Ted Ballantine | Pension360

Britain Secretary of Energy: Investing in Fossil Fuels Big Risk for Pension Funds

Last week the advisory board of one of the largest asset owners in the world, the $857.1 billion Norway Pension Fund Global, concluded that divesting from fossil fuels would be an unwise financial decision that would reduce returns.

But Edward Davey, Britain’s Secretary of State for Energy and Climate Change, said Monday he thinks fossil fuel companies could become the sub-prime assets of the future.

He called on Britain’s pension funds to examine the risk associated with oil, gas and coal investments.

From the Telegraph:

Investing in fossil fuels is becoming increasingly risky because global action to tackle climate change will curb demand, forcing companies to leave unprofitable reserves in the ground, Ed Davey, the energy secretary, has warned.

Financial authorities must examine the risks posed by coal, oil and gas companies to prevent pension funds investing in what could become “the sub-prime assets of the future”, Mr Davey said.

The comments are Mr Davey’s first intervention into the debate over the “carbon bubble”, the theory that the world’s existing fossil fuel reserves are overvalued because the majority must be left unburned in the ground if extremes of global warming are to be avoided.

Mr Davey told the Telegraph: “One has got to worry about the investments for pensioners.

“If pension funds are investing in companies or banks that have on their balance sheets huge amounts of assets in fossil fuels, and those assets don’t give the return that people expect – because of changes in technology where low-carbon becomes cheaper or because of the world having to take action against carbon emissions – one has got to protect those pensioners and those investments.”

OECD Report: Longer Life Expectancy Threatening Pension Sustainability; More Reforms Needed

The Organization for Economic Cooperation and Development released a report Monday morning highlighting the challenges that longer life expectancy poses to pension systems around the world.

From CNBC:

The world’s retirement bill is coming due—and many countries aren’t ready to pay it.

That’s the conclusion of a report Monday from the Organization for Economic Cooperation and Development, a Paris-based group representing the world’s developed countries.

With populations aging and lifespans rising, government-supported pensions are cutting deeper into national budgets, crowding out spending on other programs and services. The added burden comes as the economies of the developed world are growing slowly, putting added pressure on the tax revenues needed to pay rising pension costs.

[…]

“The ongoing rapid demographic shift and the slowdown in the global economy highlight the need for continuing reforms,” OECD Secretary-General Angel Gurría said. “We must communicate better the message that working longer and contributing more is the only way to get a decent income in retirement.”

The report acknowledges numerous pension reforms by countries and states in recent years, but says more needs to be done. The report presented a handful of reform proposals. From the OECD:

Increasing the effective retirement age can help but more efforts are needed to assist older workers find and retain jobs. Public policies to reduce age discrimination, improve working conditions and increase training opportunities for older workers are essential.

Countries have also introduced reforms to strengthen funded private pensions. The report highlights the importance of increasing coverage rates in countries where funded pensions are voluntary. Auto-enrolment programs have been successful in raising coverage in the countries that have implemented them.

The report also calls for strengthening the regulatory framework to help pension funds and annuity providers deal with the uncertainty around improving life expectancy. It argues that regulators should make sure that providers use regularly updated mortality tables, which incorporate future improvements in mortality and life expectancy. Failure to account for such improvements can result in a shortfall of provisions of well over 10% of the pension and annuity liabilities.

Capital markets could offer additional capacity for mitigating longevity risk, but the transparency, standardization and liquidity of instruments to hedge this risk need to be facilitated. The regulatory framework will also need to reflect the reduction of risk exposure these instruments offer by ensuring they are appropriately valued by accounting standards and lowering the level of required capital for entities hedging their longevity risk.

Issuing longevity bonds and publishing a longevity index to serve as a benchmark for the pricing and risk assessment of hedges would support the development of longevity instruments.

Rebuilding trust is also an important challenge that policy makers face, says the OECD. Young people in particular need to trust the long-term stability of the pension system and the pension promise that is made to them. Communication campaigns and individual pension statements to explain the need for reform and facilitate choice by individuals are needed, says the OECD.

The full OECD report can be read here.

Photo by Horia Varlan via Flickr CC License

Video: CalSTRS CIO Talks 2015 Market Expectations, Asset Allocation Changes

CalSTRS chief investment officer Christopher Ailman sat down with Bloomberg TV on Monday morning to talk about the odds of the market returning 8 to 10 percent in 2015, and how CalSTRS might change its asset allocation next year.

