Ted Ballantine | Pension360

Canada Pension Teams With Hermes, Invests in Massive London Real Estate Project

The Canada Pension Plan Investment Board (CPPIB) has teamed up with Hermes Real Estate to invest in a 1.5 million square foot, partially developed London property.

The building, Wellington Place, will include offices, apartments and retail space.

Think Tank: Wisconsin Has Country’s Best Funded Pension System

The think tank State Budget Solutions has released a report which names Wisconsin’s pension system the most well funded in the nation.

It’s the second year in a row the think tank has given Wisconsin that title.

From the Wisconsin Reporter:

The Badger State once again has the most well-funded public pension system in the nation, according to a study released this week by State Budget Solutions, a fiscally conservative think tank based in Virginia.

The Wisconsin Retirement System also has the lowest percentage of unfunded liability as it pertains to the 2013 gross state product and the second lowest cost per capita, only behind Tennessee, the report says.

But don’t go ordering balloons, streamers and other party favors just yet. You’re going to need the extra cash.

Wisconsin’s estimated funding ratio of 67 percent is still below the 80 percent benchmark that’s considered healthy by industry standards, and each resident in the state would have to pay $6,720 to erase the pension system’s $38.6 billion in unfunded liabilities, the study says.

The SBS report lists Wisconsin’s funding ratio at 67 percent. But the state says its system is 99.9 percent funded – and it didn’t pull that number out of thin air; the number originated from a 2013 Morningstar analysis.

What accounts for the stark difference?

The SBS report measured liabilities using different methods that the state, including a much lower assumed rate of return on pension investments. More from the Wisconsin Reporter:

For its survey, State Budget Solutions used a discount rate of 2.73 percent, the approximate equivalent to the yield of a 15-year U.S. Treasury bond. The state uses a discount rate of 7.2 percent for active participants prior to their retirement and 5 percent for retired members and for active and inactive participants following retirement, according to the Department of Employee Trust Funds.

Although Wisconsin’s discount rates are among the lowest in the country, Luppino-Esposito doesn’t think they are low enough.

“We base our numbers on a discount rate that carries much less risk,” Luppino-Esposito said. “We would rather the pension plan make safer investments and ensure stability for pensioners and state residents who will lose out on vital services if the pension liability becomes too large.”

To validate his organization’s methods, Luppino-Esposito pointed to a Moody’s Investor Services report released in September that shows the unfunded liabilities of the 25 largest state pension plans — including Wisconsin’s — tripled to nearly $2 trillion between 2004 and 2012, despite coming close to meeting their “lofty investment return goals.”

“The most recent Moody’s report shows us that even if investment targets are met, high discount rates will cause the funds to come up short by trillions of dollars,” Luppino-Esposito says in his study.

Read the SBS report here.

Read Morningstar’s 2013 report here.

Panel Recommends Atlantic City Delay Payments to Pension System For Next Three Years

A task force has released its recommendations for staving off the financial collapse of Atlantic City, New Jersey.

Buried in the report is one recommendation that might sound familiar to residents of New Jersey: that the city should defer its payments into the pension system for the next three years.

From NorthJersey.com:

State officials and people outside government would take on a greater administrative role in Atlantic City under a plan for the economically troubled resort made public Thursday.

The proposal comes as the city struggles to right its budget and cover debt payments in the wake of four casino closures this year, and as a fifth casino is threatening to shut down.

To help offset financial losses brought on by the casino closings, Atlantic City would be permitted to defer payments into the public employee pension system and could qualify for more state education aid.

[…]

The details of the report were discussed Wednesday during a meeting Christie organized with local officials, casino executives and union leaders in Atlantic City. A bipartisan group of lawmakers also attended the meeting and has pledged to work cooperatively with the governor on legislation that may be required to help turn the city around.

John Bury gives his take on that part of the plan over at Bury Pensions:

New Jersey politicians and their enablers had a discussion today where they reviewed a secret report that kicked off with the suggestion:

To help ease the burden on city taxpayers, the recommendations include a three-year window for deferring the city’s employer contributions into the public employee pension system.

