Ted Ballantine | Pension360

2nd Largest UK Pension Shifting Investment Powers Away From Trustees, Towards Experts

The Universities Superannuation Scheme (USS) is making some major governance changes, as a plan is well underway to shift investment responsibilities away from trustees and towards experts.

Investment decisions that were previously made by trustees – such as strategic asset allocation – will now be the responsibility of investment staff.

However, trustees will still oversee the process.

From Investments & Pensions Europe:

The Universities Superannuation Scheme’s (USS) aim to remove the role of strategic asset allocation from trustees’ responsibilities is nearing completion, as its internal manager looks to more delegated responsibilities.

[…]

USS, with £41.6bn (€51.2bn) in assets, has been looking to amend its investment governance structure to shift more execution to experts and away from its trustee board.

Speaking at a National Association of Pension Funds (NAPF) conference on governance, USS chief executive Bill Galvin said the fund had taken some investment governance ideas from Canadian and New Zealand pension funds.

[…]

“What we have been working really hard on is delegation to the right level of the organisation, where experts are making decisions within clearly defined parameters.”

He said the trustees’ investment sub-committee still owned the detailed strategic allocation but added that this would be passed on to USSIM, with the committee taking charge of the reference portfolio,

“The critical thing is complete transparency about decision-making in the in-house asset manager, and that is overseen by the investment committee,” he said. “But the decisions are delegated.”

USS chief executive Bill Galvin also vocally wondered whether UK trustee boards could adequately run pension systems. From IPE:

He criticised the current legal requirements for UK pension trustees as “inadequate” and said the Trustee Toolkit – TPR’s qualification to sit on a trustee board – was fairly minimal in the context of EU legislation for fit and proper persons.

The USS chief also questioned whether UK’s trustee boards had the range of capabilities required to run pension schemes in today’s environment.

He said schemes’ focus for member and employer representation on trustee boards was a strange concept, whereas other international models focused more on capability.

“I find the issue of representation really challenging,” he said.

“It must be very difficult for someone put on a trustee board [to assume] they will represent members. How do you do that? How do you know? Do you assume what you want is what they want?”

Galvin praised the Ontario Teachers’ fund, where trustee members all fit a jointly agreed job description between trade unions and sponsors.

The Universities Superannuation Scheme covers employees at many UK universities. It manages $63 billion in assets.

Louisiana Pension Borrowing Proposal Shot Down

Louisiana lawmakers were floating a plan to borrow money and buy out the pensions of thousands of “vested” retirees – paying them a lump sum payment up front in order to reduce the state’s future pension obligations.

But experts and stakeholders testified that the plan was not a good idea.

From the Advocate:

A proposal to borrow money to help reduce state pension system debts got shot down quickly Monday.

The idea was to borrow money that would be used to pay one lump sum and buy out the pensions of vested retirees who have not yet begun to draw their benefits. Waiting before drawing on a pension allows the retiree’s pension to increase in value. Paying off the benefits of those retirees would reduce the state’s $20 billion long-term debt obligations, called the unfunded accrued liability.

But a state treasury official, the Legislature’s actuary and two state retirement system chiefs all testified that the idea was plagued with problems.

Just how many vested retirees could take part in such a program, if approved, is unclear. However, the Teachers Retirement System of Louisiana has 6,336 vested but inactive members, and the value of their pensions is $283 million.

Maureen Westgard, executive director of the Teachers Retirement System, said her board “has viewed (the idea of borrowing) as highly risky” in the past.

According to testimony, the aspect of the plan that called for borrowing money was the most problematic. The option of issuing pension obligation bonds was floated. From the Advocate:

Goldman Sachs pitched the idea of “pension obligation bonds,” and he wanted to see if the idea was a viable one, said Pearson, R-Slidell.

“Pension obligation bond history has not been very favorable,” said legislative actuary Paul Richmond, who noted a disaster involving the New Orleans firefighters retirement system.

First Assistant State Treasurer Ron Henson said the state is restricted in its ability to issue debt by a limit on the money it can spend annually in debt payments.