Cover photo by Santiago Medem via Flickr CC

Two UK Pensions Enter Investment Partnership – What Will It Look Like?

Last week, two UK pension plans, each with assets of around $7 billion, entered an agreement to pool their assets and invest as one entity.

Officials say the partnership will lead to lower investment costs and stronger governance. But what will the partnership look like?

Chief Investment Officer found out:

Under the proposed new agreement, each fund would remain responsible for its own liabilities but the asset management would be pooled.

[…]

“Both funds have a similar investment philosophy,” says Susan Martin, CEO of the LPFA. “We have a joint aspiration to close our funding gap.”

The basis for this relationship lies in bringing more assets to be managed in-house, both sides say.

“It gives us better governance, lower costs, more efficiency, and better control over execution,” says Martin. “There will be a joint committee that is responsible to both funds, on which a representative from each will sit as they will understand the cash flow required.”

Each fund already has a substantial in-house investment team, but approval from the FCA will mean the partners can carry out a range of investment activities that had previously been accessible to them only through asset managers and other providers.

Clearly, the move would see several fund managers lose their mandate.

“We need to look in detail at each fund,” says Graham. “There might be funds and some managers that can be merged or pooled or we could run some in parallel for a time.”

Graham also has ambitions that push outside the strict boundaries of the pension.

“In creating our own investment manager and partnering with LPFA we are mitigating risk,” he says. “We can begin training people up and start succession planning. We could have a centre of excellence for finance in the North West of England.”

More background on the partnership, from Ai-CIO.com:

“We believe in greater collaboration, so this is really putting our money where our mouth is,” says Lancashire County Council Deputy Treasurer George Graham.

Graham is speaking to CIO on the day the £5 billion local authority pension announced it had agreed—in principle—to tie up with one of its peers based 300 miles away in the UK capital, the $5 billion London Pensions Fund Authority (LPFA).

“We have a broad agreement about the shape of something and now we will sit down with lawyers and the Financial Conduct Authority (FCA) to come up with something that suits both funds and to which we can both formally agree,” says Graham. “We have been in talks about this since the late summer.”

The funds have collective assets of £10 billion and want to bring the majority of them under their own auspices. Along with a joint belief in self-management, the funds are against a push from central government towards public pension funds being managed purely on a passive basis. It would be a “backwards step”, according to Graham, and would work against the efforts each team has been doing to manage its own assets and liabilities.

The pension funds say that they would be receptive if other pension funds were interested in joining the partnership.

Photo by @Doug88888 via Flickr CC License

Fast-Tracking of Illinois Pension Case Could Be Blocked

Last week, Illinois asked the state Supreme Court to expedite the hearing over the state’s pension reform law.

But on Sunday, attorneys representing the state workers and retirees said they could block the attempt to fast track the case. Such a move could drastically change the timeline for the lawsuit’s hearing.

From the Southern Illinoisan:

In a move that could play a significant role in how Gov.-elect Bruce Rauner crafts his first budget this spring, the lawyers say Illinois Attorney General Lisa Madigan’s bid to put the case on a fast track is unwarranted.

“We do not believe there is any need to impose an emergency schedule,” said attorney John Fitzgerald, who is among a team of lawyers representing retirees. “We see no need to depart from the rules.”

On Thursday, Madigan asked the high court to move quickly in hearing the case because of the financial ramifications the pension changes will have on the state budget.

[…]

Madigan suggested the court schedule oral arguments for as early as Jan. 22 or no later than mid-March.

Attorneys for the retirees, who say the expedited schedule is unnecessary, have until Tuesday to file their objections to the motion.

Without the expedited schedule, the deadline for filing the first significant set of records in the case wouldn’t occur until the final week of January.

After that, the typical court schedule calls for both sides in the lawsuit to trade paperwork for nearly three months. Once that is completed, the high court would then schedule oral arguments.

Under that scenario, the court could hear the case as early as May. If they miss the May docket, the next time the judges are scheduled to hear oral arguments is September.

Following the argument phase, the court could take months to issue a ruling. In a similar case regarding health insurance costs, the court took nearly 10 months to overturn the state’s attempt to force retirees to pay a portion of their pensions toward that expense.

Sangamon County Circuit Judge John Belz ruled last month that the law was unconstitutional.

