Ted Ballantine | Pension360

Think Tank: New Jersey Pension Benefits Aren’t That Lucrative

One of the criticisms leveled at New Jersey and its underfunded pension system – and one of the main justifications used to cuts in worker benefits – is that New Jersey’s public employees receive more generous pension benefits than their peers in other states.

But a left-leaning think tank released a report Wednesday that cast doubt on the generosity of New Jersey’s pension benefits relative to other states.

From NJ.com:

New Jersey’s public employee pension plans ranked among the least generous of top public pension plans in the country, according to a report released today.

The study shows New Jersey’s pensions are more modest than 94 of the country’s 100 largest plans.

[…]

The study considered whether pension plans protect retirees from rising inflation, how benefits are calculated and how much employees contribute to their plans.

New Jersey fell in the bottom half in all three fields, which Stephen Herzenberg, the Executive Director of the Keystone Research Center, who authored the report, called the three most important dimensions of generosity.

[…]

Workers kick in 6.93 percent of their pay — and that number is rising — while employees contribute less in more than half of the other systems, according to the findings.

New Jersey’s retirees do not receive yearly cost-of-living adjustments to offset inflation, unlike 69 other plans included in the study that offer some protection from inflation. Retirees are suing to restore the cost-of-living increases that Gov. Chris Christie suspended as part of a 2011 pension reform package.

The state’s formula for calculating pension payments also uses a low multiplier — 1.67 percent — that lands it in the bottom quarter of plans.

The report notes that Garden State workers also receive some of the lowest pension benefits, but those were not factored into the rankings.

On average, pension benefits are $26,000 a year. Local government employees receive less on average, $16,000, while teachers receive more, $40,000. State employees collect $25,000.

Read the full think tank report here.

Photo: “New Jersey State House” by Marion Touvel. Licensed under Public domain via Wikimedia Commons

Many Rhode Island Retirees To See COLAs Unfrozen in 2015

One of the pillars of Rhode Island’s sweeping 2011 pension reform law was the suspension of annual cost-of-living-adjustments for retirees.

According to the Civic Federation, the reform law mandated:

Automatic annual increase in pensions benefits (COLA) is suspended until state employees, teachers, nurses, correctional, officers, judges, and state police plans’ funding level calculated together exceeds 80 percent; interim increases will be paid at 5-year intervals, based on investment returns.

The interim annual increase and all future annual increases will be applied only to the first $25,000 of income (indexed) and based on investment returns.

But in 2015, for the first time in years, many municipal retirees are will receive a COLA. The raise will be to the tune of 2.73 percent.

The increase was triggered by funding improvements that moved many pension systems over the 80 percent funding threshold required for members to receive COLAs. From the Providence Journal:

Good news for many Rhode Island municipal retirees: they will see a 2.73 percent increase in their pension benefits starting next year.

[…]

59 of the 113 municipal plans in the state-run Municipal Employees Retirement System are healthy enough now (at least 80 percent properly funded) that their members will see the COLA next year on the first $25,000 of their pension benefit, reported the state Retirement Board on Wednesday.

The COLAs were approved by the board as it accepted its annual valuation reports for the MERS plans and the Employees Retirement System of Rhode Island, the major retirement plan for state employees and teachers.

Those valuations reports showed that the state’s overall investments earned 8.23 percent last year on a five-year “smoothed” basis, outperforming the state’s 7.5 percent assumed rate of return.

The ERSRI plans are not expected to reach 80 percent funding until around 2031. But since passage of the pension overhaul law, lawmakers approved a provision where some pension increase for those workers could be added every five years if certain investment levels were met.

To see the list of retirement systems receiving COLAs, click here.

Photo credit: “Flag-map of Rhode Island” by Darwinek – self-made using Image:Flag of Rhode Island.svg and Image:USA Rhode Island location map.svg. Licensed under CC BY-SA 3.0 via Wikimedia Commons

Kolivakis Weighs In On CalPERS’ PE Benchmark Review

It was revealed last week that CalPERS has plans to review its private equity benchmarks. The pension giant’s staff says the benchmark is too aggressive – in their words, the current system “creates unintended active risk for the program”.

