Author: Ted Ballantine

Kentucky Pension Director: Fewer Active Workers, More Retirees Is Problem For Fund

Kentucky flag

Kentucky Retirement Systems (KRS) executive director Bill Thielen spoke in front of the state’s Pension Oversight Board on Monday, and revealed an as-yet unaddressed trend that spells bad news for the pension system.

The trend involves the balance of active workers to retirees receiving payouts – and the balance is not shifting in the pension system’s favor.

Reported by WFPL:

One problem that remains unaddressed, said Thielen, is the imbalance created by fewer employees paying into KRS and more retirees receiving benefits this year. Board members were told that between 2007 and 2014, the number of active members in the Kentucky Employee Retirement System dropped from 47,913 to 40,365, while the number of retirees grew from 33,849 to 41,223.

That difference represents $228.9 million in losses this year (not counting payouts for hazardous jobs), and Thielen said the state will see more increases in benefit payout during 2015. Overall pension benefits (for all sectors) paid “for fiscal 2014 totaled $1769.7 million compared to $1706.2 in fiscal 2013,” according to the audited data report.

“Our own staff at KRS, also. About 40-45 percent of staff will be eligible to retire,” he said, explaining that private sector wages have begun to lure state employees into early retirement as Kentucky employees go into a fifth year of wage freezes.

“Without raises, we’ll probably see a lot retire.”

The 21 percent funded KERS Non-Hazardous plan is a sub-plan of the Kentucky Retirement Systems.

CalPERS Encourages Employers to Make Extra Contributions Now For Long-Term Savings

Flag of California

CalPERS is asking municipalities and other government employers to use any extra money available to boost their contributions to the pension system — a move that is tricky in the present moment for cash-strapped cities but that would yield long-term savings.

From CalPensions:

CalPERS is encouraging government employers to make extra payments to reduce their pension debt or “unfunded liability” if budgets allow, saying millions can be saved in the long run.

Annual CalPERS reports to 1,581 local government agencies this fall began showing estimates of future savings when extra payments, going beyond the required amount, are made to the pension fund.

The Newport Beach city council approved a plan for extra payments to CalPERS last month that is expected to save $47 million over 30 years, compared to the standard payment plan.

Huntington Beach approved extra payments to CalPERS last fiscal year based on an analysis by an independent actuary, Bartel Associates, showing each additional $1 million contributed to CalPERS saves $5 million over 25 years.

CalPERS estimates that about 60 employers made 111 extra payments to CalPERS last fiscal year. The new “alternate amortization schedules” in the annual reports to local governments are a response to requests from employers.

“The message we want to get out to employers is that if they have the ability, the financial means, to pay off some of this unfunded liability, it’s a smart business move and can really benefit them over the long run,” Anne Stausboll, CalPERS chief executive officer, said last week.

Read the entire report from CalPensions here.

Institutional Investors Bullish on Stocks, Alternatives in 2015

stock market numbers and graph

Institutional investors around the globe believe equities will be the best-performing asset class in 2015, according to a survey released Monday.

Investors are also bullish on alternatives, but not as thrilled when it comes to bonds, according to the survey.

The results summarized by Natixis Global Asset Management:

Forty-six percent of institutional investors surveyed say stocks will be the strongest asset category next year, with U.S. equities standing above those from other regions. Another 28 percent identify alternative assets as top performers, with private equity leading the way in that category. Only 13% predict bonds will be best, followed by real estate (7%), energy (3%) and cash (2%).

Natixis solicited the market outlook opinions of 642 investors at institutions that manage a collective $31 trillion. The survey found:

– Realistic expectations of returns: On average, institutions believe they can realistically earn yearly returns of 6.9 percent after inflation. In separate surveys by Natixis earlier this year, financial advisors globally said their clients could anticipate earning 5.6 percent after inflation1 and individuals said they had to earn returns of 9 percent after inflation to meet their needs.2

– Geopolitics leads potential threats: The top four potential threats to investment performance in the next year are geopolitical events (named by 17% of institutional investors), European economic problems (13%), slower growth in China (12%) and rising interest rates (11%).

– Focus on non-correlated assets: Just under three-quarters of respondents (73%) say they will maintain or increase allocations to illiquid investments, and 87% say they will maintain or increase allocations to real estate. Nearly half (49%) believe it is essential for institutions to invest in alternatives in order to outperform the broad markets.

– Words of advice for retail investors: Among the top investment guidance institutions have for individuals in the next 12 months: avoid emotional decisions.