And that passes for a solution! How has this strategy worked out for the state which has been shortchanging the pension plans for a generation and is now in day 105 of awaiting more solutions from a study panel report that should have been released 45 days ago.

But the chilling paragraph of the northjersey.com story is:

The recommendations released Thursday were prepared by [Christie adviser Jon] Hanson, who also produced a report for Christie in 2010 that the governor used at the time to guide Atlantic City revitalization efforts.

The same adviser! Wasn’t there somebody in 2010 who looked at Hanson’s guide to AC revitalization then and saw it as a blueprint for closing half the casinos and mass layoffs?

More details of the plan can be read here.

Photo by Richard Feliciano via Flickr CC License

Report: CalPERS’ Strong Real Estate Returns Unlikely To Last

CalPERS has seen strong real estate returns since 2011. But a consultant for the pension fund warns in a new report that the consistent double-digit returns are unlikely to continue.

[The report, from Pension Consulting Alliance, can be read here, or at the bottom of this post.]

More details from Randy Diamond of Pensions & Investments:

The PCA report, which is contained in agenda materials for CalPERS’ Nov. 17 investment committee meeting, said sustaining those returns is unlikely because of a challenging and highly competitive investment market.

The report cites increased competition from sovereign wealth funds, high-net-worth investors and other large direct investors in real estate as among the reasons for the potentially declining results. It says persistently low interest rates are fueling the demand for income-producing assets.

In 2011, CalPERS changed the focus of its real estate program to focus on investing in income-producing properties — and away from opportunistic real estate — after suffering massive losses following the crash of the real estate market.

CalPERS spokesman Brad Pacheco said in an e-mail: “We recognize that recent high returns will be difficult to achieve in the current real estate market. Our goals now are to diversify portfolio risk and generate steady, modest gains.”

CalPERS manages $25.6 billion in real estate assets, and is planning to expand its real estate portfolio by 27 percent by 2016.

The report:

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Canada Pension Eyes Oil As Prices Drop

The head of the Canada Pension Plan Investment Board (CPPIB) said Thursday he sees “increasing opportunity” for investment in Canadian energy companies as oil prices continue their recent decline.

From a Bloomberg interview:

“We are seeing a period now where there may be increasing opportunity in the Western Canadian basin and Canadian energy companies as the market sort of reprices,” Mark Wiseman said in a telephone interview today.

Brent crude extended losses below $80 a barrel, dropping to a four-year low on speculation Saudi Arabia will not reduce output amid a glut of supply.

Wiseman said the resulting decline in oil prices will put pressure on some of the less financially sound energy companies, potentially creating some opportunities for acquisitions.

“Our attraction will be to those best-quality assets, best-quality management teams, and best-quality companies,” he said.

Wiseman, chief executive officer of the fund, pointed to Canada Pension’s investment in Seven Generations Energy Ltd. (VII) as an example. The pension fund is the largest shareholder, holding more than 15 percent of its common shares, according to data compiled by Bloomberg.

Canada Pension, which was an early investor in Seven Generations, didn’t sell shares in the company’s initial public offering last month because it sees long-term opportunities in the company. Seven Generations debuted in Toronto on Oct. 30 at C$18 a share and has since climbed to $22.50 today.

“It’s a great example of the long-term view we take,” Wiseman said. “We made a very conscious decision that we want to watch that value accrete and grow over the long term.”

The CPPIB manages $206 billion in assets for the Canada Pension Plan.

Photo by ezioman via Flickr CC License

South Carolina Pension Seeks Smaller Hedge Fund Managers

The South Carolina Public Employee Benefit Authority (PEBA) allocates a large portion of its assets towards hedge funds – 17 percent, as of June 30.

But PEBA is looking for a change. It isn’t considering moving away from hedge funds, but it is looking at different kinds of hedge funds. Namely: smaller ones.

From Bloomberg Briefs:

South Carolina’s pension is interested in allocating to smaller hedge fund managers to enhance diversification and capture increased returns as it reduces holdings in larger funds, according to state treasurer Curtis Loftis.

