Pension360

A 2014 California law – designed to make sure the state’s Teacher Retirement System remains funded in good markets and bad – is very likely to have a positive effect on CalSTRS’ health in coming years.

But there’s a downside: California’s annual pension payment now swings up and down with the market, leaving the state in a place of uncertainty.

From Bloomberg:

Beginning in mid-2017, California would pay less if the system bests its earnings assumption and more if it falls short, due to a formula that divides the responsibility for the unfunded liability between the state and districts, according to the Legislative Analyst’s Office, a nonpartisan agency that conducts research for lawmakers.

[…]

In a down market, “not only is the state getting less money from the way the tax structure is comprised, but it also forces them to increase their payments for their unfunded pension liability,” said Howard Cure, head of municipal research in New York at Evercore Wealth Management, which oversees $6.2 billion of investments. “It compounds the vulnerability of their tax structure.”

There is a limit to how high the state’s contributions could rise: 0.5 percent annually. That could slow the state’s progress toward eliminating the pension shortfall if the markets reverse course after a period of good years that allowed California to cut its contributions, said Ryan Miller, principal fiscal and policy analyst at the legislative office.

[…]

“This could certainly add to fiscal pressure on the state in the event of a down market,” Gabriel Petek, a credit analyst in San Francisco for Standard & Poor’s, said of the pension overhaul.

The provision is designed to bring CalSTRS up to 100 percent funding in 30 years.

There’s also a clause which allows the governor and lawmakers to review the terms of the measure every five years and make adjustments. That could lead to less volatility for the state; but it could also derail the stated funding goal for CalSTRS.

The Ontario Teachers’ Pension Plan is looking to offload a portion of its PE portfolio in the secondaries market.

It’s looking to sell a $1 billion chunk of PE fund stakes, which represents about 5 percent of its overall PE portfolio.

More from Financial News:

The portfolio is worth around $1 billion and consists of fund stakes in a range of private equity funds spread globally, the people said.

The Canadian pension plan is speaking to a limited group of potential buyers. The process is at an early stage and no formal bids have been made yet.

A spokesman for Ontario Teachers’ declined to comment on the deal, but said in an emailed statement: “We regularly review our allocation of funds. We remain committed to investing in Europe via GP [general partner] allocation, co-investments and directly.”

As the private equity market continues to mature, many institutions have become active buyers and sellers in the secondaries market, which saw an annual volume of around $40 billion in 2015, according to secondary advisory firm Greenhill Cogent.

While just 14% of sellers in the secondaries market last year were public pension funds, they accounted for over 45% of the aggregate dollar volume in 2015, according to Greenhill Cogent’s Secondary Market Trends & Outlook report, which was published in January.

Ontario Teachers’ managed $155 billion in assets as of the end of 2014.

 

Photo  jjMustang_79 via Flickr CC License

The Canada Pension Plan Investment Board is continuing its expansion into Brazil, even as the country goes through troubled economic times.

The fund is adding two people to its Sao Paulo office, according to Bloomberg, despite the fact the the country’s credit rating was lowered another notch this week.

Bloomberg talked to CPPIB’s Rodolfo Spielmann, head of Latin America:

“This crisis, like others, will pass,” Spielmann said in an interview at Bloomberg’s office in Sao Paulo. “We’re not reassessing our strategy for Brazil, unless a cataclysm happens. We’re still very excited about investment prospects in the country in the medium and long term.”

Born in Argentina, Spielmann worked for Bain & Co. Inc for 21 years, 14 of them in Brazil, before joining CPPIB in 2014.

The Canada Pension Plan Investment Board isn’t calling a bottom for Brazilian assets, and sees a sustained rebound in the currency as a ways off. Still, there’s long-term value in the region’s best companies, Spielmann said, declining to specify which stocks he is buying.

“We are not bottom fishers,” Spielmann said. “Our ambition is to have the best assets on the market, because their price may fall 10 percent, 20 percent or 30 percent, and, still, they will always perform better than the medium-quality assets in the long term.”