Further, he said, borrowing is already planned for state and local projects that legislators and their constituents want. “Our debt capacity will not allow the luxury of issues like these,” Henson said.

Louisiana State Employees Retirement System Executive Director Cindy Rougeou said it’s uncertain whether the idea would produce a savings or a cost.

“The overall debt is not being reduced. It’s just restructuring part of the overall UAL debt for a hard bond debt,” she said. “It’s almost taking out a second mortgage.”

Louisiana’s pension systems were collectively 58 percent funded in 2013, according to a 2014 Bloomberg analysis. That ranked 8^th-worst in the country.

Video: The Promise of Defined-Ambition Plans, and Lessons for the United States

The above talk was given by Lans Bovenberg (Tilburg University) at the 2014 Pension Research Council Conference; Bovenberg spoke about his research into “defined-ambition plans”, and whether similar ideas could work in the United States.

Further explanation of defined-ambition plans, from the video description:

Firms no longer act as external risk sponsors but continue to provide a distributional platform for pensions, thereby addressing behavioral and agency issues as well as imperfections of insurance and financial markets. Pension entitlements are defined in terms of (deferred) annuities, and participants share the risks of assets and a joint liability pool on the basis of complete contracts. We investigate risk management and valuation of these plans, explore their strengths and weaknesses, and analyze whether such plans hold promise for the United States.

Pension Transparency: Reform Rauner Can Make Alone

Illinois governor-elect Bruce Rauner will likely face opposition on many issues as he tries to work with the Democrat-controlled General Assembly.

But over at the Illinois blog Wire Points, Mark Glennon writes about one thing Rauner can accomplish without the help of the rest of the legislature: making the public pension system more transparent.

The post from Wire Points is printed below.

____________________________

By Mark Glennon, Wire Points founder

Public pension numbers are by far the murkiest part of Illinois’ fiscal crisis, and the biggest. Pension numbers have been deliberately obfuscated for years by politicians intent on hiding problems and by many actuaries hired by those politicians who are willing to play ball. They’ve succeeded.

Reform is long overdue, and Governor-elect Rauner can do it alone after he takes office.

Readers here, and anybody who follows public pensions closely, are well aware of the gap between the numbers reported by government and the real numbers calculated using better, more realistic methods, like new ones from the Governmental Accounting Standards Board. Absurdly, Illinois now keep two sets of books – the official ones (that are widely reported), and the new ones required by the those standards (that are rarely reported).

Additionally, irrespective of how pensions numbers are calculated, the form of typical actuary reports is impenetrable for all but serious pension students. A step forward on this problem was taken recently when the actuary for the Illinois teachers’ pension put its annual report in readable form, clearly flagging where major problems previously hid. That report, discussed here, might be a good starting point for a better model form. It ridiculed “Illinois Math” used by the state to calculate appropriate pension payments.

Finally, the Illinois Department of Insurance collects extensive numbers, much of which is not online, for all 675 public pensions in Illinois. One village trustee who is particularly conscientious about the municipal pension crisis (Jim Palermo of La Grange) had to file Freedom of Information Act requests on all 675 to get the data he wanted. That’s ridiculous. The Department of Insurance had the data in electronic form and it should be online.

All these problems can be corrected by a governor who wants pension transparency, and he can do it on its own. Rauner will be appointing many new trustees to the largest pensions and a new Director of the Department of Insurance. They can be selected based on a commitment to transparency. He could probably also implement reform by executive order, or by making his expectations clear to the state actuary that annually summarizes major pensions in a report certified by the Auditor General. (The most recent such report is discussed here.) One way or another, a governor can do it if he wants.

Pensions are immensely controversial for many reasons, but two of them are that the numbers are rigged and few people understand them. The cooperation needed to solve the pension crisis requires, initially, a shared understanding of what the real numbers are.

Fix it. No more “Illinois Math.” Report pension numbers honestly and transparently.

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

Outgoing San Jose Mayor Chuck Reed Will Continue Pushing For Pension Reform After Leaving Office

Chuck Reed won’t be the mayor of San Jose much longer. But even as he leaves office, Reed doesn’t plan on leaving politics behind. The outgoing mayor says he will continue raising money and campaigning for pension reform in California.