The $30 billion pension had 14 investments in “strategic partnership funds” of $1 billion or more at the start of this year, of which it has “unwound about half,” Loftis said in a speech at the Alternative Asset Summit in Las Vegas last month. It is “very interested in emerging managers” to help with this “fear of non-diversification, and to enhance returns” he said in the Oct. 28 speech. The pension has already made “several or so investments of $50 million or less the last few of months,” he said. This includes a commitment of $25 million to $50 million last month to a small manager that Loftis declined to identify.

“I love alternative investments. I love Wall Street. I don’t mind paying fees,” Loftis said in 2013. “But I want returns.” The pension last year had investment fees and expenses of 1.59 percent of assets, compared to a national average of 0.57 percent, according to a presentation on its website.

[…]

The state treasurer suggested emerging hedge funds to “come show up” at public meetings of public pension plans, including the South Carolina Investment Commission. “If I were an emerging manager and I wanted to understand how public pension plans work, I would attend the meetings, shake hands and pass out cards.”

The move is interesting because there is data out there suggesting pension funds can get the best returns by investing with newer, smaller hedge funds.

Dr. Linus Wilson writes:

Most institutions and their consultants implicitly or explicitly limit their manager selection criteria to hedge funds with a multi-year track record (three years or more) and assets under management in excess of $250 million. The AUM screen is probably higher; $1 billion or more. Unfortunately, all the evidence shows that choosing hedge funds with long track records and big AUM is exactly the way to be rewarded sub-par returns.

A recent study by eVestment found that the best absolute and risk-adjusted returns came from young (10 to 23 months of performance) and small (AUM of less than $250 million) hedge funds. My anecdotal evidence is consistent with this fact. My young and small fund, Oxriver Captial, organized under the new JOBS Act regulations, is outperforming the bigger more established funds.

Dr. Wilson believes pension funds are ignoring data that suggests newer, smaller managers perform better than the older, larger hedge funds that pension funds typically prefer

Read Dr. Wilson’s entire piece here.

Oklahoma Pension Officials Report Big Improvements in Funding, Liabilities Since 2010

Four years ago, Oklahoma’s state-level pension systems were collectively 58 percent funded. Now, their aggregate funding ratio stands at 74.4 percent, and unfunded liabilities have declined by $6.5 billion.

Pension officials reported the figures to state lawmakers on Wednesday during a House hearing.

More details from the Associated Press:

The improvements reflect the impact of legislation approved by lawmakers in recent years designed to improve the financial health of the systems, including bills passed in 2011 that increased the retirement age of some state employees and required that any retiree cost-of-living raises be fully funded, said state Rep. Randy McDaniel, R-Edmond, author of many pension overhaul bills.

“We’ve been monitoring this for several years,” McDaniel told members of the House Economic Development and Financial Services Committee. “I’m very proud of what Oklahoma has done.”

McDaniel, chairman of the committee, made the comments after officials from the Oklahoma Teachers Retirement System, the Oklahoma Public Employees Retirement System and other major retirement systems outlined their financial conditions.

In 2010, the state pension systems’ unfunded liability — the amount owed to pensioners beyond what the system can afford to pay — was more than $16 billion. The Teacher’s Retirement System was only 48 percent funded and had a $10.4 billion unfunded liability, and the Public Employees Retirement System was 66 percent funded and had $3.3 billion in unfunded liability.

At the time, officials said the pension systems threatened to place financial burdens on the state’s ability to finance road and bridge construction and other capital projects.

“The status quo was not sustainable,” McDaniel said. “Reforms were needed to ensure strength and security.”

Oklahoma’s most aggressive pension changes will be implemented next year, when new hires will be enrolled in a 401(k)-style plan instead of a defined-benefit plan.

A group of public employees are suing the state over the changes.

More Details Emerge About SEC, DOJ Probe Into State Street Pension Business

State Street won a $32 billion contract from Ohio’s retirement systems after the firm hired a lobbyist who had a cushy relationship with Ohio’s then-deputy treasurer. The deputy treasurer, in turn, had oversight of the contract.

That allegation is one among several levied against State Street by the Department of Justice and the SEC, who are probing the way State Street solicited public pension business.

