Author: Ted Ballantine

Japan’s $1.3 trillion Government Pension Investment Fund posted its worst return since 2009 in fiscal year 15-16, officials confirmed last week.

They also disclosed the fund’s equity holdings for the first time, and it revealed a largely passive investment strategy. Some observers wonder whether the fund could improve its long-term prospects by taking a more active approach.

From Bloomberg:

The list of domestic shares owned by Japan’s $1.3 trillion Government Pension Investment Fund hews closely to the benchmark Topix index, which isn’t that surprising for a fund where almost 80 percent of investments are passive. But it means that in market downturns like in the past year, GPIF will struggle to increase assets.

“There’s more they can do,” said Masahiro Ichikawa, a senior strategist at the Tokyo-based money manager. “They should be more active with their currency hedging and their investments. They should also look to increase exposure to alternatives.”

[…]

While criticism of GPIF’s passive approach to investing isn’t new, this is the first year the fund posted a loss since it doubled its allocation to stocks in 2014 and reduced its investments in domestic bonds, which were the only asset to return a profit in the year. The fund is taking flak on both sides, from those who want to turn back the clock to when it held more bonds to people who say it should become more of a stock picker.

“GPIF should invest more actively but from a long-term perspective,” said Tetsuo Seshimo, a portfolio manager at Saison Asset Management Co. in Tokyo. “That’s the only way they can improve their returns.”

GPIF President Norihiro Takahashi, speaking after the results announcement on Friday, said the fund planned to use its allowable deviation limits when allocating assets, in a sign he will be flexible in managing the portfolio.

GPIF is unlikely to make any major changes.

Japan’s Government Pension Investment Fund — the largest pension fund in the world with $1.3 trillion in assets — posted a return of -3.8 percent for its fiscal year 15-16, officials confirmed on Thursday.

The loss, which amounts to $51 billion, comes on the heels of a years-long portfolio overhaul which saw the fund skew its allocation towards equities and away from bonds.

More from Bloomberg:

The annual loss — GPIF’s first since doubling its allocation to stocks and paring domestic bond holdings in October 2014 — came during a volatile stint for markets. Japanese shares sank 13 percent in the year through March while the yen climbed 6.7 percent against the dollar, reducing returns from overseas investments. The only asset class to post a profit was local debt, which jumped in value as the Bank of Japan’s adoption of negative interest rates sent yields tumbling.

“The results are painful,” said Masahiro Ichikawa, a senior strategist at Sumitomo Mitsui Asset Management Co. in Tokyo. “Because it’s a pension fund, they need to have a long-term outlook, so I don’t think we can say yet that they took on too much risk. It was a harsh investment environment for most of us.”

In a press briefing in Tokyo after the results were announced, GPIF President Norihiro Takahashi said he will reflect on the performance, but that the current portfolio has enough flexibility to adapt to different market conditions and he wants to run the fund steadily. Yoshihide Suga, Japan’s chief government spokesman, said GPIF’s management shouldn’t be influenced by short-term moves and there is absolutely no issue with its financing.

CalSTRS this week served a subpoena on Volkswagen as part of the pension fund’s lawsuit against the German carmaker.

CalSTRS, which owned over $50 million of Volkswagen stock at the end of 2015, is suing the car company for shareholder losses related to the emissions scandal.

From the Financial Times:

CalSTRS, which held $52m of VW stock as of December 31, 2015, said it is looking for internal documents at Volkswagen to clarify how the carmaker came up withemissions control technology that cheated official tests.

It also seeks documents that would show how the company responded to a May 2014 study that first proved emissions were far higher than standards permitted, as well as follow-up investigations by US regulators.

“It is expected that these documents will help answer the central questions raised in the German proceedings,” CalSTRS said.

“The US Code permits discovery in support of foreign proceedings, while German law does not provide for such pre-trial discovery.”

The US Court issued an order on July 21, CalSTRS said. On Wednesday, the pension fund’s lawyers then served a subpoena to VW of America, “demanding that they deliver up the documents requested.”

Larger 401(k) plans are more likely to keep their recordkeeping and asset management separate, according to a study.

The report from SEI Industries Co., suggests that smaller plans are more likely to use their recordkeepers’ proprietary target-date funds.

According to Benefits Pro:

More than two-thirds of plan sponsors with more than $1 billion in plan assets are using target-date funds from a provider other than the plan’s recordkeeper, according to a survey of 231 plans with assets between $25 million and $5 billion: 47 of those plans are SEI clients.