Pension360 last week published the take of Naked Capitalism’s Yves Smith on the situation. Here’s the analysis of pension investment analyst Leo Kolivakis, publisher of Pension Pulse, who takes a different stance.

____________________________________

By Leo Kolivakis [Originally published on Pension Pulse]

I was contacted in January 2013 by Réal Desrochers, their head of private equity who I know well, to discuss this issue. Réal wanted to hire me as an external consultant to review their benchmark relative to their peer group and industry best practices.

Unfortunately, I am not a registered investment advisor with the SEC which made it impossible for CalPERS to hire me. I did however provide my thoughts to Réal along with some perspectives on PE benchmarks and told him unequivocally that CalPERS current benchmark is very high, especially relative to its peers, making it almost impossible to beat without taking serious risks.

Almost two years later, we now find out that CalPERS is looking to change its private equity benchmark to better reflect the risks of the underlying portfolio. Yves Smith of Naked Capitalism, aka Susan Webber, came out swinging (again!) stating CalPERS is lowering its private equity benchmark to justify its crappy performance.

There are things I agree with but her lengthy and often vitriolic ramblings just annoy the hell out of me. She didn’t bother to mention how Réal Desrochers inherited a mess in private equity and still has to revamp that portfolio.

More importantly, she never invested a dime in private equity and quite frankly is far from being an authority on PE benchmarks. Moreover, she is completely biased against CalPERS and allows this to cloud her objectivity. Also, her dispersion argument is flimsy at best.

Let me be fully transparent and state that neither Réal Desrochers nor CalPERS ever paid me a dime for my blog even though I asked them to contribute. I am actually quite disappointed with Réal who seems to only contact me when it suits his needs but I am still able to maintain my objectivity.

I remember having a conversation with Leo de Bever, CEO at AIMCo, on this topic a while ago. We discussed the opportunity cost of investing in private markets is investing in public markets. So the correct benchmark should reflect this, along with a premium for illiquidity risk and leverage. Leo even told me “while you will underperform over any given year, you should outperform over the long-run.”

I agreed with his views and yet AIMCo uses a simple benchmark of MSCI All Country World Net Total Return Index as their private equity benchmark (page 33 of AIMCo’s Annual Report). When I confronted Leo about this, he shrugged it off saying “over the long-run it works out fine.” Grant Marsden, AIMCo’s former head of risk who is now head of risk at ADIA, had other thoughts but it shows you that even smart people don’t always get private market benchmarks right.

And AIMCo is one of the better ones. At least they publish all their private market benchmarks and I can tell you the benchmarks they use for their inflation-sensitive investments are better than what most of their peers use.

Now, my biggest beef with CalPERS changing their private equity benchmark is timing. If we are about to head into a period of low returns for public equities, then you should have some premium over public market investments. The exact level of that premium is left open for debate and I don’t rely on academic studies for setting it. But there needs to be some illiquidity premium attached to private equity, real estate and other private market investments.

Finally, I note the Caisse’s private equity also underperformed its benchmark in 2013 but handily outperformed it over the last four years. In its 2013 Annual Report, the Caisse states the private equity portfolio underperformed last year because “50% of its benchmark is based on an equity index that recorded strong gains in 2013″ (page 39) but it fails to provide what exactly this benchmark is on page 42.

Also, in my comment going over PSP’s FY 2014 results, I noted the following:

Over last four fiscal years, the bulk of the value added that PSP generated over its (benchmark) Policy Portfolio has come from two asset classes: private equity and real estate. The former gained 16.9% vs 13.7% benchmark return while the latter gained 12.6% vs 5.9% benchmark over the last four fiscal years. That last point is critically important because it explains the excess return over the Policy Portfolio from active management on page 16 during the last ten and four fiscal years (click on image).

