Ted Ballantine | Pension360

Why Have Local Governments Been Slow to Adopt Automatic Enrollment Practices?

As defined-benefit plans around the country become more costly, some local governments have begun switching new hires into defined-contribution (DC) plans.

But those same governments have been slow to adopt automatic enrollment practices, according to a report published in the November issue of Pension Benefits.

From the article:

The public sector has been much slower that the private sector to adopt automatic enrollment for its defined contribution (DC) plans: only 2% use automatic enrollment. Currently, five states have automatic enrollment for the DC plans available for their workers: Georgia (ERSG), Missouri (MOSERS), South Dakota (SDRS), Texas (TRS), and Virginia (VRS).

[…]

Workforce trends and the current state of public retirement benefits strongly suggest that DC features that encourage savings, such as automatic enrollment, can play an important role in the retirement income security of many public employees.

So why haven’t local governments adopted auto enrollment practices? The article’s author, Paula Sanford, offers some reasons:

– Legal constraints. Only 11 states permit automatic enrollment for public DC plans. In a few places, an exemption to anti-garnishment laws has been written into statute for a particular retirement system or plan.

– Perception. Government leaders worry that automatic enrollment in a supplemental savings plan might overburden their employees, especially those who earn modest wages.

– Labor questions. There is debate in the labor community about whether automatic enrollment should be supported.

– Administrative challenges, such as multiple record keepers.

Cobb Country, Georgia, offers an example of how auto enrollment can increase participation:

The county started automatic enrollment for new employees in January 2013, and the feature has been very successful at increasing participation in the 457(b) plan. Prior to automatic enrollment, countywide participation in the 457(b) plan was only at about 33%; yet in just a little over a year, it has increased to 57.5%. This increase is striking considering that approximately two-thirds of the employees still participate in the original DB plan. The initial employee contribution under automatic enrollment is 1% of salary, and the county has kept its matching formula for all hybrid plan participants.

Read the full report, containing further analysis and other examples, in the latest issue of Pension Benefits or here.

Photo by TaxCredits.net

CalSTRS Appoints Three Key Investment Staff As Fund Completes Restructuring

CalSTRS has finished a restructuring of its investment staff, and announced Friday it had made three key appointments: the fund hired its first Chief Operating Investment Officer, as well as new directors of Fixed Income and Inflation Sensitive investments.

From a CalSTRS release:

Debra Smith has been selected CalSTRS Chief Operating Investment Officer (COIO). Glenn Hosokawa was named director of the $22.4 billion asset class, Fixed Income, the funds’ second largest. Paul Shantic was named Director of Inflation Sensitive, the newest and smallest asset class with an investment portfolio at $1.4 billion.

“These three appointments, coupled with our 2010 creation of a Deputy Chief Investment Officer, completes a new organizational structure that allows us to bring more assets in-house,” said CalSTRS Chief Investment Officer Christopher J. Ailman. “This structure matches what you find in most large investment money managers. This also fits our plans to internally manage more of our assets–currently at 45 percent in-house–to a projected 60 percent internally managed.”

[…]

All three moved up from high-level positions in CalSTRS. Ms. Smith was director of investment operations. Messrs. Hosokawa and Shantic were acting co-directors of Fixed Income. All three come with deep knowledge and experience in finance and investment management and operations.

CalSTRS’ inaugural COIO, Ms. Smith, has risen through the ranks at CalSTRS from associate investment officer in 1998 to director of investment operations in 2010. She holds a Bachelor of Science degree from Fresno State University in business administration, finance and marketing. In 2012 she received a certificate as a graduate of the CalSTRS Management Academy. Ms. Smith is currently enrolled in the CalSTRS Executive Development Program with a graduation date of November 2014.

“I look forward to collaborating with investment management at CalSTRS and with our strategic business partners to put in place adaptive and innovative solutions to achieve our mission, which is securing the financial future and sustaining the trust of California’s educators,” Ms. Smith said.

