Ted Ballantine | Pension360

Outcry From Pensions Over Delaware Court Ruling On Legal Fees

A recent ruling by the Delaware Supreme Court lets corporations shift their legal tab to investors.

Now, public pension and trade groups are speaking out against the ruling. Two trade groups representing public pension funds have contacted Delaware lawmakers over the last two weeks to lambast the ruling.

From Pensions & Investments:

A letter sent Wednesday to Delaware Gov. Jack Markell by the National Conference on Public Employee Retirement Systems and eight unions representing public- and private-sector workers warns that the decision “eviscerates investor rights” beyond the state’s borders.

The letter joins an earlier call Nov. 24 by the Council of Institutional Investors for Delaware lawmakers to restore investors’ legal rights that are now threatened by the decision in ATP Tour Inc. et al. vs. Deutscher Tennis Bund. While the court allowed a private corporation to amend its bylaws to make litigants personally liable for legal expenses, public company boards of directors have embraced the May 8 ruling. More than three dozen companies have unilaterally adopted similar or even more restrictive fee-shifting provisions, said CII, whose members represent $2 trillion in assets, including the $187.1 billion California State Teachers’ Retirement System, West Sacramento; New York City Police Pension Fund, New York City Fire Department Pension Fund and other funds in the $160 billion New York City Retirement Systems; and North Carolina Department of State Treasurer’s Office, which oversees the $88.4 billion North Carolina Retirement Systems, Raleigh.

Both groups are calling for the governor to take immediate action, including legislation to restrict or overturn the court’s decision and curb the adoption of fee-shifting bylaws by companies, many of which are incorporated in Delaware. Calls to the governor’s office were not returned by press time.

“Pension plans are among the largest and most active institutional investors. Approximately 70% of the typical public pension plan’s funding comes from investment returns. As shareholders, pension plans must ensure the integrity of their investments. But as fiduciaries, pension plans cannot expose their capital — and their beneficiaries — to unreasonable financial risk,” said the letter from NCPERS, which represents $3 trillion in pension assets. “No reasonable investor … would be willing to risk facing this type of uncontrollable financial exposure.”

More on the case – ATP Tour Inc. et al. vs. Deutscher Tennis Bund – can be read here.

Photo by Joe Gratz via Flickr CC License

Pension Funds Look to Place Bets on Shipping Recovery

Some pension funds are thinking of buying a boat.

More specifically, they are weighing investments in the shipping industry, which some observers say is due for a recovery. If the industry does rebound, pension funds want to be among the beneficiaries.

But they are treading these waters carefully.

Reported by Reuters:

Pension funds, squeezed by low interest rates, are exploring investments in shipping in their hunt for higher returns, hoping to benefit once this industry starts to recover from one of its worst ever downturns.

There are signs of a gradual pick-up in world trade and ship values for the first time since the financial crisis. Ship financier NordLB has said the market could see a broad recovery but not before 2016.

The industry’s revival could deliver double-digit returns for pension funds that decide to add shipping to their so-called alternative assets such as infrastructure, which can make up about 15 percent of a fund.

But they need to do their homework.

Some hedge funds and private equity firms have been burned by diving into shipping too early and have found the recovery they were betting on has taken longer to materialise.

So far only a few pension funds have taken the plunge, also partly because of the need for specialised knowledge on shipping, such as how to price vessels accurately.

One pension fund leading the way is Ilmarinen in Finland, which had 34 billion euros ($41.8 billion) in assets at end-September. Earlier this year, Ilmarinen acquired five oil tankers and three supply ships from Finland’s state owned refiner, Neste Oil.

Esko Torsti, head of non-listed investments at Ilmarinen, said the investment was for tens of millions of euros through a new joint-venture firm owned by the pension fund and Finland.

“Investing in ships is not the easiest area, it requires extreme carefulness and special expertise,” Torsti said.

Another potential driver for investment is the shipping industry’s growing funding gap that has opened up as banks scale back lending due to capital constraints.

The combined value of ships on the water is estimated at $1.25 trillion with a further $380 billion in ships on order.

Among the pension funds that have taken the dive: Canada’s OMERS, Britain’s Merseyside Pension Fund and Finland’s Ilmarinen.