But you might ask what are the benchmarks for these Private Market asset classes? The answer is provided on page 18 (click on image).

What troubles me is that it has been over six years since I wrote my comment on alternative investments and bogus benchmarks, exposing their ridiculously low benchmark for real estate (CPI + 500 basis points). André Collin, PSP’s former head of real estate, implemented this silly benchmark, took all sorts of risk in opportunistic real estate, made millions in compensation and then joined Lone Star, a private real estate fund that he invested billions with while at the Caisse and PSP and is now the president of that fund.
And yet the Auditor General of Canada turned a blind eye to all this shady activity and worse still, PSP’s board of directors has failed to fix the benchmarks in all Private Market asset classes to reflect the real risks of their underlying portfolio.

All this to say that private equity, real estate, infrastructure and timberland benchmarks are all over the map at the biggest best known pension funds across the world. There are specific reasons for this but it’s incredibly annoying and frustrating for supervisors and stakeholders trying to make sense of which is the appropriate benchmark to use for private market investments, one that truly reflects the risks of the underlying investments (you will get all sorts of “expert opinions” on this subject).

Photo by rocor via Flickr CC License

Two Pension Bills Sitting in Pennsylvania Legislature Likely to Resurface In 2015

Pennsylvania’s outgoing governor, Tom Corbett, made reforming the state’s pension system his top priority over the last year. But his plan – which would shift new hires into a “hybrid” plan with characteristics of a 401(k) – failed to enthuse most legislators.

Still, two pension bills are still sitting in the legislature, and they are likely to be brought up again in 2015. The first bill mirrors Corbett’s “hybrid idea”. As described by the Scranton Times-Tribune:

The hybrid plan, proposed by state Rep. Seth Grove, R-York, would maintain defined benefit plans for current employees and retirees and shift new hires into a plan that has features similar to 401(k) plans.

The proposal has several provisions to help municipalities reduce pension deficits, including guaranteeing a rate of investment return and allowing any excess earnings to be used to reduce the pension plan’s unfunded liabilities, said Rep. Grove.

[…]

The bill was introduced in the last legislative session, but never made it out of the Local Government Committee. Rep. Grove said he plans to reintroduce the bill in the next session.

The other bill takes a different approach. From the Times-Tribune:

The other bill focuses on reforming Act 111, which requires binding arbitration when a municipality is unable to reach a contract with its police or firefighters unions.

State Rep. Rob Kauffman, R-Chambersburg, introduced a bill last year that would, among other things, require an arbitrator to consider a municipality’s ability to pay when issuing an award. It did not make it out of committee, but is expected to be reintroduced this session, said Rick Schuettler, executive director of the Pennsylvania Municipal League, which supports the legislation.

Municipal officials statewide have long-complained that binding arbitration is stacked in favor of the unions, with arbitrators often issuing excessive awards.

How likely are these bills to gain any traction? The second one has the better chance, because incoming Gov. Tom Wolf is opposed to changing the pension system to a “hybrid” plan.

Ontario Pension Commits $200 Million to Infrastructure

The Ontario Pension Board has earmarked $200 million to AMP Capital for investment in global infrastructure.

Details from IPE Real Estate:

Launched in October, the strategy is aiming to raise CAD2bn (€1.57bn) for investments in OECD transport, communication and utilities.

AMP, which manages unlisted and listed infrastructure investments in Asia, Europe, North America, Australia and New Zealand, said the strategy currently holds a $750m portfolio of diversified European infrastructure equity assets.

Glenn Hubert, a private markets managing directors at OPB, said the pension fund was attracted by the possibility to gain exposure to multiple, high-quality assets.

OPB had a 3.2% allocation to infrastructure at the end of last year.

The commitment, he added, grows OPB’s presence in North America, a region that AMP has been building its presence in. The manager has an infrastructure equity team in New York.