More on the fund’s new investment staff structure:

The new structure has the COIO overseeing Investment Operations, Branch Administration, and a new unit comprised of Compliance, Internal Controls, Ethics and Business Continuity. The new position will also directly report to the Investment Committee twice per year. This fulfills a goal of CalSTRS’ internal auditors, who recommended the separation between investment management and investment operations.

“This new structure puts in place a smoother operation for a portfolio of our size and allows for better oversight by the board, the Deputy CIO and myself,” said Mr. Ailman, adding that: “The competition for these positions was very intense and was nationwide in scope, which speaks well for the quality of the talent we have in house.”

Read the entire release, including bios of the three appointees, here.

Fitch: Hedge Funds Will Continue “Winning and Keeping” Public Pensions Assets

Fitch Ratings predicts that, despite several high-profile exits by pension funds this year, hedge funds will continue to count public pension funds as major investors.

The ratings agency says exits by funds like CalPERS are “not representative of broader sector trends” and says it believes hedge funds still “deliver competitive returns net of fees, while providing a degree of downside protection and uncorrelated return during periods of stress”.

From Fitch:

Recent decisions by two large US public pension plans to pull back from hedge fund investments, and the likelihood of a sixth consecutive calendar year of return averages underperforming broad equity market returns, are not expected to curb investors’ overall allocations to hedge funds, according to Fitch Ratings.

Barring an unforeseen major market decline, hedge fund assets under management (AUM) should continue on a path toward $3.0 trillion, good growth relative to 2013’s year-end level of $2.6 trillion. The rise is attributable to market appreciation and inflows outpacing redemptions. The AUM flows show significant variation by strategy, with equity-oriented funds attracting more capital in recent periods, but global macro funds falling from favor.

While hedge fund growth has certainly slowed over the past several years, the high-profile pension plan withdrawals seen over the past six weeks are not representative of broader sector trends, in our view.

The Fitch report backs its conclusions with data from several studies conducted this year:

Fitch points to analysis recently compiled by Preqin as an indicator of the progress that hedge funds have made in winning and keeping US public pension assets more broadly. The data generally shows improvements in hedge fund investment allocations by public pensions since 2010. As of June 2014, 269 public pensions in the US made allocations to hedge funds, with an average of about 8.6% of their total AUM allocated to hedge funds.

[…]

Over the past decade and a half, hedge funds have delivered steadier performance relative to the overall market during bear markets, as was seen in 2000 to 2002 and in 2008. This downside protection, however, comes at the expense of limited upside during bull markets, a trend seen in 2003, 2009 and especially 2013.

According to Hedge Fund Research, hedge fund performance averages are set to be nearer to the broad equity market measures in 2014. However, trailing 36- and 48-month annual return levels generally range around low single-digit percentages, which paint the entire sector as under delivering relative to broader equity index benchmarks.

Read the full Fitch release here.

Placement Agent in CalPERS Bribery Case Pleads Not Guilty

Alfred Villalobos, the former CalPERS board member and placement agent who allegedly bribed then-CalPERS Chief Executive Fred Buenrostro to the tune of $250,000, pleaded not guilty to bribery charges on Wednesday.

Buenrostro has already pled guilty to charges that he accepted the $250,000 bribe and falsified pension fund documents with Villalobos.

San Francisco Pension Not Expected to Approve Hedge Fund Proposal, But Alternate Plan Could Pass

Trustees of the San Francisco Employees’ Retirement System will vote sometime in the next few weeks on a proposal to invest up to 15 percent of assets – or $3 billion – in hedge funds.

The vote has been proposed and tabled nearly half a dozen times since May.

According to reporting by Pensions & Investments, the proposal isn’t expected to pass a vote – although a toned-down version, where hedge fund investments are capped at 5 percent of assets, has a better chance at passing.

From Pensions & Investments:

The board of the San Francisco City & County Employees’ Retirement System is expected to reject Chief Investment Officer William Coaker’s plan for a 15% allocation to hedge funds at a meeting in the next several weeks and instead limit hedge funds to no more than 5% of the portfolio, sources say.

The board had been scheduled to vote on the hedge fund allocation at a special meeting scheduled for Wednesday.