The fund returned about 18 percent in the 2015 fiscal year, more than double its 10-year annual average.

[…]

Brazilian stocks are trading near the lowest in six years, while the nation’s currency has dropped every year since 2011 as President Dilma Rousseff struggles to get support for measures to reverse a budget deficit that has caused the country to lose its investment-grade rating.

CPPIB has about $1.8 billion in Brazil-related investments.

 

Photo by  Horia Varlan via Flickr CC License

Leo Kolivakis is a blogger, trader and independent senior pension and investment analyst. This post was originally published at Pension Pulse.

Adrian Morrow of the Globe and Mail reports, Ontario to delay start of pension plan in bid to ease business fears:

Ontario is slowing down the start of its signature pension plan but speeding up the delivery of this year’s budget, two moves calculated to soothe the fears of business leaders amid an uncertain economy.

Big corporations will not have to start contributing to the Ontario Retirement Pension Plan (ORPP) until 2018, rather than 2017.

The budget, meanwhile, will come down on Feb. 25 – more than a month before the end of the fiscal year and more than two months earlier than the Liberal government’s three previous spending plans.

Finance Minister Charles Sousa made both announcements in a speech to the Empire Club on Tuesday.

He said he decided to move up the budget so businesses could see the government’s fiscal framework for the coming year as soon as possible, helping them better plan as the country rides an economic roller-coaster. For instance, the budget will implement a cap-and-trade system for carbon emissions starting in January, 2017; releasing the details early will give companies more time to prepare.

“We focus on a dynamic business environment, strategic infrastructure, investments in skills and training, all within a fair society,” Mr. Sousa said in his speech. “There are opportunities to be seized upon, but we need to act quickly.”

He later told reporters: “Our government is committed to creating a low-carbon economy through a cap-and-trade system. The budget will set the stage for Ontario to be a part of the 2017 carbon auction.”

The ORPP is one of Premier Kathleen Wynne’s legacy pieces. Funded by contributions from workers matched by their employers, it will return an average payment of $6,410 a year in retirement income if contributed to for 40 years.

Delaying the start of contributions for large corporations by a year will give them breathing space to sort out how they will make the payments. It will also mean some workers will receive slightly lower benefits in retirement as a consequence of missing one year of contributions. None of the other key dates for the plan’s rollout will change: Medium-sized companies will start contributing in 2018 and small businesses in 2019; the first benefits will be paid in 2022.

Karl Baldauf, vice-president of policy and government relations at the Ontario Chamber of Commerce, said the delay for big business is much-needed. The government has not yet done direct outreach to help companies set up ORPP payments, he said, and this has to happen to ensure the system is set up smoothly.

“You can’t reasonably expect to be collecting money from organizations who don’t know what their obligations will be,” he said in an interview. “We need education, registration, then implementation.”

The delay also gives the federal government and the other provinces more time to negotiate a possible enhancement to the Canada Pension Plan. A nationwide CPP expansion would help ensure Ontario firms aren’t put at a disadvantage by paying more in pension contributions. “We have agreed to enter into a national dialogue to enhance the Canada Pension Plan. To foster and accommodate this dialogue, we are extending the time required to comply with the ORPP,” Mr. Sousa said in his speech.

Dan Kelly, president of the Canadian Federation of Independent Business and an opponent of the ORPP, said he hoped Ontario would cancel the plan if the rest of the country agrees on a CPP enhancement.

“We’re hoping it’s the first step to delay or even rethink the ORPP,” he said. “It will allow the CPP discussion to take place to see what, if any, changes the government might consider to the ORPP program itself.”

But government sources said the Liberals are determined to push ahead with their pension plan. Even if the rest of the country reaches a deal on CPP by 2018, it could still take years to implement, and Ontario does not want to wait. The essential details of the ORPP – how much people and companies will pay into it and how much retirees will receive – are not going to change, the sources said.

If the rest of the country agrees to a CPP enhancement smaller than the ORPP, Ontario plans to merge the ORPP with CPP, but Ontarians would pay more into CPP and receive larger benefits than people in other provinces.