Photo by Louis Vest via Flickr CC License

Canada Pension Eyes Corporate India

The Canada Pension Plan Investment Board (CPPIB) – the entity that manages assets for Canada’s biggest pension plan – has made a flurry of investments in India-based corporations over the past few years. And the flow of pension money to India isn’t likely to slow down – the country is a “key” part of CPPIB’s long-term plan, according to a CPPIB official. More details from Bloomberg:

Toronto-based Canada Pension Plan Investment Board […] is planning to add to the $1.5 billion it has already poured into the South Asian country since 2010, said Mark Machin who oversees its international investments division. “India is a key long-term growth market for CPPIB,” Machin said in an e-mail. “We will continue to seek investment opportunities which may include direct investments,” and will seek “smart” local partners, he said, without elaborating. […] “I can see many pension and sovereign funds coming to India,” said Khushru Jijina, managing director of Mumbai-based Piramal Fund Management Pvt., which has a $500 million realty joint venture with CPPIB. “Basically, the big boys with patient money who want to play the 8-10 year game are coming.” The Canadian pension fund, which made its first India investment in 2010, followed that up with three more in the past year. It invested $200 million in an alliance with construction conglomerate Shapoorji Pallonji Group in November last year followed by $250 million in a venture with billionaire Ajay Piramal-owned Piramal Enterprises Ltd. (PIEL) for debt financing of residential projects in February. The third was $332 million in L&T Infrastructure Development Projects Ltd. in June.

CPPIB manages $206 billion in assets for the Canada Pension Plan. Photo by sandeepachetan.com travel photography via Flickr CC License

Newspaper: Kentucky Pension System is Public Business

Pension360 covered the push last week by several Kentucky lawmakers to make the state’s pension system more transparent.

But at least one lawmaker wasn’t on board with those plans. House State Government Committee Chairman Brent Yonts had this to say about his colleagues’ proposals, which included public disclosure of pension benefits, management fees, and other data:

“Frankly, I don’t think that’s the public’s business,” Yonts said. “They have access to the public payroll and salary information. They can theorize about what we’re going to collect in pensions. But the public is not entitled to know every last little thing about us.”

The Lexington-Herald Leader editorial board weighed in on the issue on Wednesday. The newspaper’s stance: public pensions should be public business. From the editorial:

Rep. Brent Yonts, D-Greenville, is certainly right that the public “is not entitled to know every little thing about us.”

We don’t need to know Yonts’ blood pressure or where he gets his hair done, or which, if any, bourbon he likes to sip of an evening.

But taxpayers are entitled to know how much he and every other state employee will receive from our public pension systems.

Yonts, chairman of the House State Government Committee, made his “every little thing” remark while explaining his opposition to two bills — prefiled for the upcoming session — that would increase transparency in the beleaguered public retirement systems.

Specifically, Yonts thinks the public just doesn’t have the right to know how much retirees are drawing in public pension benefits.

“Frankly, I don’t think that’s the public’s business,” he told reporter John Cheves.

It is all the public’s business: How much people draw and how much the retirement systems pay hedge fund managers and other investment advisers.

Right now the largest of these funds, the Kentucky Employees Retirement System, which covers workers in non-hazardous jobs, is at a perilous 21-percent funding level. That means it has only about one in five of the dollars it is obligated to pay out.

This has happened for several reasons, undoubtedly the most important being that governors and the General Assembly have balanced too many budgets by forgoing the state’s annual match to the money paid in by employees. That’s a breach of promise and an unconscionable slap at state workers.

[…]

And, then there’s the $55 million that the retirement systems paid to investment managers with very little disclosure about what we got for that money.

It’s impossible to fix Kentucky’s public pension mess without laying all the cards on the table. How much do the spikers, double-dippers and well-retired lawmakers cost the system? No one knows, or if they do they’re not telling. How are the investment advisers’ fees set and what do we get for them?

Yonts and public employees who say retirement benefits are none of our business should get over it.

Employees are absolutely right that they took jobs and paid into the retirement system on the belief the money would be there.

But taxpayers funded those salaries and will pay the lion’s share of the bill to solve the pension mess. They have the right to know every little thing.

The full editorial can be read here.

San Francisco Pension Postpones Hedge Fund Vote

The San Francisco Employees’ Retirement System is delaying a vote on a new proposal to begin investing in hedge funds.

The scaled-down proposal calls for investing a maximum of 5 percent of assets in hedge funds. Originally, the pension fund was considering a 15 percent allocation.

The vote will be held in February.