From the Wall Street Journal:

Federal officials are examining the connections between Boston financial giant State Street Corp. and an Ohio lobbyist as part of a broader look at the company’s dealings with public pension funds, according to people familiar with the investigations.

The scrutiny from the Justice Department and the Securities and Exchange Commission centers on State Street’s hiring of the lobbyist in 2010, several months before winning a contract to provide administrative services for $32 billion in three of Ohio’s largest retirement systems.

[…]

In Ohio, the investigation in part concerns the relationship between lobbyist Mohammed Noure Alo and Ohio’s then-deputy treasurer, Amer Ahmad. The men were in touch roughly 14 times a day over a certain period via text and phone, according to court testimony from an agent with the Federal Bureau of Investigation. The treasurer’s office had oversight of the contract.

State Street’s interactions with Mr. Alo, the founding member of a Columbus law firm, began in early 2010, when Mr. Alo met a State Street representative at a campaign event for the state treasurer, according to the FBI agent’s testimony last week during a U.S. court hearing. State Street contacted him with a draft contract for work as a lobbyist and Mr. Alo forwarded that document to Mr. Ahmad, the FBI agent said.

Mr. Alo, who became a registered Ohio lobbyist in 2010, also approached Bank of New York Mellon Corp. with the same request, leaving a voice mail claiming the bank’s existing business with the state was “not really guaranteed to stay with you,” according to the testimony. Both banks were vying for a contract to handle assets held by three Ohio pension funds. Bank of New York Mellon didn’t retain Mr. Alo, while State Street eventually agreed in the contract to pay him $16,000 upfront, according to the FBI testimony. BNY Mellon declined to comment.

Federal officials uncovered what they described as a separate $3.2 million kickback scheme involving an Ohio securities broker and the Ohio treasurer’s office while investigating the State Street deal. They brought charges in that case against Messrs. Alo and Ahmad and two other men. All four have pleaded guilty.

The lobbyist, Mohammed Noure Alo, hasn’t been accused of breaking the law in this instance by the SEC of DOJ. But he does have a recent criminal history. From the WSJ:

Mr. Alo, who hasn’t been accused of any wrongdoing surrounding the State Street contract, pleaded guilty in December 2013 to wire fraud as part of a separate bribery and money-laundering case. A U.S. judge sentenced him to four years in prison on Wednesday for his role in the scheme, during which he accepted $123,000 from a securities broker picked by the treasurer’s office to handle certain trades for the state. Mr. Alo’s lawyer declined to comment.

Pension360 reported on Monday that State Street had admitted in a regulatory filing to being probed by the SEC and the DOJ.

Firms Managing Illinois Pension Money May Have Skirted Pay-to-Play Rules By Donating To Rauner Campaign

Over the course of his campaign, Illinois governor-elect Bruce Rauner accepted contributions from executives from firms that manage portions of the state’s pension money, according to a new report from David Sirota.

Those contributions may violate SEC pay-to-play rules, under which investment firms can’t make donations to politicians that have any influence—direct or indirect—over the hiring of firms to handle pension investments.

As Illinois governor, Rauner will have that influence – the governor has the power to appoint trustees to the state’s pension boards.

More from David Sirota on the donations:

During his gubernatorial campaign, Rauner raised millions of dollars from executives in the financial sector — and, despite the pay-to-play rule, some of the money came from executives at firms affiliated with funds that receive state pension investments. That includes:

– $1,000 from Mesirow Financial senior managing director Mark Kmety and $2,000 from Mesirow Financial managing director David Wanger. ISBI’s 2013 annual report lists Mesirow Financial as a hedge fund-of-fund manager for the pension system, and lists $271 million in holdings in Mesirow investment vehicles. In an emailed statement, a Mesirow spokeswoman told IBTimes that a separate branch of Mesirow works with the Illinois pension system and that therefore “we do not believe these contributions violate the pay to play laws.” Neither Rauner donor from Mesirow Financial “has any relationship with and/or receives any compensation from any state entity, nor do they pursue state business,” she wrote.