Are you confused with all this back and forth on the ORPP? I’m not. I still think it’s a “Wynning” pension strategy but obviously something is cooking in the background.

Importantly, politicians don’t delay a big bold pension policy unless there is a good reason to delay it. All this talk about giving big corporations more time to prepare sounds logical but more likely than not, it’s just a smoke screen. I think something is happening in the background on enhancing the CPP which is why Ontario is delaying the launch of the ORPP.

Why am I so sure? It was just a day ago when the federal government cleared the red tape on Ontario’s new pension plan. There’s definitely something cooking in the background here and the delay is not something that concerns me in the least.

I’ve said it before, and I’ll keep saying it. Ignore all the rubbish on the costly CPP and calls to cancel, not delay the ORPP. Until our politicians implement real change to Canada’s Pension Plan, and enhance the CPP once and for all despite the economic crisis headed our way, our retirement system will keep failing millions of Canadians staring at pension poverty. And this will jeopardize the long-term economic growth of our country and add to our debt profile.

There’s nothing to fear about enhancing the CPP or introducing another well-governed Canadian public defined-benefit plan. Politicians from all sides of the political spectrum should be agreeing on this, recognizing the brutal truth on DC plans as well as the benefits of DB plans.

 

Photo credit: “Canada blank map” by Lokal_Profil image cut to remove USA by Paul Robinson – Vector map BlankMap-USA-states-Canada-provinces.svg.Modified by Lokal_Profil. Licensed under CC BY-SA 2.5 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Canada_blank_map.svg#mediaviewer/File:Canada_blank_map.svg

Japan’s Government Pension Investment Fund (GPIF) is considering disclosing more details on its stock portfolio in an effort to boost transparency at the fund.

The GPIF is in the midst of ramping up its allocation to stocks; any details made public would be of interest and consequence to the market.

From Reuters:

An executive of Japan’s trillion-dollar public pension fund said the fund is considering disclosing details of its stock holdings in a bid to enhance transparency, information that could potentially move market prices when released.

The remark by Hiromichi Mizuno, chief investment officer of the Government Pension Investment Fund (GPIF), comes amid concerns that the government may wield influence over corporate management as the fund boosts its allocated weighting of stock holdings.

“We are considering unveiling how much shares (the GPIF) holds in what companies,” Mizuno told a panel meeting of experts on corporate governance at the Financial Service Agency on Thursday.

Such a move would reveal investment trends by the mammoth public fund and could potentially shift market sentiment when made public.

GPIF manages $1.19 billion in assets and is the world’s largest pension fund.

Ninety-two percent (92%) of pension funds globally are looking to improve their governance over the next calendar year, according to a recent report from State Street.

The report, Pensions with Purpose: Meeting the Retirement Challenge, surveyed 400 pension professionals from 20 countries on topics ranging from governance to ESG investment to alternatives.

More on governance from Benefits Canada:

Respondents believe their board’s expertise is not strong enough in critical areas and must be improved, with 45% planning to increase training and education opportunities for board members.

About a third (32%) of respondents rate their board’s ability to think beyond short-term issues to address longer-term, strategic factors affecting their portfolio as “very strong.”

Just 36% rate their board’s understanding of the risks facing the retirement fund as “very strong,” while 38% believe their board has a high level of general investment literacy.

“As a result of the difficult economic environment and shifting demographics, the most innovative pension funds are proceeding with confidence in tackling the retirement challenge,” said Martin J. Sullivan, head of asset owner sector solutions for North America at State Street.

“While there’s no single strategy that will solve the challenges for the entire industry, leading pension funds are employing stronger governance frameworks, more advanced risk management capabilities and a more diverse and specialized talent pool to meet long-term objectives.”

Request access to the full report here.

 

Photo by jypsygen via Flickr CC License

 

Arizona Gov. Doug Ducey on Tuesday signed a bill that affects pension benefits for the state’s new public safety hires.

The measure would slash and cap cost-of-living-adjustments and limit the amount of salary that can be used in calculating a pension, among other changes.