New York Common Fund Commits $200 Million to Urban Real Estate

The New York Common Retirement Fund has committed $200 million to a fund that invests in real estate in New York City, Los Angeles and other urban areas.

Researcher: High Transition Costs For States Switching From DB to DC Plans Are a “Myth”

Anthony Randazzo, director of economic research for the Reason Foundation, recently sat down with CapCon to talk about the concept of a state switching from a defined-benefit system to a defined-contribution system.

Disclosure: the Reason Foundation is a libertarian-leaning research organization.

Randazzo has published research in the past claiming that the “transition costs” of switching from a DB to a DC plan are largely a myth – and he expanded on that view in the interview.

From Michigan Capitol Confidential:

Michigan Capitol Confidential: You argue that these “transition costs” are a myth. What’s the basis for that myth?

Randazzo: The myth is based on two mistaken assumptions that certain steps need to be taken when switching from a defined-benefit system to a defined-contribution system. They are:

(1) That government must start making bigger debt payments to the defined-benefit system after it is closed.

(2) That a defined-benefit system needs new members in order to keep it solvent.

Neither of these assumptions are true. Regarding the first mistaken assumption; it might be recommended that a government increase the size of its debt payments after the system has been closed in order to pay off the debt sooner, but there is no legal requirement that it do so.

Regarding the second mistaken assumption, defined-benefit systems are supposed to be fully funded on a yearly basis by employer and employee contributions plus investment earnings. These systems are not based on new workers subsidizing older workers.

Michigan Capitol Confidential: So we have this disagreement between independent pension experts and individuals with an interest in the current systems. What’s at the core of this disagreement?

Randazzo: I think it is a disagreement between philosophies. It’s true that a defined-benefit system could be changed to a defined-contribution system that would be more expensive. But to prevent this, all you would have to do is put in a defined-contribution rate that ensures lower costs. Therefore, if the defined-contribution system – that’s put in place to try to solve a growing debt problem being created by a defined-benefit system – ends up costing too much, to me, that’s not a transition cost, it’s just the result of a bad policy decision.

[…]

Michigan Capitol Confidential: And you would argue that switching to a defined-contribution pension system would do away with most of the guesswork.

Randazzo: A defined-contribution system is 100 percent more transparent than a defined-benefit system because it requires zero actuarial assumptions about the future, and zero backroom negotiations with pension boards and union members. The costs of a defined-contribution system are clear every year: it is simply whatever the government body has chosen to be the contribution rate to each employee’s retirement account. The cost is known each year, and taxpayers don’t have to worry about whether investment returns will equal assumptions, or whether people will wind up living longer than expected and costing the system more money than it has projected pensions to cost.

Read the full interview here.

Photo by 401kcalculator.org

Quebec Passes Controversial Pension Reform Into Law

Despite the legal threats of unions and the protests of public workers, Quebec’s controversial pension reform measure passed into law Thursday.

The law, Bill 3, mandate that workers contribute a higher percentage of their paychecks to their pensions. In short, they split the bill 50-50 with municipalities.

More details from CBC:

The bill was passed on Thursday morning at the National Assembly by a vote of 85-28.

The law will force municipal workers and retirees to contribute more to their pensions to offset a $4-billion pension fund deficit.

[…]

Liberal Premier Philippe Couillard defended the reforms during question period in the National Assembly.

“In Quebec, we don’t spend more than what we have,” he said.

“The reality of catching up — there are millions of dollars to get back. We’re doing it with courage, we’re doing what was supposed to be done before. And why are we doing it? We’re doing it for today’s Quebecers and the next generations to whom we want to pass on a Quebec in good financial health,” Couillard said.

Members of the opposition parties groaned when Couillard said the move was to overcome a $5.8-billion deficit.

[…]

Municipal Affairs Minister Pierre Moreau’s reforms passed with just two amendments to the bill.

One was to take some of the burden off retirees when it comes to paying off the deficit.

The second gives municipal workers’ unions and the province more flexibility in contract negotiations.

Bill 3 can be read here.

Illinois Passes Bill To Automatically Enroll 2.5 Million Workers in Retirement Plans

Illinois lawmakers have passed a bill that would allow 2.5 million private-sector employees without retirement plans to enroll in a Roth IRA. Both the House and the Senate passed the bill on Wednesday, and Quinn is expected to sign the measure.

Crain’s explains how the program, called Secure Choice, would work:

[The program] would apply to employees of firms with at least 25 workers who do not have access to an employer-provided retirement account.

