Pension360

South Korea’s national pension fund – the third largest pension fund in the world with $415 billion in assets under management – will be investing for the first time in hedge funds later this year.

The fund has picked two investment firms to lead the foray into hedge funds: BlackRock and Grosvenor, who will each be in charge of $500 million.

More from Reuters:

South Korea’s National Pension Service (NPS), the world’s third-largest pension fund, said it had chosen a BlackRock Inc unit and Grosvenor Capital Management to manage investments in funds of hedge funds in 2016.

[…]

“The upcoming hedge fund investment is expected to contribute to the generation of stable profits by diversifying risk for the fund’s entire portfolio,” NPS Chief Investment Officer Kang Myoun-wook said in the statement.

A bit of background from PulseNews:

Last year, NPS operation committee decided to invest in funds of hedge funds as an alternative investment as part of efforts to diversify its asset allocation and improve returns on its investments in a low interest rate environment. NPS initially planned to start to invest in hedge funds late last year, but delayed the process following the strife between former NPS CEO Choi Kwang and Hong Wan-sun then-chief investment officer at the National Pension Fund Investment Office.

In April, the fund drew up a guideline to evaluate investment performance in hedge funds and set a goal to invest 1 trillion won in funds of foreign hedge funds this year. Korea’s largest institutional investor plans to start to invest funds of foreign hedge funds and then gradually expand its investment in other hedge funds, according to an unnamed NPS official. Global consulting company Mercer is said to be advising NPS hedge fund allocations.

A study by CEM Benchmarking found that hedge funds provide the lowest net annual returns to US pension funds among all asset classes. With an average compound return of 5 percent, only cash provided lower return figures.

[Read the full study here.]

Bloomberg summarizes the results:

Hedge funds provided lower average net annual returns to U.S. pension funds than any asset class except cash, according to a report analyzing $8.4 trillion in defined-benefit plans from 1998 through 2014.

“If cash is excluded as an asset class, then hedge funds must be considered the worst performing,” with an average compound return of about 5 percent, according to the study of retirement-plan assets by CEM Benchmarking, a Toronto-based consultant for institutional investors.

Pension funds from New York City to Orange County, California, are weighing exiting hedge fund investments. Vicki Fuller, chief investment officer of the New York State Common Retirement Fund, the country’s third-biggest pension fund, said in June that hedge funds should face performance hurdles to earn their traditional “2 and 20” fees, or 2 percent of assets and 20 percent of gains. The California Public Employees’ Retirement System, the largest U.S. pension fund, divested its $4 billion hedge fund portfolio in 2014, saying the asset class was too expensive and complex.

The same study found that publicly traded real estate investment trusts (REITs) and private equity produced the highest annual net returns for pension funds.

New Jersey governor Chris Christie just signed into law the $34 billion state budget, which – among other things – will push the state’s pension contribution up to $1.86 billion dollars.

The payment is less than the actuarially required contribution, but is the highest single pension payment in state history.

NJ Spotlight elaborated on the win for retired public workers:

Much of the increased spending authorized by Christie for the 2017 fiscal year will be earmarked for the state’s grossly underfunded public-employee pension system, pushing the pension contribution up to $1.86 billion. That’s a record-setting amount. And though the figure is less than the full payment calculated by actuaries, Christie was able to keep the increased pension payment in the budget even after the state dealt with a $1 billion revenue shortfall in late May. That will make it harder for him to question the affordability of a proposed constitutional amendment calling for similar annual pension-contribution increases that’s likely to go before voters this fall.

It’s not all good for public employees. Although their pension system will get an incremental funding boost, they will have to make healthcare-related concessions. NJ Spotlight:

The budget as enacted also banks on $250 million in undefined savings from employee healthcare plans that now have to be worked out between union officials and the administration. To add pressure, Christie says he will hold back funding for distressed cities and legislative add-ons until the savings materialize. Also, a proposed sales-tax cut that the Assembly passed last week in a broader plan to replenish the state’s Transportation Trust Fund with a 23-cent gas-tax hike should give public workers more cause for concern. The sales-tax cut could take away so much revenue from the budget in coming years that more drastic healthcare changes may become inevitable.

An anonymous source claiming direct knowledge of the matter told Reuters that Japan’s Government Pension Investment Fund suffered more than a $50 billion dollar portfolio loss in the last fiscal year (15-16), owing to the surge of the yen as Tokyo stocks crashed.

Reuters, via CNBC, elaborates:

Portfolio losses for the Government Pension Investment Fund for the 12 months through March were between 5 trillion and 5.5 trillion yen, the person told Reuters on Friday, speaking on condition of anonymity as the results are not public.

The $1.4 trillion GPIF has taken a more aggressive investment stance in recent years, shifting towards stocks and away from low-yielding Japanese government bonds, in line with Prime Minister Shinzo Abe’s push to deploy more of Japan’s huge financial assets in riskier investments and boost economic activity.

These results will reportedly be made public on July 29, 19 days after the country’s national election.

An ERISA class action suit has been filed against Fujitsu Technology & Business of America Inc.’s 401k plan, describing it as the “most expensive plan” of its kind during 2013 to 2014.

Bloomberg BNA elaborates:

Fujitsu’s failure to monitor the plan administrative fees resulted in millions of dollars charged to participants, according to the complaint, filed June 30 in the U.S. District Court for the Northern District of California. The proposed class also alleges that the plan fiduciaries imprudently designed and implemented the plan’s target-date funds feature in violation of the Employee Retirement Income Security Act.