The measure still needs to be approved by voters.

More on the bill, from the Arizona Republic:

Voters will be asked to link retirees’ pension cost-of-living adjustments to the regional Consumer Price Index, with an annual cap of 2 percent. A 4 percent compounded increase has been paid out for the past two decades, significantly cutting into the trust’s money.

Legislation signed by Ducey would offer new workers a choice between a full-defined contribution plan and a traditional pension plan. It also would require new employees and their employers to split the cost of a pension. Currently, employees pay 11.65 percent of their salary toward pension benefits, but there is no cap on contributions by employers. On average, employers pay an amount equivalent to nearly 43 percent of each employee’s salary for retirement benefits.

The new law also would cap pension benefits for new employees by limiting the maximum salary on which it is calculated to $110,000 a year. The current cap is $265,000 a year. This would lower pension benefits and limit “pension spiking,” a method of enhancing retirement benefits by artificially increasing salary and other payments to employees during their last few years before retirement.

The bill also contains a governance change: it expands the board of the Public Safety Personnel Retirement System from seven members to nine.

 

Photo credit: “Entering Arizona on I-10 Westbound” by Wing-Chi Poon – Own work. Licensed under CC BY-SA 2.5 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Entering_Arizona_on_I-10_Westbound.jpg#mediaviewer/File:Entering_Arizona_on_I-10_Westbound.jpg

Moody’s released some interesting data last month regarding the adjusted net pension liabilities of U.S. states.

Bloomberg then spun that data into the chart, above.

If you’re a Moody’s subscriber, you can view their full report here.

Otherwise, here’s a summary of the report:

The majority of US states experienced declines in their adjusted net pension liabilities (ANPL) in fiscal 2014, Moody’s Investors Service says. Moody’s ANPL decreased for 27 states, of which, nine saw a decline for a second year in a row. However, the aggregate 50-state ANPL increased marginally to $1.3 trillion due to rising liabilities in some states.

Strong investment returns drove an average pension liability decline of 15.3%, with median returns for larger plans at 16.1%, Moody’s says in “Fiscal 2014 Pension Medians – US States: Robust 2014 Investment Returns Provide Pause in Growth of Adjusted Net Pension Liabilities.”

“Double-digit investment returns contributed to reducing pension liabilities. More timely plan disclosures under Governmental Accounting Standards Board (GASB) 67 improve comparison between states,” says John Lombardi, a Moody’s Associate Analyst.

Also in fiscal 2014, most states made budgetary contributions at or close to their actuarially determined contribution (ADC) levels. Thirty-six states contributed greater than 90% of ADC, with 12 contributing between 60% to 90% and only two funding below 60% of their pension costs.

An explanation of “adjusted net pension liability” can be found on page 2 of this report.

Two Arizona judges are suing the state, seeking a refund for pension contributions they’ve made over the last four years.

A 2011 law nearly doubled pension contribution rates for judges, who contend that the law was a breach of contract.

If the Supreme Court rules in the judges’ favor, it could lead to a refund totaling $175 million.

More from the Arizona Republic:

Judges, politicians and public-safety workers for the past four years have been required by law to pay significantly more out of their pockets for their state-sponsored pension benefits.

But two Arizona Court of Appeals judges are suing to turn the higher payments, contending they are unconstitutional — even though the 2011 law was passed to help shore up their financially troubled state pension trust.

[…]

The outcome, which may not be known for months, could be financially significant.

The retirement trust fund for judges is part of the Public Safety Personnel Retirement System, and any ruling in their favor also will affect police officers and firefighters, who are the biggest trust members. PSPRS estimated refunds sought by the judges’ challenge would total about $175 million, with another $1.4 million going toward permanent benefit increases.

The Hall case seeks to roll back the pension payments of roughly 200 judges to pre-2011 levels, or 7 percent of their salaries. Today, they pay 13 percent. Employers pay an average of 23.5 percent.

Arguments begin Thursday.

 

Photo by Joe Gratz via Flickr CC License