– $2,500 from Sofinnova general partner James Healy. TRS lists Sofinnova as a private equity manager. The system’s 2013 annual report says the firm manages $8.1 million of state pension money, and was paid more than $900,000 in fees that year. In June, TRS committed to invest another $50 million of state pension cash in Sofinnova. Healy did not respond to IBTimes’ interview request.

– $5,000 from Northern Trust’s Senior Vice President Brayton Alley. Illinois TRS lists Northern Trust Investments as an equity manager. The system’s 2013 annual report says Northern Trust manages $2.3 billion of state money, and made $548,000 in fees from the system that year. A spokesman for the firm told IBTimes, “We are aware of the obligations under various Illinois and federal laws and regulations” and “we are unaware of any violation to such requirements.”

– $9,600 from employees of the real estate firm CBRE. The 2013 annual reports of TRS and ISBI show a combined $184 million worth of state pension investments in CBRE investment vehicles. A representative for CBRE told IBTimes that the employees are not covered by the SEC rule because they are not involved in state pension business and not employed by the subsidiary of CBRE that does pension investment work.

– More than $90,000 in in-kind contributions from John Buck of the John Buck Company, which is listed as an investment manager for TRS. A spokesman for TRS, David Urbanek, told IBTimes that the pension system’s investment in the John Buck Company “is now in wind-down mode” and added that “the company is no longer actively managing TRS money.” A representative for the John Buck company said, “We do not manage money for TRS.”

While some of the contributions are relatively small, the SEC recently prosecuted its first pay-to-play case over donations totaling just $4,500. SEC sanctions can be strong: The rule can compel investment managers to return all fees they have collected from the pension systems after the political contributions were made.

Illinois state law also restricts contributions from state contractors to candidates for governor, though the executive director of ISBI, William Atwood, told IBTimes that the pension systems are exempt from the statute.

Specifics of the SEC rule in question, as explained by law firm Bracewell & Giuliani:

Rule 206 (4)-5, which was adopted in 2010, prohibits investment advisers from providing compensatory advisory services to a government client for a period of two years following a campaign contribution from the firm, or from defined investment advisers, to any government officials, or political candidates in a position to influence the selection or retention of advisers to manage public pension funds or other government client assets. Some de minimus contributions are permitted, topping out at $350 if the contributor is eligible to vote for the candidate, and the contribution is from the person’s personal funds.

Read Sirota’s entire report here.

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

Ontario Proposes Rule Change That Would Let Pension Funds Put Larger Slice of Assets in Infrastructure

Under current rules, Ontario pension funds can only invest up to 30 percent of assets in infrastructure investments.

But the Ontario Ministry of Finance is proposing an amendment to that regulation, which would raise the cap on infrastructure.

The proposed change would exempt Ontario public infrastructure projects from being counted toward the 30 percent infrastructure cap – allowing pension funds to exceed 30 percent as long as they were investing in local infrastructure projects.

From the Financial Post:

The Ontario Ministry of Finance has proposed that pension plans be permitted to take a greater stake in infrastructure projects.

Currently, the Pension Benefits Act limits pension plan investments to a 30% equity stake in the securities of most public companies. Exemptions to the “30% rule” do exist for real estate corporations, resources companies, investment corporations and others. The proposed investments would add “infrastructure corporations” to the list of exemptions.

“Many stakeholders have advocated the elimination of the 30% rule [entirely] over the years,” notes a recent Goodmans Update.

Despite such a recommendation from the Ontario Expert Commission on Pensions in 2008, the federal government, whose rules are incorporated into the PBA, has taken the position that it will not change the 30% rule “for prudential reasons.”

But in the 2013 Ontario Economic Outlook and Finance Review, the provincial government announced that it would modify the Rule by exempting infrastructure projects. The proposed amendment would apply to a host of “physical structures and associated facilities by or through which a public service is provided in Ontario” provided the infrastructure is located exclusively in the province.

[…]

“As with the current exemptions for real estate, resource and investment corporations, a pension plan administrator could only benefit from the exemption to the 30% Rule if it filed with the Superintendent a prescribed form of undertaking by the infrastructure corporation,” Goodmans advises.

The amendment is currently in a comment period, which ends January 9.

It can be found online here.

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