For all plan sizes surveyed by Oaks, Pennsylvania-baed SEI, which does not have a recordkeeping business, 46 percent are using a separate asset manager’s target-date funds.

Plans in the smallest size segment are most likely to use their recordkeeper’s target-date funds. For plans with less than $100 million in assets, 68 percent use their recordkeepers’ target-date funds; about half of midsize plans with $100 million to $300 million in assets use their recordkeeper’s target-date funds; and 61 percent of large plans with assets between $300 million and $1 billion are still using their recordkeeper’s proprietary target-date funds.

Of all plan sponsors, 62 percent said it was a good idea to separate asset management services from recordkeeping. Among mega sponsors, 38 percent said sponsors should not be offering their recordkeepers’ target-date funds.

A managing director for Moody’s Investors Service said that even as Chicago’s pension debt has climbed to $33.8 billion amid numerous credit downgrades, the city still has time to “reverse the trajectory of the pension problem.”

In an article in Bloomberg:

“Time is not about to run out for Chicago,” [Naomi] Richman said during a panel at the City Club of Chicago on Monday. “The city clearly doesn’t have forever, but there’s still time we think to make policy changes to avoid a full blown financial crisis.”

Chicago is not on the brink of default, according to Richman. The total of Chicago’s pensions and debt is more than nine times the city’s operating revenue, she said. That means that more than 35 cents of every dollar of the budget goes to pay debt and pensions.

[…]

Moody’s rates Chicago Ba1, one step below investment grade, and has a negative outlook. Right now, a downgrade is “much more likely” than an upgrade, Richman said. To get on track for an upgrade, the city needs to reverse “the trajectory of the pension problem,” Richman said. Last year, Mayor Rahm Emanuel pushed through a record $543 million property tax increase that will shore up public-safety pensions. Investors applauded the move and rallied the bonds. Still, it’s not enough, according to Moody’s.

Pennsylvania’s General Auditor Eugene DePasquale said on Monday he plans to conduct audits of the state’s two major public pension systems.

The audit will probe into the funds’ use of outside investment managers and the fees paid to those managers.

From PennLive:

DePasquale said it is timely now to do an independent stress test of the systems, their investment strategies, and the use of external, third-party managers to try to maximize returns.

“I have ordered this audit because we want to do everything we can to try to help with this situation,” DePasquale said Monday, noting neither fund has met its investment targets for the last year and both have significant unfunded liabilities.

“The main thing we want to answer is, are there ways they can do things better that actually saves them a lot of money, so they can put that money back into the (respective) systems,” the auditor general said.

DePasquale added that he’s not pre-judging the funds’ performance, but “obviously they’re not meeting their targets and that’s creating huge financial problems for the state.”

DePasquale said he also will examine pension forfeitures, both to make sure that law is being applied correctly, and whether Pennsylvania’s current statute should be strengthened to promote better behavior among public officials.

EU stress tests are expected to show that one of Italy’s largest banks is in dire straits.

In anticipation, the Italian government is asking a group of pension funds to invest in a state-sponsored fund that would buy the bank’s bad loans.

Some reports suggest the pension funds could invest up to $550 million.

From Reuters:

Monte dei Paschi (BMPS.MI), Italy’s third-biggest bank by assets, is likely to be found short of capital under an adverse scenario when EU stress tests results are announced on Friday. A deeper financial crisis at the bank could further undermine confidence in Italy’s banking sector, the euro zone’s fourth-largest.

The chairman of ADEPP, the association of sector-specific pension funds, told Reuters that the government had asked association members to invest in the state-sponsored Atlante fund, which is working with Monte dei Paschi on the sale of 10 billion euros (£8.3 billion) in bad debts after writedowns.

“The government has made a request,” Alberto Oliveti said, adding each pension fund would decide independently after a meeting of association members later on Monday.

[…]

Under the plan, Atlante would buy the bank’s loans to borrowers deemed insolvent in a complex scheme that aims to leverage fivefold the fund’s residual resources of 1.75 billion euros, sources have said.

Atlante is ready to buy the loans at a higher price than investors specialising in buying distressed assets would offer, but that would still be below the portfolio’s net book value, blowing a hole in the bank’s account and forcing it to raise capital.

Fewer employers are offering auto-enrollment and auto-escalation for new employees, according to a study by the Society for Human Resource Management.

Why? The answer is simple: the potential cost of such policies.

From Bloomberg:

By sparing workers extra paperwork—and making the investment decisions they didn’t feel qualified to make—auto-enrollment could boost 401(k) participation rates as high as 95 percent. Auto-escalation could nudge workers to take full advantage of an employer’s match and save the 10 percent or more of salaries they generally need to retire comfortably.