[…]

Under the measure, qualifying employees will be asked now or when they are hired whether they want to contribute 3 percent of their salary to a retirement account. Unless they say no, the money will be deducted from their check, just like taxes, and go into an individual Roth Individual Retirement Account that will be tax-free after retirement.

Operating much like the state’s Bright Start college savings program, a panel including the state treasurer, budget chief and several outside directors named by the governor will hire a private firm that will run the program and offer various investment options. The program, called Secure Choice, will be portable, carrying over to a new employer if a worker changes jobs. Employees can contribute more or less than 3 percent of their salary if they choose.

AARP “applauded” the passage of the bill. The group said in a press release:

“Today, the General Assembly took a monumental step toward helping to ensure a more secure financial future for small business employees in Illinois by passing Senate Bill 2758 – the Illinois Secure Choice Savings Program.”

[…]

“The Illinois Secure Choice Savings Program means more private savings, a stronger competitive edge for small businesses, and a more secure financial future for our state. Over 2 million Illinois workers who did not previously have access to a workplace retirement plan will now have access to an Individual Retirement Account – and many small businesses in Illinois will, for the first time, be able to offer current and potential employees the benefit of a workplace retirement account.”

Some lawmakers vocally opposed the program on the grounds that it was rushed through the legislature and not enough time was put into investigating the consequences for small businesses. From Illinois Watchdog:

Representative Ron Sandack said the issue should have more investigation before another mandate is levied against small business.

“Yes, people aren’t saving up for retirement, yes we ought to do more to incentivize that,” he said. “No, we shouldn’t mandate a program that we don’t know a thing about. We shouldn’t mandate small business and encumber small business, yet again, with an expense and a burden that we really don’t know anything about.

The language of the bill – called S.B. 2758 – can be read here.

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

Biggs: Public Pensions Take On Too Much Risk

Andrew Biggs, former deputy commissioner of the Social Security Administration and current Resident Scholar at the American Enterprise Institute, penned a column for the Wall Street Journal this week in which he posed the thesis that public pension funds invest in too many risky assets.

To start, he compares the asset allocations of an individual versus that of CalPERS. From the column:

Many individuals follow a rough “100 minus your age” rule to determine how much risk to take with their retirement savings. A 25-year-old might put 75% of his savings in stocks or other risky assets, the remaining 25% in bonds and other safer investments. A 45-year-old would hold 55% in stocks, and a 65-year-old 35%. Individuals take this risk knowing that the end balance of their IRA or 401(k) account will vary with market returns.

Now consider the California Public Employees’ Retirement System (Calpers), the largest U.S. public plan and a trendsetter for others. The typical participant is around age 62, so a “100 minus age” rule would recommend that Calpers hold about 38% risky assets. In reality, Calpers holds about 75% of its portfolio in stocks and other risky assets, such as real estate, private equity and, until recently, hedge funds, despite offering benefits that, unlike IRAs or 401(k)s, it guarantees against market risk. Most other states are little different: Illinois holds 75% in risky assets; the Texas teachers’ plan holds 81%; the New York state and local plan 72%; Pennsylvania 82%; New Mexico 85%.

The column goes on:

Managers of government pension plans counter that they have longer investment horizons and can take greater risks. But most financial economists believe that the risks of stock investments grow, not shrink, with time. Moreover, while governments may exist forever, pensions cannot take forever to pay off their losses: New accounting rules promulgated by the Governmental Accounting Standards Board (GASB) and taking effect this year will push plans to amortize unfunded liabilities over roughly 15 years. Even without these rules, volatile pension investments translate into volatile contribution requirements that can and have destabilized government budgets.

Yet public-plan managers may see little option other than to double down on risk. In 2013 nearly half of state and local plan sponsors failed to make their full pension contribution. Moving from the 7.5% return currently assumed by Calpers to the roughly 5% yield on a 38%-62% stock-bond portfolio would increase annual contributions by around 50%—an additional $4 billion—making funding even more challenging.

But the fundamental misunderstanding afflicting practically the entire public-pension community is that taking more investment risk does not make a plan less expensive. It merely makes it less expensive today, by reducing contributions on the assumption that high investment returns will make up the difference. Risky investments shift the costs onto future generations who must make up for shortfalls if investments don’t pay off as assumed.

Read the entire column here.

Photo by dktrpepr via Flickr CC License

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