AMP Capital global head of infrastructure equity Boe Pahari said growing numbers of institutional investors are seeking greater exposure to alternative assets such as infrastructure, attracted to ”predictable risk-adjusted returns, consistent yields and portfolio diversification”.

As reported in October, private equity firm Pantheon is among investors backing AMP Capital’s strategy.

The Ontario Pension Board manages more than $19 billion in assets.

Detroit Pension Chair Calls for Firing of Lawyer Employed During Bribery Scandal

The Chairman of the Detroit Police & Fire pension fund is calling for the termination of the fund’s general counsel. That’s because the lawyer was employed at the fund during the bribery and pay-to-play scandal that cost the fund millions.

The general counsel, Joseph Turner, was not charged with any crimes. But the trustees have said publicly that they don’t trust him and want a clean break from the years of bribery that have plagued the fund.

From the Detroit News:

A powerful lawyer who factored into the Detroit pension fund bribery scandal and continues to wield influence over the Police & Fire retirement system could soon be out of a job.

Critics of the retirement system’s general counsel, Joseph Turner, say his continued involvement in the pension board raises questions about the city’s ability to move past a history of corruption, mismanagement and bad investments that helped push Detroit into bankruptcy.

Detroit Police & Fire pension fund Chairman Mark Diaz said he is prepared to ask board members to fire Turner and his law firm Clark Hill PLC, now that a corruption trial has ended in six convictions and Detroit has emerged from bankruptcy.

The pension board’s next meeting is Thursday.

Here’s what trustees have said of Turner, from Detroit News:

“Very simply: we don’t have confidence in him,” [Chairman] Diaz told The News Wednesday. “This is a multi-billion-dollar corporation and we cannot have the air of impropriety whatsoever.”

Fellow Trustee Georze Orzech was blunt when asked about Turner.

“He’s got to go,” Orzech said. “I don’t trust him.”

According to Detroit News, in 2007 Turner gave thousands of dollars of “birthday money” to various trustees. Soon after, the trustees voted to raise Turner’s pay from $225 to $300 an hour.

Photo credit: “DavidStottsitsamongDetroittowers” by Mikerussell – Own work. Licensed under Creative Commons Attribution-Share Alike 3.0 via Wikimedia Commons

Video: Lawmaker Calls for Investigation into Jacksonville Police and Fire Pension

Florida State Representative Janet Adkins called this week for state Governor Rick Scott to consider launching an investigation into possible misconduct at the Jacksonville Police and Fire Pension Fund.

According to Rep. Adkins, the investigation would focus on:

– Why “a special pension plan…was designed for one or two beneficiaries”

– Whether rules and laws have been broken “in regards to the creation, management and regulation of the DROP accounts”

Watch the video for more.

Cover photo by pshab via Flickr CC License

CalPERS, CalSTRS Responds To Push For Coal Divestment

California Senate President Kevin de León said on Monday he would introduce a bill in 2015 that would require CalPERS and CalSTRS to divest from coal-related investments.

CalPERS was the first of the funds to publicly respond to the bill. Summarized by Chief Investment Officer magazine:

CalPERS responded strongly to the proposal, stating that “we firmly believe engagement is the first call of action, and results show that it is the most effective form of communicating concerns with the companies we own”.

The statement also detailed CalPERS’ “proven track record” of engaging and dealing with climate change risks within its portfolio. This included CalPERS’ work as a founder member of the Investor Network on Climate Change, and its efforts to persuade governments and policy makers to support a low-carbon future.

“We are also working aggressively with a coalition of 75 international investors worth over $3 trillion in assets to engage with the 45 largest fossil fuel companies to ensure they are taking appropriate action to manage the physical and capital risks associated with climate change,” CalPERS said.

CalSTRS released its own response as well, according to ai-cio.com:

CalSTRS highlighted its review of “sustainable investing and risk management” as well as its plan to triple the value of its investments in clean energy and technology in the next five years. CIO Chris Ailman said at the time the pension could raise its allocation as high as $9.5 billion—5% of the current value of its portfolio.