[…]

“Institutional investors have an enormous fiduciary responsibility to fund current goals and meet future obligations,” said John Hailer, president and chief executive officer for Natixis Global Asset Management in the Americas and Asia. “The current market environment makes it difficult for institutions to earn the returns that are necessary to fulfill both short-term and future responsibilities. Building a durable portfolio with the proper risk management strategies can help investors strike a balance between pursuing long-term growth and minimizing losses from volatility.”

[…]

“Institutional investors have an unusually good perspective about markets and long-term prospects,” Hailer said. “Like ordinary investors, institutions have short-term worries. They also feel the pressure to take care of current needs, no matter what the markets are doing. Because of their longer-term time horizon, they offer valuable perspective.”

The full results of the survey can be read here.

Chart: Which Type of Private Equity Investors Are Most Resistant to Letting An Underperforming Fund Change It’s Terms?

limited partners, private equity

Consider this scenario: A limited partner invests money in a private equity fund under a certain set of terms and conditions. But eventually, it becomes clear the fund isn’t achieving the preferred performance and the general partner (PE firm) approaches the LP to re-set the terms of the deal.

A recent survey asked institutional investors whether they would comply with the GP’s request.

Turns out, pension funds would be more resistant to the changing of terms that any other type of institutional investor – over 60 percent said they would refuse to re-set terms.

 

Chart credit: Coller Capital

Pennsylvania Law Allows Scranton to Pay Fraction of Required Pension Contribution

Pennsylvania flag

Two Pennsylvania laws have allowed the city of Scranton to short its pension systems by about $10.9 million since 2009 – or over 22 percent of the city’s actuarially-required contributions over that time period.

Scranton used this tactic because the city needed money to plug budget shortfalls elsewhere – but now bigger payments await the financially troubled city in the future.

The laws that allow the practice are called Act 44 and Act 205. More details from the Scranton Times-Tribune:

Act 205 allowed municipalities to reduce their MMOs by employing an accounting tactic known as actuarial smoothing, which spreads out debt and stock market losses over a long period, up to 15 to 30 years.

But the breaks did not stop there.

Scranton also benefited from Act 44, which allowed municipalities with financially distressed pension plans to reduce the MMO by 25 percent for up to six years. Scranton has taken the reduction each year since 2009.

In 2014, for instance, the actuary determined the city needed to contribute $15.7 million,but the Act 44 reduction allowed it to put in just $12.1 million.

The acts were designed to provide temporary relief for municipalities hit by the stock market crash, which caused their MMO’s to skyrocket, said James McAneny, executive director of the Public Employee Retirement Commission. Scranton’s plans were particularly hard hit, losing a combined total of $21.3 million in the crash, PERC records show.

The problem, he said, is putting off the payments only compounded the pension plans’ financial woes.

“It defers the payment but it doesn’t make it go away,” Mr. McAneny said. “The obligation to make the payment is still there . . . If you are putting it off, all you are doing is facing a bigger payment later. If you can’t pay it now, what makes you think you can pay it later?”

Former Mayor Chris Doherty said he knew the city was putting in less than the actuary determined was required, but he said he felt safe doing so because the reductions were state-approved.

“It’s not like a choice I made that I’m going to deliberately underfund it,” Mr. Doherty said. “We didn’t have the money. We funded it at the rate they told us to fund it.”

A state audit earlier this year revealed that Scranton’s pension system could become broke in as soon as 3 to 5 years.

Report: Institutional Investors Plan to Increase Private Equity, Decrease Hedge Fund Allocations in 2015

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A Coller Capital report released Monday showed two strong trends in institutional investor sentiment.

Forty percent of investors are planning on increasing their allocations to private equity in 2015. Meanwhile, 33 percent of those same investors said the see themselves decreasing their hedge fund portfolios.

More from Money News:

Ninety-three percent of investors believe they will get annual net returns of more than 11 percent from their private equity portfolios over a three- to five-year horizon, the survey showed, up from 81 percent of investors two years ago.

Last year saw a record $568 billion of distributions from private equity, compared with $381 billion in 2012, according to figures from data compiler Preqin.

“What you’ve seen over the last two years is distributions from the private equity portfolio have been very, very strong, which will give investors a cause for optimism,” said Michael Schad, Partner at Coller Capital.

“Four years ago people might have had questions on the 2006-2007 vintage. But these funds have really turned around,” Schad added, referring to funds raised in the years just before the financial crisis.

That optimism contrasted with the one-third of investors that said they would decrease their allocation to hedge funds, following poor performance from many such firms. Major U.S. pension fund CalPERS made a high-profile withdrawal from hedge funds in September.

Hedge funds on average have gained just under 5 percent this year through November, according to data from industry tracker Eurekahedge, against a 10.2 percent rise in the S&P 500 U.S. equities index.