His ultimate goal is to get a state-wide pension reform measure on the 2016 ballot.

From Fox & Hounds:

“For me, it’s unfinished business,” says Reed, the outgoing mayor of San Jose, California. “I’m stubborn, persistent, whatever you want to call it.”

He’s talking about his plans for a statewide pension reform initiative in 2016; the $25 million is the cost of taking the message to the streets. While some observers may have thought he’d abandoned reform after his abortive 2014 attempt, Reed says he’s just getting warmed up.

“The fight will continue,” he says. “I’m going to work on fiscal reform issues, on the state and national level.”

For Reed, it’s personal.

“The problem is still threatening my city,” he says. “Retirement costs continue to go up, and this year the costs ate up all my revenue.”

And this was after voters in San Jose passed pension reform.

[…]

“The legislature is not going to take action,” he says. “So the best approach is working at the local level to create political momentum with a statewide initiative, allowing voters to go over the head of the legislature.”

Details are sparse on what Reed’s initiative would look like, in part because he is still figuring it out himself. But he offered some details to Fox & Hounds:

[Reed] says the main thrust will be to give state and local governments authority to alter future pension formulas for current employees.

“The retirees are the last people who should be impacted because they’re already retired,” he says. “That’s why I focus on current employees, because they still have the capacity to earn. The younger employees understand that it’s something that’s not sustainable, and they are the ones who are going to get hurt.”

The next mayor of San Jose will be Sam Liccardo. He starts Jan. 1.

Photo by San Jose Rotary via Flickr CC License

PE Executive To Become First CIO of Japan’s Largest Pension Fund

Japan will appoint a private equity executive, Hiromichi Mizuno, to the newly created Chief Investment Officer post at the Government Pension Investment Fund, the largest public pension fund in the world.

Hiromichi Mizuno is a partner at private equity firm Coller Capital.

More details from the Wall Street Journal:

The appointment would put the 49-year-old from central Japan in control of the world’s biggest fund of its kind as it tries to boost returns with more aggressive investments.

Mr. Mizuno would be a big catch for the fund, which has struggled to attract outside talent because of low salaries and a small budget. Despite its size, the GPIF’s roughly 80 employees are squeezed into one floor of a 1970s office building in downtown Tokyo and most of its investments are managed by outside asset management firms.

Mr. Mizuno was educated in the U.S. and speaks fluent English, which addresses concerns of foreign investment firms that had trouble working with GPIF.

[…]

The GPIF is headed by its president, Takahiro Mitani, who has ultimate decision making power under the current law, but Mr. Mizuno would be de facto in charge of overseeing important investment decisions. Rather than make investments himself, Mr. Mizuno will spend more time choosing professional fund managers to oversee portions of the fund’s investments.

Mr. Mizuno joined the GPIF as an adviser and a member of its investment committee, an eight-member group that advises the fund part-time, in July. At a news conference last month, Mr. Mitani said described Mr. Mizuno’s expertise in private equity as “invaluable.”

The Government Pension Investment Fund manages $1.1 trillion in assets.

Photo by Ville Miettinen via Flickr CC License

Public Utility Company: We Can’t Afford Jacksonville’s Pension Reform Deal

A key part of Jacksonville Mayor Alvin Brown’s pension reform proposal was forcing the city to pay an addition $40 million every year for 10 years into the city’s Police and Fire Pension Fund.

But the question was always: where does the city get that money?

The solution, pushed for months by Brown, was to have JEA, a public utility company, make the payments.

But after further analysis, JEA says it simply can’t foot the bill.

From the Florida Times-Union:

In a closely-watched report completed with help from outside attorneys and financial consultants, JEA says it can’t afford Mayor Alvin Brown’s proposal to use the utility’s financial muscle to help pay off the city’s $1.65 billion Police and Fire Pension Fund debt, according to a draft copy of the document.

