Ted Ballantine | Pension360

How Much Are Low Oil Prices Hurting Retirement Accounts?

Americans are thrilled to be saving money at the gas pump. But low oil prices aren’t good news for everyone – namely, oil and gas companies.

And that affects many Americans who are invested in oil and gas companies through their retirement accounts. But how much do low oil prices really hurt retirement funds?

Dan Boyce from Inside Energy explores the question:

Oil was at $55 to $60 a barrel just before Christmas, down from a high of more than $100 per barrel this summer.

Wanting to see just how much stake the average person has in oil and gas, we found that the most direct way to get access to sensitive personal financial information was if we analyzed one of our own retirement accounts. I humbly volunteered my own T. Rowe Price Roth IRA.

It’s a meager account, containing a little more than $4,200 at this point, and analyzing it for my oil and gas holdings revealed how complex the modern retirement portfolio really is.

My $4,200 splits among 19 smaller funds, which are invested in thousands of sources. The list ranges from companies like Tootsie Roll Industries and WD-40 to countries like Norway and even World Wrestling Entertainment.

It turns out a little less than 6 percent of my IRA is directly invested in oil and gas companies, or about $243.

Scott Middleton, who works with investment consulting company Innovest, said this mirrors the national average for retirement investments in energy at somewhere between 5 to 10 percent.

It’s true for IRA accounts like mine, as well as for others like 401(k)s, 403(b)s and pension funds.

The Colorado Public Employees Retirement Association, for example, has about 7 percent of its total portfolio in the energy sector, which in Wall Street-speak basically means just oil and gas. It makes up about 9 percent of the total stock market.

Middleton said as oil prices shrink, so, too, does my $243 in oil and gas investments. And so do most of the other funds invested in the same stocks.

But Boyce offers a few qualifiers that muddy the picture of just how much falling oil prices might hurt retirement savings:

A couple of things to remember, though. For one, I’m betting on my retirement account for the long term. The account is based upon the premise that I won’t start withdrawing from it until 2055.

Short-term fluctuations in price shouldn’t really concern us. Over the long term, the energy sector has been considered a very safe investment, yielding about a 10 percent annual rate of return.

Also, while declining oil prices might be bad for one part of my portfolio, they’re good for other parts. For example, Middleton said chemical producers and transportation companies tend to do well with lower oil prices.

Ultimately, oil and gas is not a critical part of our retirement funds. But, make no mistake, our retirement funds are absolutely critical for the oil and gas industry. The American Petroleum Institute says about 70 percent of U.S. oil company worth is owned by tens of millions of U.S. households through our IRAs, our pensions and our mutual funds.

Read the whole piece here.

Photo by ezioman via Flickr CC License

Ontario Teachers’ Pension Boosts Stake in UK Airport

The Ontario Teachers’ Pension Plan has increased its stake in Birmingham airport after the airport reported its busiest November on record.

The pension fund’s stake in the airport now totals 48 percent.

From the Financial Times:

The Birmingham deal comes a week after the regional airport said passenger numbers in November were the highest ever at 646,000, up 10 per cent on the previous year. It was the sixth record-breaking month in 2014 and the airport said it expected Christmas traveller numbers to be 7.4 per cent higher than last year.

“Birmingham airport is a high-quality asset that we know well. It has good growth prospects and we look forward to working with our partners to strengthen its position as a key regional airport in the UK,” said Andrew Claerhout, senior vice-president at Teachers’.

Birmingham is the UK’s seventh busiest airport with more than 9m passengers passing through its doors in 2013, according to the UK’s Civil Aviation Authority. Heathrow airport is the largest with 72m passengers, double the number of passengers of its nearest competitor, Gatwick.

Teachers’ first invested in Birmingham airport in 2001 and later acquired a joint 48.25 per cent stake with Victorian Funds Management Corporation in 2007 for £420m after the Dublin Airport Authority and Macquarie Airports Group sold their holdings.

The Canadian pension fund now has a sole 48.25 per cent stake, in addition to other airport investments in Copenhagen, Brussels and Bristol. Seven local district councils will continue to own a significant shareholding in the airport.

“We will continue to work with Teachers’ and the district shareholders with the shared goal of developing Birmingham airport’s connectivity to benefit both the region and the UK as a whole,” said Paul Kehoe, chief executive of Birmingham airport.