The full report can be read here.

 

Photo  jjMustang_79 via Flickr CC License

Quebec Pension Part of Investor Group Buying PetSmart

Petsmart

Caisse de Depot et Placement du Quebec, the entity that manages Quebec’s public pension plans, is part of the consortium of investors that agreed to buy PetSmart over the weekend.

Details from the New York Times:

PetSmart agreed on Sunday to sell itself to a group led by the investment firm BC Partners for about $8.7 billion, months after the retailer came under pressure from two hedge funds.

[…]

PetSmart has long been seen as a good target for private equity firms, given its relatively strong cash flow and low debt. In a leveraged buyout, private equity firms generally finance the majority of the purchase price with borrowed money.

PetSmart operates more than 1,300 pet stores in the United States, Canada and Puerto Rico.

“The question is, ‘Why haven’t there been more people interested in PetSmart?’” said Raymond Svider, a managing partner of BC Partners. “The category of pet products has been growing in the U.S. and abroad consistently for a number of years.”

The retailer disclosed in August that it was exploring a sale after Jana Partners, the big activist investor, emerged as a major shareholder. The pet supply company had already been weighing its strategic options as its sales had begun to slow.

By that time, Jana and another firm, Longview Asset Management, had begun agitating for a sale of the company. Jana now has a stake of 9.75 percent.

The monthslong auction of PetSmart eventually drew the interest of some of the biggest private equity firms, including Apollo Global Management, Kohlberg Kravis Roberts and Clayton Dubilier & Rice.

Ultimately, BC Partners, a European-American firm with about $15 billion under management, and some of its own investors emerged as the winner. (Longview, which owns a stake of roughly 9 percent in PetSmart, will roll over about a third of its holdings into the newly private retailer, cashing out the rest of its shares.)

Under the deal’s terms, the consortium will pay about $83 a share in cash, about 6.8 percent higher than PetSmart’s closing price on Friday and about 39 percent higher than the closing price on July 2, the day before Jana emerged as a shareholder.

Caisse de Depot et Placement du Quebec manages $214 billion in assets.

 

Photo by  Mike Mozart via Flickr CC License

Video: South African Pension Head Talks Investing for the Future

In this video, John Oliphant – Head of Investments at the $106 billion Government Employees Pension Fund of South Africa – discusses “irresponsible” investing and how his fund is investing with sustainability issues in mind. How has the strategy worked out for the GEPF? And would it work with other funds?

Oliphant begins by giving some talking points about the GEPF, and the real discussion begins around the 5:00 mark.

Bruce Rauner Named Most Important Player in U.S. Pensions

Bruce Rauner

Institutional Investor magazine has released its list of the 40 most influential people in U.S. pensions. Topping the list is the man who now governs a state with one of the worst pension problems in the country: Bruce Rauner.

From Institutional Investor:

Republican Bruce Rauner, the victor over Democratic incumbent Pat Quinn in the recent Illinois gubernatorial race, may regret he ever wished to win elective office. Rauner, onetime chairman of Chicago private equity firm GTCR, has had no real profile on retirement policy but finds himself staring at what may be the most serious pension mess among the states.

As of June 30, 2014, Illinois’s pension debt had reached $111 billion; Moody’s Investors Service reported in September that the state’s three-year average pension liability over revenue was 258 percent, five times the median percentage for all 50 states.

In 2013, Quinn persuaded the legislature to pass a bill raising the retirement age and cutting cost-of-living increases for beneficiaries. But the Illinois constitution holds that pensions cannot be “diminished,” and a coalition of public employee unions sued. And on November 21, Sangamon County Circuit Judge John Belz found the law unconstitutional, declaring, “Protection against the diminishment or impairment of pension benefits is absolute and without exception.”

Depending on various appeals, Rauner, 57, could try to implement his campaign agenda for pensions, which includes capping the current program and shifting members to a defined contribution plan — though he has begun to talk of just shifting new employees to avoid legal problems. Rauner has said he’d seek to keep benefits from rising faster than inflation and would eliminate employees’ ability to receive large pay hikes before retirement to beef up their pensions.

The odds of pushing these reforms through a Democratic-controlled state senate remain long, made worse by allegations that Rauner (and separately, Chicago mayor Rahm Emanuel [No. 4]) accepted contributions from executives affiliated with firms that manage Illinois pension plans. Rauner has not publicly responded to the allegations.

The ranking clearly reflects not what Rauner has already done, but the power he will have in the coming years. If the Illinois Supreme Court strikes down the state’s pension reform law, lawmakers will have to start from scratch – and Rauner will be at the helm.

 

Photo By Steven Vance [CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons


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