through employers, others not. Some workers have retirement assets in multiple DC plans as they change employers. While the details for each vehicle seemed to make sense when created, the resulting rules and options can be confusing for many workers, and this confusion can lead to insufficient or poorly invested savings.”

“Without radical reform, our nation will have a rapidly growing percentage of impoverished elderly in need of government support,” they say.

Citing the examples of countries with successful retirement strategies, the authors note that Australia, Denmark, Netherlands and Switzerland all mandate high-percentage employee deferrals to savings plans – without offering an “opt-out” choice.

“We don’t believe Americans would agree to the mandating of large pension contributions in addition to what we already contribute to Social Security (through FICA taxes),” the researchers admit. “But we believe we can best meet the challenge by establishing high levels of retirement contributions by employees to Trusteed Retirement Funds, from which employees have the right to opt out. And by adapting the best of Australia’s superannuation concepts, we can sharply improve the effectiveness of our retirement savings.”

More details of the Trusteed Retirement Fund from Main Street:

The “Trusteed Retirement Funds” would have several key features, including:

– Supervision by a fiduciary trustee with strict requirements regarding investment objectives and fees

– Employee contributions would automatically increase by 1% every time an employee received a pay raise, unless the employee directed otherwise

– At retirement, a portion of the assets would be placed into a deferred annuity to provide for guaranteed income later in life, unless the participant declined the option

Employers would have fewer responsibilities under this new system, and participant education would be mandated – and provided by the government, as it is in Australia.

Read the white paper, which was written last June but released this August, here.

Photo by TaxCredits.net

Pension Funds Sue Exchanges Over High-Frequency Trading

A handful of pension funds have joined a lawsuit against Nasdaq and other major stock exchanges, alleging that the exchanges favored high-frequency traders and in the process hurt other investors, including pension funds. From the New York Times:

The pension funds, including one in Boston and another in Stockholm, have joined a lawsuit originally filed by Providence in April, according to a filing in U.S. District Court in New York last week. They are taking aim at some of the biggest stock exchanges – including the New York Stock Exchange, Nasdaq and BATS Global Markets – as well as the investment bank Barclays, which operates a private stock trading venue known as a dark pool.

Their legal action comes during a period of heightened scrutiny for high-frequency traders, which use computer algorithms to buy and sell shares in milliseconds. In recent months, Washington lawmakers have summoned financial executives to testify about high-frequency trading, the Securities and Exchange Commission has stepped up its scrutiny of the practice, and the New York state attorney general, Eric T. Schneiderman, has sued Barclays over high-frequency traders in its dark pool.

The pension funds and Providence, which are seeking class-action status, claim the exchanges ran afoul of their legal duties by providing certain advantages to high-frequency traders, “diverting billions of dollars annually from buyers and sellers of securities and generating billions more in ill-gotten kickback payments.” They are seeking an unspecified amount of damages.

Spokesmen for the defendants, which also include the Chicago Stock Exchange, all declined to comment.

Stock exchanges offer a number of paid services used by high-frequency traders, including detailed data feeds, special types of orders and the ability to place computer servers in the exchanges’ data centers. The lawsuit argues that such practices hurt other investors, and it claims the exchanges have a “financial incentive to create an uneven playing field.”

The pension funds that joined the lawsuit include the Employees’ Retirement System of the Government of the Virgin Islands; the State-Boston Retirement System; the Plumbers and the Pipefitters National Pension Fund in Alexandria, Virginia.

Photo by Terence Wright via Flickr CC License

Pension Policy: Taking Stock of Where Florida’s Candidates For Governor Stand

Pension policy has become an important issue in the race to be Florida’s governor, and the two major candidates (incumbent Rick Scott and challenger Charlie Crist) both have very different views on how the pension system should be altered, or not.

A rundown of their respective positions, from the Ocala Star Banner:

If Rick Scott is re-elected, you can expect a renewed push to move more public workers out of the traditional pension plan and into a 401(k)-type plan — which is currently an optional plan in the retirement system.

It was under Scott that public workers began making an annual 3 percent contribution to the state retirement fund in 2011. Scott’s criticism of the current system includes keeping a list of public workers who qualify for more than $100,000 in annual pension benefits on his state office website.

Under the changes, employees can choose whether their contributions and state contributions go into the traditional pension plan or into a 401(k)-type plan in which they can direct the investments.

If Charlie Crist wins, he is more likely to side with major labor unions that are supporting his campaign, including the Florida Education Association, which argue that Florida’s pension plan should not be changed.

The positive returns on the pension fund for the fiscal year that ended in June will bolster the argument that change is not needed.

Florida’s pension funds returned 17.4 percent in fiscal year 2013-14.

Photo by The 45th Space Wing via Flickr CC License

CalPERS’ Withdrawal From Hedge Funds Not Yet Indicative of Broader Trend

California is a bellwether for the rest of the country in many ways – and that sentiment applies to pension fund investment strategy, as well.

CalPERS made headlines this summer when it announced its decision to cut its hedge fund investments by nearly 50 percent. A handful of other funds, like the Los Angeles Fire and Police Pensions system and the Louisiana Firefighters’ Retirement System, have made similar decisions.

But those within the industry say none of that is indicative of a wider trend. From the Financial Times:

Alper Ince, managing director at Paamco, a California-based fund of hedge funds with $9bn of assets, believes that Calpers’ decision is unlikely to be indicative of a wider trend because “hedge fund investing has now become mainstream for pension funds”.

Arno Kitts, head of UK institutional at BlackRock, agrees: “People do pay attention to Calpers but there are plenty of hedge funds that have delivered consistent long-term performance with good risk-adjusted returns, which are uncorrelated with other assets.”

US public pension funds account for approximately 14 per cent of hedge fund assets owned by institutions, according to Preqin, the data provider.

Amy Bensted, head of hedge fund products at Preqin, says the shift by Calpers could fuel concerns that US public pension schemes are losing faith in the hedge fund industry.

“But I don’t think this is the start of a trend. The majority of US public pension schemes remain committed,” she says.

She points out that US pension funds in aggregate have been increasing their allocations to hedge funds steadily in recent years, a trend that has continued into 2014.

A recent Preqin survey found that 34 percent of hedge funds received more capital from pension funds in the first half of 2014 than they did in the second half of 2013.

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