The Ontario Teachers’ Pension Plan manages over $140 billion in assets.

Photo by Caitlin ‘Caity’ Tobias via Flickr CC License

Is Illinois America’s Greece?

A recent piece in The Economist wonders whether Illinois’ pension debt might lead the state down the same path as Greece.

From the Economist, and re-published by Business Insider:

Illinois is like Greece in one obvious way: It overpromised and underdelivered on pensions and has little appetite for dealing with the problem, says Hal Weitzman of the University of Chicago Booth School of Business.

This large Midwestern state, with a population of 13 million (Greece has 11 million, though a far smaller GDP than Illinois), has the most underfunded retirement system of any state and the largest pension burden relative to state revenue. It also has the highest number of public-pension funds close to insolvency, such as the one looking after Chicago’s police and firemen.

[…]

The state devotes one in four of its tax dollars to pensions, which is more than it spends on primary and secondary education.

Mainly as a result of this gargantuan pension debt, Illinois’s bond rating is the lowest of all the states, which means dramatically higher borrowing costs.

When the state government failed to address pension underfunding in its budget for 2014, two credit-rating agencies, Fitch and Moody’s, cut the state’s bond rating, which in Moody’s case put Illinois on a par with Botswana. (An incensed editorial in the Chicago Tribune asked what Botswana had done to be so insulted.)

The main reason for the pension debacle is decades of underfunding. “Everything was always done with a short-term view,” says Laurence Msall, head of the Civic Federation. “Unique to Illinois is the idea that you don’t have to pay for pensions and you don’t have to follow actuarial recommendations.”

Whereas most other states follow the rules set by the Governmental Accounting Standards Board (GASB), which, however imperfect, require some budget discipline, Illinois has mostly ignored them.

Read the entire piece here.

Texas Pension Accounting Tweak Will Shift Debt to Schools, If Only Symbolically

In light of newly adopted GASB accounting rules, the Teacher Retirement System of Texas in 2015 will require school districts, colleges – and any other government entities that pay into the system – to declare their employees’ pension liabilities on their books.

From the Killeen Daily Herald:

School districts across the state will soon have more debt listed on their general fund balances and teachers could see a smaller paycheck…

[…]

“TRS does not want to put this liability on their books so they are taking the allocation to the districts and the cities and colleges and saying, ‘You record this amount; I’ll record this amount,” said Dane Legg, a partner at Lott, Vernon and Company PC, the Killeen Independent School District’s external auditing firm.

Legg reviewed the upcoming financial policy change with board members at their mid-December workshop.

In laymen’s terms, this means Killeen ISD will have to show a $48 million liability in its budget for about 28 years, the amount TRS said it owes toward Killeen ISD employees’ pensions.

The liability stems from the TRS Trust Fund, which is underfunded but will be fully funded in 28 years.

“It’s not set in stone — that number has not been set yet — but this was what they were charged to do to give people a heads up and go ahead and come up with their best guess,” Legg said.

TRS is $28.9 billion underfunded statewide, Legg said. And officials expect many government entities will take issue with the new GASB 68 policy because it will force some of them to look like they are in debt.

“TRS determines how that liability gets allocated by the district, and TRS is only taking a small piece of that $28 billion, and they are giving most of the rest to the district to record,” said Megan Bradley, the chief financial officer for Killeen ISD.

The district will not have to fund the liability, it will simply be a book entry, Legg said. TRS will fund it, however, by changing its member contribution rates and possibly the district’s match rate.

The Teachers Retirement System of Texas managed $124 billion in assets as of the end of 2013.

Photo by www.SeniorLiving.Org

Do Pension Plans Give Retirees a False Sense of Retirement Security?

At one time, pensions were seen as the safest, most secure stream of retirement income. But the security of pension benefits is no longer rock-solid. That raises the question: do pensions give retirees a false sense of retirement security?

Economist Allison Schrager explores the idea:

Until recently, a pension benefit seemed as good as money in the bank. Companies or governments set aside money for employees’ retirements; the sponsors were on the hook for funding the promised benefits appropriately. In recent years, it has become clear that most pension plans are falling short, but accrued benefits normally aren’t cut unless the plan, or employer, is on the verge of bankruptcy—high-profile examples include airline and steel companies. Public pension benefits appear even safer, because they are guaranteed by state constitutions.