The report’s conclusion is a body blow to Brown’s efforts to pass his signature pension-bill, and it echoes skepticism some JEA officials have aired for months about the idea — which would have JEA pay an additional $40 million a year for 10 years on top of the more than $100 million it already contributes annually to the city’s general fund.

“JEA recognizes the challenges for our community resulting from very significant unfunded pension liabilities for the Police and Fire Pension Fund and General Employee Pension Plan, which includes JEA employees,” the report says. “However, at this time, we are unable to increase our contribution to the City of Jacksonville without increasing rates, and even with a rate increase an increase in contribution to the city threatens our bond ratings.”

JEA says that it has other challenges it needs to address, and shifting more money towards the pension system would hurt its credit. From the FTU:

The report details many of the financial challenges facing JEA: industry-wide declines in electric and water sales, impending federal regulations that could come with massive costs and billions of dollars of its own in existing debt.

Several City Council members quickly dismissed Brown’s idea earlier this year, saying it’s clear JEA has too much on its plate.

The nation’s major credit-rating agencies have cautioned JEA that increasing its city contribution — which historically has been higher than the industry average — to address Jacksonville’s pension crisis could hurt its credit.

Officials in surrounding Northeast Florida counties that also use services from the city-owned utility have said they’re wary about the plan if it means higher rates for customers.

JEA already contributes about $100 million to the city’s pension system.

Survey: Institutional Investors Often Driven Towards Short-Term Thinking

Previous surveys have shown that pension funds almost universally consider themselves long-term investors. But their investment decisions, by their own admittance, can often reflect short-term thinking.

A new survey sheds some light on the factors and pressures that cause pension funds to break away from long-term thinking.

Summarized by Chief Investment Officer:

Accounting demands, valuation models, and modern portfolio theory are driving institutional investors towards short-termism, Hermes Investment Management has claimed.

After conducting a survey of more than 100 European investors, the fund manager reported that 44% said external pressures were forcing them away from views in line with their long-term liabilities.

“The short-term factors driving the management of pension schemes require detailed attention,” said Saker Nusseibeh, CEO of Hermes Investment Management. “Schemes need to have the freedom to act and focus on longer term considerations to best serve their end beneficiaries, savers.”

Hermes is owned by the UK’s largest pension, the BT Pension Scheme.

One of the major headaches for investors, the survey found, was quarterly results, with 44% demanding longer-term reporting. Pension accounting measures and triennial valuations were equally admonished by respondents.

This short-term thinking is also taking investors’ eyes away from their roles as good shareholders. Some 37% told the survey they thought focus on short-term investment performance acted to disconnect them from “their responsibilities as owners of actual companies”.

Additional questions were asked about innovation in the asset management industry. Some 42% said they wanted greater innovation around outcome-focussed investing, while 32% wanted better ways to reduce volatility.

More than half—56%—said they wanted innovation around the disclosure of costs.

The survey was conducted with 100 institutional investors from across Europe.

Photo by Santiago Medem via Flickr CC

Chart: Chicago’s Pension Debt, Visualized

Among the country’s largest cities, Chicago’s pension debt is unmatched — in a bad way. Check out the chart above to see just how much pension debt Chicago is shouldering compared to other large cities.

Here’s how Chicago’s unfunded liabilities broke down by system as of 2012, according to the city’s website:

– Municipal Employees’ Annuity & Benefit Fund of Chicago (MEABF): $8.2 billion
– Laborers’ & Retirement Board Employees’ Annuity & Benefit Fund (LABF): $0.9 billion
– Policemen’s Annuity & Benefit Fund (PABF): $7.0 billion
– Firemen’s Annuity & Benefit Fund (FABF): $3.1 billion
– Chicago Teachers Pension Fund (CTPF): $7.1 billion
– Park Employees Annuity and Benefit Fund (PEABF): $0.4 billion

Pension Insurer Deficit Hits Record High of $61 Billion

The Pension Benefit Guaranty Corporation (PBGC) said Monday its deficit had ballooned to $61.7 billion for fiscal year 2014.

The PBGC is a government agency that guarantees pension benefits to members of private defined-benefit pension plans.