Nichols Kaster PLLP filed the complaint on behalf of eight plan participants. The law firm has recently filed similar complaints against M&T Bank Corp., American Airlines, Inc., and Deutsche Bank Americas Holding Corp.

According to the complaint, had Fujiitsu limited its expenses according to the percentage for similarly-sized plans, participants would have saved around $8 million in fees.

The class action suit is said to comprise between 9,800 to 14,000 participants.

An increasing number of states are in the process of legislating auto-IRAs for employees of small businesses that are not automatically offered a pension plan or 401(k).

Backed by large groups such as AARP, these measures could help secure retirement for over 55 million Americans, or almost half of the workforce in the country.

But there is push-back too, from two notable places: employers and financial service firms.

But it is not currently getting the reception it needs to succeed. As explained by CBS News:

Yet as these bills wind their way through statehouses, they’re also getting major pushback from financial service firms because the auto-IRAs would typically be invested by state-administered agencies that might compete with private-sector retirement plan vendors and investment managers. Employers, which would be required to deduct the contributions from their employees’ paychecks and forward them to the state, are also expressing concerns about that role.

The American Council of Life Insurers has been the biggest and most vocal opponent. But in California, the Securities Industry and Financial Markets Association is part of a group of 36 trade and business organizations led by the California Chamber of Commerce that’s opposing a proposed auto-IRA. They want it amended to address a variety of concerns, including potential employer liability, said Marti Fisher, the Chamber’s policy advocate.

If passed, auto-IRAs will give employees the opportunity to opt-in or opt-out. “Some might opt out,” conceded Senator Daniel Biss of Illinois, the main proponent of that state’s plan. But of those who stay in, he believes “very, very few will be disappointed about their decision 10 years later” when they’re “surprised to have the beginnings of a nest egg,” he told CBS.

Seventy-one percent of surveyed voters in New Jersey say they’ll vote in favor of the constitutional amendment that will force the state to contribute to its public pension system, according to a Monmouth University Poll.

However, the poll also indicates that support wanes significantly when taking into account the possible peripheral effects of the amendment — namely, decreased funding for other state services.

According to NJ.com:

“At first glance there appears to be widespread support for constitutionally guaranteeing that the full pension obligation is met in each annual budget,” said Patrick Murray, director of the independent Monmouth University Polling Institute.

“However, it is not clear that voters really comprehend that approving this measure would mean pension payments would automatically take precedence over funding other key services.”

Given the choice, voters said they’d rather fully fund the school aid formula than pensions. A quarter preferred to make the full pension payment, compared with 63 percent who want to fund schools.

Fifty-nine percent would support fully funding roads and bridges, and 30 percent would spend the money on pensions.

The proposed measure — which would amend the New Jersey constitution to require an annual pension contribution from the state — will be on the ballot in November.

New Jersey has a troubled history of making full pension contributions.

In what is considered to be the biggest pension overhaul in the country since 1999, Poland announced its plans to dismantle its privately-owned pension fund system and transfer $35 billion worth of assets to individual retirement accounts, a quarter of which will be managed by a state entity.

While the decision cannot be called nationalization, especially after a Supreme Court ruling deemed pension-fund assets to be public, the proposal will still entail a partial government takeover.

Bloomberg explained:

“It’s not the worst-case scenario we feared and doesn’t imply an immediate sell-off,” Marcin Gatarz, head of equity research at Pekao Investment Banking brokerage in Warsaw, said in a note. “While this doesn’t envisage the state gobbling up a big chunk of assets, uncertainty remains as the plan may change. That should keep Polish stock valuations lower.”

The revamp risks worsening concern over state interference in the economy after the Law & Justice party, which has pledged to spur growth and distribute wealth more evenly, won elections eight months ago. A standoff with the European Union over democratic standards prompted the country’s first-ever credit rating downgrade and spooked investors. Foreign owners of the pension funds targeted by authorities include Allianz SE, MetLife Inc. and Nationale-Nederlanden NV.

But Deputy Prime Minsuter Mateusz Morawiecki said privately-owned pension funds have not been performing efficiently. “Private pension funds haven’t worked out, the system isn’t serving anyone, doesn’t provide higher pensions and has failed to support growth,” he said.

Putting the state at the forefront of a national effort to help manage a retirement issue that concerns millions of Americans, Maryland passed legislation that will come into law on Friday to give employees with no retirement savings options state-sponsored and private alternatives.

The new bill will give employees who do not have a 401(k) plan an option to contribute to a retirement savings account.

The Brookings Institute reports that there are 52 percent of these employees in companies with 50 to 99 employees, and 80 percent of them in companies with less than 10 employees. In Maryland, there is an estimated million of them.

The Baltimore Sun explained:

“This is kind of trying to head off a crisis that we see coming,” said Del. C. William Frick, the Montgomery County Democrat who sponsored the bill in the House of Delegates. “It’s a big step forward and it’s going to be a national model.”

Proponents describe it as a minimally intrusive system under which the state will oversee but not manage a retirement plan for businesses. Employers are not required to contribute to the plan. They may use their existing automated payroll systems to make voluntary deductions on behalf of workers who choose to participate.

Opponents, which include the Maryland Chamber of Commerce and other business groups, see it as government overreach.
“It’s our position that it still puts government in the position of picking winners and losers,” said Mike O’Halloran, director of the National Federation of Independent Business in Maryland. “That’s something that should be left to the private sector.”

The law is set to be fully implemented in 2018.