South Dakota Pension Officials Brainstorm Ways to Guard Funding Status Against Another Market Downturn

If another market downturn comes, officials at the South Dakota Retirement System want to be ready. That’s why they spent their last meeting talking about what they could do to mitigate damage if another downturn comes and plagues fund investments.

Among the options discussed: lower the fund’s assumed rate of return and raising the retirement age of new hires.

Arizona Pension Lowers Employee Contribution Rate For First Time in 5 Years; Strong Investment Returns Cited

Starting in July, members of the Arizona State Retirement System will pay a smaller percentage of their paychecks toward the pension system. It’s the first contribution rate decrease in five years, but it comes with a catch: retirees will not receive a cost-of-living raise in 2015.

More details on the contribution rate decrease from the Arizona Republic:

The decrease in the contribution rate, which was approved by the ASRS board of trustees, is the first in five years.

Chairman Kevin McCarthy said the reduction is small — a fraction of 1 percent — but a step in the right direction. He said it will save money for public employees and employers “who have seen nothing but increases.”

The reduction is possible because of large investment returns this past fiscal year. In addition, roughly 500 more public employees joined ASRS and began paying into the trust. Since 2009, the system annually lost thousands of active members — and their payments — because of government layoffs.

And details on the COLA:

Barbara Masztakowski, who retired in 2003 from Chandler, said it’s not fair that retirees are not getting an increase when ASRS investment staffers are.

“Truly, they should treat themselves the way they treat us,” Masztakowski said in a phone interview.

She said the formula that ASRS uses to trigger benefit increases for retirees is nearly impossible to achieve.

For a permanent benefit increase to kick in, the trust must produce a rate of return in excess of 8 percent — the assumed rate of investment growth — for 10 years and generate a pool of excess earnings.

That formula uses a “geometric and actuarially smoothed average” that takes into account compounding. The current 10-year average is about 7.6 percent, below the trigger.

Although ASRS retirees have not received a cost-of-living adjustment for nearly a decade, retirees in the more financially fragile state Public Safety Personnel Retirement System saw their COLA benefits restored earlier this year after winning a lawsuit. The ASRS retirees were not part of that case.

Paul Matson, ASRS executive director, said he understands retirees may not be happy but said he expects a benefit increase within the next few years.

The lack of a COLA is controversial among retirees because 10 of the System’s investment staffers are receiving bonuses in 2015 totaling $225,000. Fund investments returned 18.6 percent overall last fiscal year.

Photo credit: “Entering Arizona on I-10 Westbound” by Wing-Chi Poon – Own work. Licensed under Creative Commons Attribution-Share Alike 2.5 via Wikimedia Commons

Pennsylvania Lawmakers: Municipal Pension Reform Needed

Two Pennsylvania state Representatives – Rep. Seth Grove (R) and Rep. Keith Greiner (R) – have penned a column on Lancaster Online arguing for the reform of municipal pension systems.

Specifically, they argue for reforms that would remove pension negotiations from the collective bargaining process and would transfer new hires into a cash balance plan.

Grove and Greiner explain:

Gambling with pension funds needs to end by both local governments and employee unions. Pension negotiations need to be permanently removed from the collective bargaining process to ensure that our police and firefighters are not at risk of having their pensions destroyed, and taxpayers aren’t put on the hook because of short-term and short-sighted decisions.

These two fixes are both long-term solutions, but what can we do in the short term? The answer is change the pension benefit structure for new hires to a cash balance pension plan. A short-term solution will require new revenue to reduce the unfunded liability. A cash balance plan allows municipalities to use excess stock market earnings to pay off the unfunded liability.

Instead of raising taxes or creating new taxes, this allows the pension plan to fund itself. The cash balance concept also has long-term taxpayer protections built in. New hires will have their own accounts, just like a 401(k), which allows them to transfer their retirement between jobs and ensures taxpayers are not on the hook for future underfunding of pensions.

It also provides employees with the ability to take their retirement by monthly payments, which is just like a traditional defined benefit plan. And since a cash balance pension concept is considered a defined benefit pension plan by IRS guidelines, you can still combine pension funds together and ensure you do not underfund the old pension systems. Lastly and most importantly, it will not affect our current public safety personnel’s pensions, but will ensure that new hires will still receive a good pension, which they deserve.

We do not want to honor the dedication and service of public safety personnel by putting them in the poor house after retirement. However, we also do not want to shift costs from pensions to welfare.

Ultimately, these changes are actually about hiring more police and fire personnel and protecting the pensions of current police and fire personnel.

