Ted Ballantine | Pension360

Urban Institute Launches Public Pension Tool – “Build Your Own Pension Plan”

The Urban Institute has released its “Build Your Own Pension Plan” tool, which allows users to construct and analyze the costs and benefits of self-made pension plans.

The tool, outlined by Pensions & Investments:

State and local governments dealing with pension challenges can use a new tool from the Urban Institute in Washington to model possible changes.

The independent think tank released on Tuesday the interactive tool, “Build Your Own Pension Plan.”

As part of its Public Pensions Project, the Urban Institute also has a pension report card that grades states on pension funding, retirement security for both short-term and long-term employees, and workforce incentives.

New approaches like cash balance plans and offering annuities for public-sector workers score well on the report card, said Richard Johnson, senior fellow and program director for retirement policy at the Urban Institute. While they don’t solve current underfunding woes, “they represent the kind of bold thinking needed to address the pension challenges confronting state and local governments. There are better ways of reforming pensions that can provide public servants with secure retirements and still save taxpayers money,” Mr. Johnson said in a statement.

Use the tool here.

Photo by Michael Scott via Flickr CC License

San Diego Pension Changes Media Policy; Trustees Now Free to Make Public Comments

The San Diego County Employees Retirement Association (SDCERA) has amended its media policy to allow its trustees to talk to media outlets. Previously, all media requests were re-directed to the fund’s CEO, Brian White.

Trustees called the policy “too controlling” and equated it to “communist Russia”.

Reported by the San Diego Union-Tribune:

County pension trustees are now free to talk to reporters, bloggers and anyone else without running afoul of their media policy.

The San Diego County Employees Retirement Association policy previously prohibited board members from commenting to the media, instructing them to direct all media requests to the CEO or his spokesman.

The board voted 7-1 to remove the prohibition.

Trustee Samantha Begovich said the old policy violated her First Amendment right.

“That’s communist Russia right there,” she said. “I see no basis for that.”

She said one problem with CEO Brian White as the sole arbiter of agency comments is that he’s too quick to defend investment consultant Salient Partners of Texas.

“We are not the PR arm of Salient,” Begovich said.

[…]

Supervisor Dianne Jacob, who represents the county Board of Supervisors on the pension board, suggested at one point that having a media policy was unnecessary.

“It’s understood that the board president or the CEO would speak on behalf of the board or the board position,” she said. “But in no way should it preclude a board member from expressing their opinion.”

County Treasurer Dan McAllister cast the only vote against the change, saying he wanted to rescind the policy entirely.

“It’s too controlling,” he said. “It’s too overlording.”

One trustee, David Myers, thought the previous policy was “fine”, although he ended up voting to amend it. From the San Diego UT:

Trustee David Myers said the policy was correct to direct board members to refer media requests to the CEO or board chair.

“The policy is fine the way it is, despite the conspiracy hysteria by one trustee to what the policy is,” Myers said, although he then went along with the board majority in supporting the change.

SDCERA manages $10.5 billion in assets.

Photo by Gene Han via Flickr CC License

Video: CalSTRS CIO On Pros and Cons of Activist Investing

CalSTRS Chief Investment Officer Chris Ailman sat down with Bloomberg TV this week to talk about the pros and cons of activist investing and the difference between “white hat” and “black hat” activist investors.

Also appearing is Columbia Business School Adjunct Professor Fabio Savoldelli.

General Partners Gain Upper Hand Over Pension Funds As Raising Capital Becomes Easier

Pensions & Investments released an interesting report yesterday outlining the balance of power in the private equity world between general partners and pension funds.

In the last few years, the balance of power has shifted dramatically towards GP’s, according to the report.

From Pensions & Investments:

Until the 2008 financial crisis, general partners pretty much set the rules, leaving most limited partners little say on terms, including on fees and expenses, when they committed to funds. Then fundraising got harder, and even the most popular private equity managers had to accept investors’ demands for lower fees and expenses and a greater degree of transparency.

Now, the highest-returning general partners are regaining the upper hand.

“Certainly, the pendulum has swung more toward the GP compared to 2009,” said Kevin Campbell, managing director and portfolio manager in the private markets group at fund-of-funds manager DuPont Capital Management, Wilmington, Del. The firm was spun out from the pension management division of DuPont’s pension plan in 1993.

[…]

Said DuPont’s Mr. Campbell: “I’ve seen the pendulum of power change positions several different times during the last 15 years,” where private equity fund terms are determined by the GP and sometimes they are more influenced by the LP.

Strong-performing managers that retain the same team and the same investment strategy used when they earned their strong returns have the most influence over fund terms, Mr. Campbell said. These managers also are raising a fund that is similar in size to their last fund and they have a “good investor base,” meaning investors who routinely commit to their funds, he said.