By comparison, 401(k) and other defined contribution plans seem much less reliable. They require employees to decide, individually, to set aside money for retirement and to invest it appropriately over the course of 30 or so years. Research suggests that people are remarkably bad at both: About 20 percent of eligible employees don’t participate in their 401(k) plan. Those who do save too little, and many choose investments that underperform the market, charge high investment fees, or both.

It turns out that pension plan sponsors, and the politicians who oversee them, are just as fallible as workaday employees. We all prefer to spend more today and deal with the future when it comes. Pension plans have done this for years by promising generous benefits without a clear plan to pay for them. When pressed, they may simply raise their performance expectations or choose more risky investments in search of higher returns. Neither is a legitimate solution. In theory, regulators should keep pension plan sponsors in check. In practice, the rules regulators must enforce tend to indulge, or even encourage, risky behavior.

Because pension plans seem so dependable, workers do in fact depend on them and save less outside their plans. According to the 2013 Survey of Consumer Finances, people between ages 55 and 65 with pensions have, on average, $60,000 in financial assets. Households with other kinds of retirement savings accounts have $160,000. It’s true that defined benefit pensions are worth more than the difference, but not if the benefit is cut.

As the new legislation makes clear, pension plans can kick the can down the road for only so long. Defined contribution plans have their problems, but a tremendous effort has been made to educate workers about the importance of participating. (Even if the education campaign has been the product of asset managers who make money when more people participate, it’s still valuable.) Almost half of 401(k) plans now automatically enroll employees, which has increased participation and encouraged investment in low-cost index funds. And now it looks like a generous 401(k) plan with sensible, low-cost investment options may turn out to be less risky than a poorly managed pension plan, not least of all because workers know exactly what the risks are.

Read the entire column here.

Photo by http://401kcalculator.org via Flickr CC License

Newspaper: Pennsylvania Pension Funding and Shale Tax Shouldn’t Be Linked

Last week, a Pennsylvania lawmaker proposed levying a shale tax of 3.5 percent on the state’s frackers. The revenues – estimated to be $400 million annually – would then go to paying down the Public School Employees’ Retirement System’s (PSERS) unfunded liabilities.

One Pennsylvania newspaper agrees that paying down pension liabilities should be a top priority. But it disagrees that a shale tax is the way to do it.

From the Pittsburgh Tribune Review editorial board:

The GOP-controlled state Legislature must make Pennsylvania’s biggest financial woe — $50-billion-plus in unfunded pension liabilities — its top 2015 priority. And it must do so without linking pension reform to Democrat Gov.-elect Tom Wolf’s proposed natural gas severance tax.

Incoming Senate Majority Leader Jake Corman, R-Centre, during a Pennsylvania Manufacturers Association forum at the Pennsylvania Society gathering in New York earlier this month, said he’s willing to consider the severance tax if Wolf will negotiate on pensions. Going beyond compromise, that sets up GOP lawmakers to capitulate to Wolf’s taxing agenda.

Allegheny Institute scholar Frank Gamrat reminds that the extraction tax would have to compensate for the state-mandated elimination of the impact fee, a levy that has brought counties and municipalities nearly $130 million over the last three years. And for the tax to yield the Wolf-estimated $1 billion-plus at current gas prices, “production would have to rise by more than 50 percent.” It’s a quite iffy proposition given current market trends.

A too-high severance tax “could have adverse consequences for Pennsylvania,” says Gamrat. GOP leaders must take heed when he urges that the Legislature not spend “a great deal of (its) time and political capital” on a severance tax and focus instead on “pension reform” to address “the principal cause of the commonwealth’s budget problem.”

The Public School Employees’ Retirement System was 63.8 percent funded as of June 30, 2014.

Benchmarks, Transparency Could Bring More Pension Funds to Infrastructure, Says Group

The European Association of Paritarian Institutions (AEIP) last week called for greater transparency and more performance data in the infrastructure sector.

These changes, according to the AEIP, could help attract more pension funds to the sector.

From Investments and Pensions Europe:

Infrastructure markets need to be more transparent, with greater emphasis placed on the development of sector benchmarks, according to the European Association of Paritarian Institutions (AEIP).