Ten years later that momentum has completely stalled, and it turns out the big reason is cost. According to the latest survey by the Society for Human Resource Management of its HR professional members, fewer than 40 percent of employers offer auto-enrollment for new employees and almost 20 percent offer auto-escalation–numbers that actually fell slightly in the past few years. (This isn’t to be confused with reenrollment, in which employers automatically change the investment mix. Employers can also auto-enroll existing employees, something 21 percent do.)

What’s gone wrong? Retirement experts, including organizations that represent employers and 401(k) plan providers, still enthusiastically endorse automatic 401(k) features. The problem is that companies remain skeptical. The top reason, according to organizations that talk to these holdout employers, is concern about how expensive all this can be.

By getting more workers to increase contributions to their 401(k), you potentially raise the amount you’ll need to pitch in as a matching contribution. If you match the first 3 percent that workers put in, for example, and you get another fifth of your workforce to meet that threshold, then auto-enrollment can look like an expensive decision.

Industry experts, however, say that employers are overestimating this fear of rising costs. According to them, raising retirement contributions could, in fact, lower other company costs.

Massachusetts’ “T” Pension Fund — the retirement system for employees of the Massachusetts Bay Transportation Authority — has made headlines in recent years for its unprecedented secrecy and exemption to public records requests.

It’s a private trust, and doesn’t qualify for the same disclosure rules as public pension funds.

But it’s also been in the news for its management decisions and underfunding.

Speaking at a State House conference meeting on Wednesday, Massachusetts Governor Charlie Baker called for the state’s $60 billion public pension system for public employees and teachers to manage the Massachusetts Bay Transportation Authority’s pension system, because the former has lower costs and better oversight than the latter.

In an article posted by The Boston Globe:

In a wide-ranging speech Wednesday, marking one year since a fiscal control board took over the Massachusetts Bay Transportation Authority, Baker said the $1.5 billion fund was in a “free fall” that could threaten its ability to pay retirement benefits for 11,700 current and former transit workers.

“We believe the T’s pension system cannot survive as a standalone entity,” Baker said, noting that its assets had declined by $89 million in the past year alone.

The pension fund has come under intense scrutiny in recent years for failing to disclose losses in a fraudulent hedge fund and running its operation in secrecy, despite receiving tens of millions of dollars annually from taxpayers.

Baker said he will ask the Legislature next year to act so the MBTA fund can be managed by the $60 billion retirement system for the state’s public employees and teachers. The administration has said the state fund has lower costs and better oversight than the T fund.

[…]

He did not offer details on how the Legislature would go about allowing the T pension to be managed by the state fund, officially known as the Pension Reserves Investment Trust. He said the administration would be conducting a legal review of the process.

Gov. Baker last month signed a law that opened the “T” fund to public records requests. The fund’s director promptly resigned.

Another day, another lawsuit levied against a 401(k) plan. This time, self-dealing is on the investment menu.

A class-action lawsuit is being filed against New York Life for allegedly using a high-cost mutual fund in the company’s 401(k) plan. The mutual fund, which is operated by New York Life, is significantly more expensive than its peers.

According to an article on Investment News:

Current participants in two New York Life 401(k) plans filed a class-action lawsuit — Andrus et al v. New York Life Insurance Company et al — alleging self-dealing by the firm and other affiliated fiduciaries for retention of a MainStay-branded S&P 500 index mutual fund in two company retirement plans.

The MainStay brand of funds is owned and operated by New York Life and subsidiaries, and the entities “improperly and unjustly benefited from the excessive fees and expenses,” according to the complaint, filed July 18 in the U.S. District Court for the Southern District of New York.

“A prudent fiduciary managing the plans in a process that was not tainted by self-interest would have removed the MainStay S&P 500 Index Fund from the plans,” the complaint said.

Rather, by not investigating availability of lower-cost funds between 2010 and the present, plan fiduciaries breached their duties of loyalty and prudence under the Employee Retirement Income Security Act of 1974, plaintiffs allege.

The MainStay fund cost 35 basis points, whereas a similar mutual fund offered by Vanguard Group cost 2 bps and a collective investment trust fund offered by and State Street Global Advisors cost 4 bps, the complaint said.

Retaining the MainStay fund ultimately caused participants in the two 401(k) plans — the $2.5 billion Employee Progress-Sharing Plan and the $600 million Agents Progress-Sharing Plan — to overpay by nearly $3 million, plaintiffs claim.