[…]

Some are increasing their negotiating clout by getting large capital commitments from sovereign wealth funds before the first close, enabling them to give other interested institutional investors a take-it-or-leave-it deal, said Stephen L. Nesbitt, chief executive officer of Marina del Rey, Calif.-based alternative investment consulting firm Cliffwater LLC.

Part of the reason GPs have power over LPs has to do with fundraising. GPs are having an easy time raising capital, which means they don’t have any incentive to negotiate terms with LPs. From P&I:

It’s easier to raise capital now; funds are raised more quickly and general partners have more influence on terms, he added.

Indeed, some private equity funds are closing very quickly, with access to much more capital than they need. Instead of holding several fund closings — giving general partners the ability to invest the capital commitments before the final close — a number of firms are having “one-and-done” closings. Because there are asset owners willing to invest on those terms, the GPs have little reason to give in to limited partners demanding changes to fund terms.

For example, Veritas Fund Management in August held a first and final close at $1.875 billion for its latest middle-market private equity fund, after just three months of fundraising. And private equity real estate manager Iron Point Partners LLC in November closed the Iron Point Real Estate Partners III LP at $750 million, well above its $450 million target.

And KPS Capital Partners LP held a first and final closing last year of its $3.5 billion KPS Special Situations Fund IV, above its $3 billion target. It was KPS’ third oversubscribed institutional private equity fund, according to a statement from the firm at the time.

Read the full report here.

Pennsylvania Pension Contribution To Rise By $466 Million in 2015

Pennsylvania’s required annual contributions to its two pension systems are set to grow by $466 million next year – bringing the state’s tab in 2015 to over $2 billion.

The information was revealed by the state’s budget secretary during an annual update on the state’s fiscal condition.

From the PA Independent:

State-level contributions to Pennsylvania’s two pension plans will have to climb by an estimated $466 million in the next budget, after an increase of about $520 million this year. Next year could be considered the mid-point of a decade-long “pension spike” that sees retirement costs consuming larger and larger shares of the state’s spending each year.

Budget Secretary Charles Zogby of Gov. Tom Corbett’s outgoing administration outlined the bad news this week in an annual mid-year update on the state’s fiscal situation.

After four years of seeing pension costs grow — the state spent about $500 million on pensions in the last budget before Corbett took office, compared to more than $1.7 billion this year — and making limited headway on any changes to how the state pays for its employees’ retirement, the governor’s team will soon hand responsibility to Wolf.

[…]

The pension crisis has its roots in a series of decisions made by three different governors and state legislatures between 2001 and 2003. A series of changes to the pension plans increased benefits without asking state workers to contribute more towards retirement, boosted retirement benefits for those who were no longer working at all and allowed the state to take a decade-long “pension holiday” without paying for those increased costs.

That pension holiday ended in 2011, leaving first Corbett and now Wolf holding the bag.

It was also revealed that pension payments could rise above $3 billion annually by 2019.

Questions Raised About Return Assumption of Japan Pension

Some experts, including a senior economist at the Japan Research Institute, have questioned whether Japan’s Government Pension Investment Fund (GPIF) is being too optimistic by assuming a 6 percent return per year on its domestic equity portfolio.

From the Asian Review:

The managers of Japan’s huge Government Pension Investment Fund must have their heads in the clouds to expect domestic shares to return an impressive 6% a year, some observers say.

The $1 trillion fund’s new medium-term investment plan, released at the end of October, assumes that economic growth and other macroeconomic conditions will resemble the Japan of 1983-93. But its expected nominal return on Japanese equities is based on corporate earnings from 1983 to 1989 — the high-flying years before the nation’s asset-price bubble burst.

Japanese bonds make up 35% of the GPIF’s new asset mix, down from 60% in the old portfolio model. Meanwhile, the fund’s target allocations for domestic and foreign stocks have each more than doubled, from 12% to 25%, while its allocation for foreign bonds has risen from 11% to 15%.

When it comes to international bonds and equities, the GPIF expects nominal returns of 3.7% and 6.4% at best. But its “upside scenario” for domestic stocks has them rising at 6% — a rate at which an investment, if compounded, would roughly double in 12 years. To arrive at this number, the fund crunched share prices, dividends, earnings per share and other stock-related data from 1983 to 1989.

Although Japanese shares returned far more than 6% during the bubble era, they did so amid an unprecedented economic boom. The odds of such an earnings-supported-rally occurring again are debatable. As to why the fund’s baseline for domestic equity returns ends at 1989, not 1993 as in the economic assumptions, GPIF President Takahiro Mitani said it was to control for the effects of the bubble bursting.

Japan’s GPIF is the largest pension fund in the world with $1.1 trillion in assets.