Setting out its views on infrastructure, the association said that while pension funds were long-term investors – and therefore well-suited to invest in the asset class – they first and foremost needed to abide by their fiduciary duties to members.

“The reality is that infrastructure represents a valuable asset class and for sure a viable option for long-term investors, but these latter face several hurdles to access it,” the AEIP’s paper noted.

It said the lack of comparable, long-term data was one of the hurdles facing investors and that the absence of infrastructure benchmarks made it difficult to compare the performance of the asset class.

It also identified an organisation’s scale as problematic to taking full advantage of the asset class.

“Direct investments, those that yield the most interesting returns, are the most difficult to pursue, as their governance and monitoring require skilled individuals and a strict discipline regulating possible conflicts of interests,” it said.

“National regulation does not always simplify direct investments, and pension regulators in some cases limit the use of the asset class in a direct or indirect way.”

The association called on governments to play their part in making infrastructure accessible.

“Often the lack of infrastructure investments is not due to a lack of projects but not finding the right match with investors,” the AEIP added. “Some form of standardisation might be investigated.”

Read the paper here.

Ventura County Pension Seeks CIO

California’s Ventura County Employees’ Retirement Association (VCERA) is currently without a chief investment officer. But the fund is looking to hire one.

The description of the position, from the VCERA recruiting brochure:

Under general direction of VCERA’s Board of Retirement, in conjunction with the Retirement Administrator, the Chief Investment Officer serves as the in-house investment expert and acts as a liaison to the Board’s investment consultant and investment managers providing independent analysis of their investment proposals; administers, monitors and evaluates the investment program, including asset allocation, and rebalancing under the authority of the Board; and plans and develops investment strategies. This position is exempt from civil service and serves at the pleasure of the Board.

Duties of the Chief Investment Officer include, but are not limited to:

– Evaluates and provides reports on all types of investment products, including real estate, and alternative investments such as private equity, infrastructure, and limited partnerships, analyzing suitability for VCERA.

– Provides advice to the Board on recommended investment strategies and tactics, and reviews new strategies in coordination with the investment consultant.

– Reviews asset allocations and performs rebalancing in coordination with the Chief Financial Officer, pursuant to Board Policy.

The deadline for applications if January 26.

The recruiting brochure, which contains a full description of the position, can be read here.

Los Angeles Pension Invests $500 Million In Real Estate

The Los Angeles County Employees Retirement Association (LACERA) has invested $506 million in real estate, including two apartment complexes, an office building and a distribution center.

From IPE Real Estate:

The US pension fund agreed eight separate account purchases in gateway and secondary markets.

Two of the investments, made by Clarion Partners, were in core assets and leveraged at 50%.

LACERA invested $300m in the Palazzo-Westwood apartment complex in Los Angeles, which, over 10 years, is expected to achieve a projected 8.5%. The pension fund took an interest-only, seven-year facility at a fixed 3.4% rate.

Clarion also bought the 138,000sqft Las Cimas IV office building in Austin, Texas for $43m.

LACERA is looking to hold the asset for 10 years, with a projected 8.4% net-of-fee return.

The transaction was funded by a floating rate loan at an interest rate of LIBOR plus 180 basis points.

Deutsche Asset & Wealth Management bought two properties for LACERA.

The $35m all-cash acquisition of the 525,000sqft Ingram Micro Distribution Center in Chicago is projected to achieve a net 8.95% IRR over 11 years.

LACERA expects a 8.25% return over 10 years for the North Clark apartment complex in Chicago, bought for $51.1m.

Stockbridge Capital Group bought two core assets and two non-core properties, investing $62.4m in the 208,705sqft Pinole Vista Shopping Center in Pinole, California and the Junction Business Park in San Jose, bought for $14.2m.

Pinole Vista is projected to achieve an 8.6% net IRR.

Non-core assets in San Diego and Fremont were also bought for a respective $16.4m and $13.4m, with expected net-of-fee returns of 9.25% and 9.5% over five and three year holding periods.

LACERA manages approximately $38 billion in assets.

Video: Update on Illinois Pension Lawsuit

Here’s a discussion with attorney Aaron Maduff, who is representing the State Universities Annuitants Association in their lawsuit against Illinois’ pension reform law. Maduff gives us a recap and update on the high-profile pension lawsuit, and an idea of what we can expect in the coming months.

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