Furthermore, the changes are about ensuring that all municipalities across Pennsylvania are financially stable and that commuter taxes go away. There are tremendous upside benefits to all stakeholders.

Read the entire piece here.

Jacksonville Will Vote On Pension Reform Measure This Week

After months of debate, the Jacksonville City Council could approve this week a measure to reduce the city’s pension debt.

Observers say the measure, which would increase city pension contributions, change retiree COLAS and give the Council the right to change benefits, has the votes needed to pass through the Council.

From the Florida Times-Union:

The full council will meet Tuesday and could take a vote on the legislation.

Thirteen council members — more than a necessary majority for passage — voted last week in favor of the bill during two committee meetings after making several changes they said make the agreement a financially better deal for taxpayers.

After years of failed attempts to reform the police and fire pension and reduce the city’s $1.65 billion debt obligation to it, council members appear close to passing a bill that Brown’s administration says will save the city $1.2 billion over a 30-year period.

“I suspect there will be limited discussion on it, and I suspect the vote will be significantly in favor, maybe even an unanimous vote,” said Councilman John Crescimbeni.

If the Council passes the bill, it will still need to be approved by the Police and Fire Pension Fund Board. There’s no guarantee they will accept the deal. From the Florida Times-Union:

The pension fund board is composed of five members. The police and firefighters union each appoint one member, the City Council appoints two members and the fifth member is chosen by the four other members.

Whether the board members pass the bill remains a major question, because it includes some significant differences from Brown’s original legislation that they supported.

Council amendments include changes to guaranteed annual cost-of-living adjustments that current police and firefighters will receive to their pensions and interest rates earned in their Deferred Retirement Option Program accounts. The council would also retain the power to impose pension benefit changes in three years if future collective bargaining talks reach an impasse.

When Brown negotiated his deal with the pension fund earlier this year, pension board members nixed the concepts now included in the council’s changes.

Officials from the mayor office told the council last month that any changes made to the deal could effectively kill it.

The reform measure would increase city contributions to the pension system by $40 million per year for the next 10 years. It would also change the way COLAs are calculated and would give the Council the right to change worker benefits for the next three years.

Photo by pshab via Flickr CC License

Illinois Senate Passes Bill That Allows Felons To Be Stripped of Pensions

A bill that would allow the Illinois Attorney General to strip pension benefits from felons passed through the state Senate unanimously last week.

From the Chicago Sun-Times:

The House bill, co-sponsored in the Senate by Sen. Kwame Raoul, D-Chicago, Jacqueline Collins, D-Chicago, and Daniel Biss, D-Evanston, passed the Senate 51-0 without debate.

“What we did in this bill is to clarify the language to make sure that it authorizes the attorney general to petition the court to enjoin the payment of pension funds where somebody’s convicted of a felony in connection to their duty,” Raoul said.

[…]

The bill was debated in committee with some Republicans worried the attorney general could abuse the authority. But Raoul said the attorney general could file a petition to the court, then to the appellate court and ultimately to the Illinois Supreme Court.

“It’s unlikely that you would have an attorney general who could have a conspiracy with the Appellate Court and the Supreme Court,” Raoul said.

A Madigan spokeswoman said the bill will give the attorney general an important new role in pension board cases.

“A public employee convicted of a felony related to their service should not be allowed to receive a taxpayer-funded pension,” state attorney general’s office spokeswoman Maura Possley said. “This bill provides the attorney general with an important watchdog role to ensure taxpayers are not left to foot the bill for a convicted felon.”

The bill came about after former Chicago policeman Jon Burge was allowed to keep his pension even after being convicted of a serious felony. From the Sun-Times:

In July, the Illinois Supreme Court ruled a Cook County court was correct in not allowing Madigan to intervene in a police pension matter. The decision allowed disgraced former Chicago Police Cmdr. Jon Burge, who was convicted in 2010 for lying about the torture of police suspects, to keep his public pension of about $54,000 a year.

The police pension board deadlocked 4-4 on a motion to strip Burge of his pension. Some argued his conviction was not related to his police work, since he was convicted on perjury and obstruction of justice from a civil suit filed after he left the force.

The bill now goes to Gov. Quinn’s desk.

Photo credit: “Gfp-illinois-springfield-capitol-and-sky” by Yinan Chen – www.goodfreephotos.com (gallery, image). Via Wikimedia Commons

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