Photo by Ville Miettinen via Flickr CC License

Two Former Detroit Pension Officials Found Guilty of Fraud

Three former Detroit officials – including two who worked for the city’s pension systems – were convicted Monday of conspiracy to commit fraud.

The men accepted bribes and other kickbacks in exchange for directing pension money to certain investments.

From the Wall Street Journal:

A former treasurer for the city of Detroit — along with two other former city pension officials — were convicted Monday of conspiring to defraud retirees by trading lucrative investment deals for bribes and kickbacks as the city’s finances spiraled out of control.

A federal jury convicted former treasurer Jeffrey Beasley, 45, of Chicago following a two-month trial. Ronald Zajac, who was an attorney for the pension fund and Paul Stewart, a former pension trustee, were also found guilty of corruption charges.

[…]

All three defendants were convicted of conspiring to defraud the city’s pensioners by accepting bribes. In addition, Mr. Beasley was convicted of two counts of extortion and one count of bribery. Mr. Beasley was acquitted on three other counts of extortion.

The evidence at trial, according to federal prosecutors, showed that Detroit’s two retirement systems lost more $97 million on pension deals corrupted by bribes and kickbacks taken or paid by the defendants…

Messrs. Beasley, Zajac and Stewart conspired with each other and, prosecutors alleged, with former Detroit Mayor Kwame Kilpatrick and others to take bribes and kickbacks in return for votes on investment decisions made by the boards of trustees of Detroit’s two pension systems.

This happened under the watch of former city Mayor Kwame Kilpatrick, who is currently serving a 28-year prison sentence for racketeering, tax crimes and bribery.

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

“Everybody’s Not Going To Retire At The Same Time”: Actuary Evaluates Former Illinois Governor Edgar’s Pension Comments

Last month, former Illinois governor Jim Edgar gave his thoughts on the state’s pension situation. He notably said he didn’t support the state’s pension reform law, and said the following:

“I don’t think also you have to have 100 percent funding in the pension plan. Everybody’s not going to retire at the same time. I think you can keep probably 75, 80 percent is sufficient, but I think what you’ve got to demonstrate to a lot of folks out there who rate the state’s credit and a lot of those things is that the plan will work over a period of time and that they are committed and are going to stick with it.”

Actuary Mary Pat Campbell, who runs the STUMP blog, weighed in on Edgar’s comments. As you’ll see, she is not a fan of Edgar’s pension knowledge. The full post is below.

_________________________________

By Mary Pat Campbell, originally published on STUMP

Seems that not all recent Illinois governors end up in prison, (Quinn isn’t out of the woods yet!) but perhaps they should be jailed for this crap:

“I don’t think also you have to have 100 percent funding in the pension plan. Everybody’s not going to retire at the same time. I think you can keep probably 75, 80 percent is sufficient, but I think what you’ve got to demonstrate to a lot of folks out there who rate the state’s credit and a lot of those things is that the plan will work over a period of time and that they are committed and are going to stick with it. We thought when we put in the provision you had to pay into the pension plan first thing before you did anything else that they would keep paying in. I never thought they would have the nerve to change that, but under (former Gov. Rod) Blagojevich they did and so you’re going to have to find some safeguards to put into the plan, but I think it’s going to take 20, 30 years to get to the level we want to get to, but if we start working toward it and don’t go on any spending spree with the pension plan, I think we can do that.”

First off, we do have an appearance of the 80% canard, but there’s a new lie that’s been creeping in that is pissing me off: “Oh, it’s not a problem right now… it would only be a problem if everybody retired at the same time.”

Let me explain, conceptually, what the pension liability is supposed to represent, and what the unfunded portion represents: it is what people have earned for their PAST service, and is using all sorts of assumptions, such as THE AGE THEY WILL PROBABLY RETIRE.

The actuarial value of the pension, under even the craziest approaches, does not assume everybody retires right now.

Let’s consider your pension value for a person still working: each extra year of service, they’ve earned some more. They are also a year closer to retirement. As long as they keep working and are still alive, the value of their pension increases, under most pension benefit design. Sometimes you’ll see a pension value drop at later ages, but that’s getting persnickety (though it has had some repercussions elsewhere).

The pension valuation is supposed to be a snapshot, indicating what has ALREADY BEEN EARNED. There are approaches that try to capture future salary increases, and tries to make accrual less drastic (as one usually does see huge increases in pension value right before retirement under some approaches).

The main time the pension value would be decreasing for a person is when they’re in retirement, as they’re not accruing more benefits, and each year they’re one year closer to death. The time the pension gets paid out is generally getting shorter. If the pension fund cannot cover retiree benefits, it’s in a really bad condition.