CalSTRS said climate change was “a material risk assessed across the entire portfolio that could impact current and future investment value”.

“CalSTRS believes our investment decisions must carefully weigh our duty to perform profitably with consideration of environmental, social and governance impact of those investments,” it added. “CalSTRS is a patient, long-term investor, and the ultimate impact of our investment in coal is something that we will be assessing in the coming year.”

CalPERS’ full statement, released on Facebook, can be seen here.

Photo by Paul Falardeau via Flickr CC License

Experts: Japan Pension Should Be Run By Board, Not President

Currently, Japan’s Government Pension Investment Fund (GPIF) – the largest pension fund in the world – is managed by a President.

The sole trustee system is rare; it is used by a few pension funds in the United States, but more typically a board of trustees is utilized to make investment policy and governance decisions.

Now, experts are calling on the GPIF to switch to a board of trustees model.

From the Wall Street Journal:

[The] Government Pension Investment Fund should be managed by a board of directors rather than a president, as is currently the case, a panel of outside experts has concluded.

[…]

“If the coach plays with the players in a sports game, if there are mistakes in the game, it’s hard for the coach to make the tough calls he should be making as coach,” said Shuya Nomura, a Chuo University professor who was appointed last month as an adviser to the welfare minister on GPIF issues, referring to how the board of directors should be structured.

The meeting ran 30 minutes over the scheduled time as members argued over whether you could compare the GPIF to the Bank of Japan 8301.TO -0.21% or a public company. They also couldn’t reach consensus about how a nomination panel to appoint fund officials should be structured.

Perhaps it shouldn’t come as a surprise that the group has differed on some issues. Welfare Minister Yasuhisa Shiozaki, an Abe appointee and a staunch advocate of an aggressive overhaul of the fund’s management, pushed hard for the group to be formed, and some of its members have expressed views similar to his. But bureaucrats at the health ministry, which oversees the GPIF, argued that the group should include more cautious voices.

The group will present its ideas to the health ministry panel for further discussion, and eventually the ministry will draft a law to submit to parliament.

The GPIF manages $1.1 trillion in assets.

Photo by Ville Miettinen via Flickr CC License

San Francisco Pension Postpones Appointment of Board Member in Wake of Ethics Complaint

San Francisco’s former first lady Wendy Paskin-Jordan sits on the board of the San Francisco Employees’ Retirement System (SFERS); her seat is appointed by city mayor Ed Lee, who was ready to appoint her to another term.

But an ethics complaint has put Paskin-Jordan’s appointment “on hold”. The details of the complaint:

The main issue discussed Tuesday was her investment in Grantham, Mayo, Van Otterloo and Co., an investment firm, in which the employees’ pension fund has invested $388 million. In a required financial disclosure statement filed last year, Paskin-Jordan reported she had invested between $100,000 and $1 million in GMO in August 2011. That amount, however, is below the company’s minimum investment threshold of $10 million.

City law prohibits board members from investing in private equity, limited partnerships and in nonpublically traded mutual funds doing business with the Employees’ Retirement System. Additionally, city law prohibits a board member from soliciting or accepting “a business opportunity, a personal loan, a favor or anything of value from any public entity or firm doing business with SFERS.”

Paskin-Jordan has been out of town recently, but the rest of the board wants to give her a chance to explain the situation for herself in front of the board. Meanwhile, she has the support of the retirement system’s Executive Director. From the SF Examiner:

In a Dec. 8 letter to the Ethics Commission, retirement system Executive Director Jay Huish argues that both these laws were not broken by Paskin-Jordan’s investment.

Huish noted that GMO is considered a manager of public-market assets, and that Paskin-Jordan had received a threshold waiver to invest in GMO from her former employees who went on to work there. That waiver, Huish said, was granted before she was appointed to the board and exercised after she was on the board.

The San Francisco Employees’ Retirement System manages about $20 billion in assets.

Photo by ilirjan rrumbullaku via Flickr CC License

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