And here’s the deal: some pensions are not able to cover just the current retiree portion of the benefits:

Nobody is any more worried now than they were before the New Jersey Pension Study Commission report came out. Yes, “[t]his problem is dire and will only become much worse if meaningful steps are not taken quickly” but what does that really mean to anyone?

…. Scary Conclusions

1. For retirees there may be about $15 billion to cover $40 billion in liabilities and that’s ONLY for retirees leaving absolutely NOTHING for the 151,669 participants who have not yet started receiving monthly benefits except, for now, the refund of their contributions.

2. There is an equally good chance that Conclusion #1 is overly optimistic

I doubt New Jersey is the only state in that situation. As noted earlier, Kentucky is looking really bad.

And in my recent teaser, I showed a set of graphs I am developing for various pension plans. The ones being shown were for Texas Teachers Retirement System. I will explain them in a later post, and start showing you some truly scary information — using the official numbers from the plans themselves.

But shame on Gov. Edgar for mouthing the same bullshit everybody else does in favor of underfunding the pensions. I have looked at over a decades’ worth of Illinois pension valuations, and for all major funds (except one), they deliberately underfunded by substantial amounts, even in “good” years.

If you’re not going to make contributions when times are good, guess what will happen to the pensions when times are bad?

I guess ex-Gov. Edgar wants to cover his own ass for the pensions being underfunded in the go-go 90s, when he was governor (1991 – 1999). Hey! Everybody was doing it! 80% is good enough!

NO, IT’S NOT.

SHAME.

Newspaper: Kentucky Pension Officials Have “Forgotten Whom They Work For”

Pension360 has covered the push in recent weeks by several Kentucky lawmakers to make the state’s pension system more transparent.

The secrecy surrounding Kentucky’s pension investments is well documented, and the issue has even spurred a lawsuit.

One Kentucky newspaper wrote Tuesday that pension officials have “forgotten whom they work for” – the public.

The Herald-Dispatch editorial board writes:

Apparently, [pension officials] are in sore need of a reminder that they are employed to serve the public and, as such, how they conduct their business should be open to scrutiny by the public.

[…]

Some want to know more about how the pension funds operate. As of now, Kentucky law allows the systems to operate partly shielded from the public. For example, the public is not allowed to know how much is paid out to individual retirees, nor does the systems have to reveal how much they pay out in fees to individual hedge fund managers who are investing the pension money and other external investment advisers. But we do know they are paying out hefty sums, to the tune of $55 million last year to investment management firms.

The public has a right to know both of those aspects of the pension system.

[…]

Private investment companies doing business with governments also must realize who’s paying their fees and that accountability comes with gaining contracts with government-run pension systems. The excuse put forth by Kentucky officials and others about how revealing the investment companies’ contracts would reveal “trade secrets” doesn’t hold up. That argument simply is not sufficient to conceal how much money they are making from taxpayers and the public employees who contribute to the systems. Until that information is revealed, the public has no way to know whether it’s getting its money’s worth from those companies.

A couple of Kentucky lawmakers plan to introduce bills next month that would require the pension systems to use the state’s competitive bidding process, disclosing terms of the deals and the proposed management fees, as well as shed more light on the pension payouts to the state’s lawmakers. All of those requirements would be steps in the right direction and should be put into law.

Read the full piece here.

Unions Speak Out Against Quebec’s Bill 3, Plan Next Moves

Quebec’s controversial pension reform legislation, Bill 3, passed into law last week. The law divvies up responsibility for paying down governments $3.9 billion pension debt 50-50 between employers and employees. As a result, employees now shoulder more of the burden for paying down pension debt in the form of higher contributions.

Now, union leaders are speaking out against the law and planning their next moves. Union leaders say government officials have “started a fire”. From the Montreal Gazette:

“We’re more determined than ever,” Marc Ranger, spokesperson for the Coalition syndicale pour la libre négociation, told a press conference at the Crémazie Blvd. E. headquarters of the Quebec Federation of Labour.

“We will target municipal administrations, that’s for sure,” he said.

“Most of these mayors will not find this funny in the months to come.”

Ranger did not specify what the pressure tactics would be, but promised that after the Christmas break, municipal employees would take action that will make the public sit up and take notice.

However, he said the coalition, representing 65,000 firefighters, police officers, transport workers, blue-collar workers and white-collar employees, will steer clear of illegal actions like the Aug. 18 ransacking of city hall, which has resulted in criminal charges.

Bill 3, calling for negotiations with unions on underfunded pension plans and a 50-50 sharing of costs to refinance plans that are in the red, is the government’s response to a $3.9-billion pension shortfall.

[…]

He added that the union is prepared to take its legal challenge to the pension bill to the Supreme Court of Canada.

“They’ve started a fire. Now it’s up to them to put it out,” he said.