Board President Victor Makras said in an interview that a new special meeting will be held in the next few weeks. He said he will schedule the meeting as soon as he can poll members for a suitable date.

He said the Nov. 5 meeting was canceled because several board members were traveling out of the country.

The board is also expected, as part of the hedge fund vote, to bar or severely limit the use of leverage by hedge fund managers, a common tactic used by such mangers to increase returns.

Mr. Coaker’s plan would shift assets from fixed income and equities to create the new hedge fund allocation.

If the “15 percent” plan passes, the following allocation changes would occur elsewhere in the fund’s portfolio, according to SFGate:

U.S. and foreign stocks would drop to 35 percent from 47 percent of assets. Bonds and other fixed-income would fall to 15 percent from 25 percent. Real estate would rise to 17 percent from 12 percent. Private equity would rise to 18 percent from 16 percent. And hedge funds would go to 15 percent from zero.

The San Francisco Employees’ Retirement System currently does not invest in hedge funds. It manages $20 billion in assets.

Hawaii Pension Commits $105 Million to Non-Core Real Estate

The Hawaii Employees’ Retirement System approved three commitments Thursday to three real estate funds, totaling $105 million.

The pension system has worked with all three funds previously, and that familiarity played a role in the new commitments.

From IPE Real Estate:

The pension fund approved follow-on commitments of $40m each to Almanac Realty Investors’ Securities VII and AG’s Core Plus Realty Fund IV, as well as a $25m allocation to Prudential’s Senior Housing Partners V fund.

[…]

Hawaii Employees is one of the first pension funds to commit to Almanac Realty VII.

The fund had previously made a $20m commitment to Almanac Realty VI.

The manager, which declined to comment, is seeking a total capital raise of $1bn for the latest fund, according to industry sources.

Typically unleveraged, the fund will be backed by the manager with a 1% commitment of the total capital raise, or $10m.

With a targeted IRR of 12-14%, all of the capital will be invested in the US.

Almanac will look to provide growth capital for private real estate operating companies and public REITs.

Angelo Gordon will buy existing sub-performing office, retail and industrial assets for its Fund IV, placing a heavy emphasis on the top-15 US markets.

Hawaii had approved a $25m allocation to the manager’s Core Plus Realty Fund III.

Pramerica Real Estate Investors is seeking a $500m capital raise for Senior Housing Fund IV, which will invest in independent and assisted living and memory care.

Hawaii Employees had previously allocated $20m to Prudential Senior Housing Fund III.

Hawaii, which could make additional investments in non-core real estate funds, will be conducting an asset liability study next year, with the help of its investment consultant, Pension Consulting Alliance.

The outcome of this study could change its future target allocation for real estate from its current 7% allocation.

The Hawaii Employees’ Retirement System manages $12.7 billion in assets for 115,000 members.

Photo by grantzprice via Flickr CC License

Ontario Regulator Issues Draft of New Guidelines for Pensions Funds Investing in Derivatives

The Financial Services Commission of Ontario (FSCO), the regulatory body that oversees the province’s pension systems, has issued a draft of new guidelines for pensions investing in derivatives.

The guidelines call for “more precise and frequent” risk monitoring and increased documentation.

FSCO drafted the guidelines after “perceived concerns about the lack of understanding of the risks associated with investments in derivatives”, according to Osler Hoskin & Harcourt LLP, one of Canada’s largest business law firms.

Osler Hoskin & Harcourt LLP summarized the guidelines:

FSCO’s Note is framed as a set of expectations of those investing in derivatives and is intended to serve as a starting point for plan administrators. It contemplates a system for internal oversight of derivatives practices that is extremely broad in scope and will increase the costs to pension plans that invest directly in derivatives or that invest in pooled funds that use derivatives. The suggestion in the Note is that prudence might require more, but not less, rigorous practices.

FSCO’s Note sets out explicit expectations for documentation, risk mitigation and risk monitoring as follows:

– Documentation is expected to include more robust authorization regarding derivatives investment and collateral use in the Statement of Investment Policies and Procedures (SIPP) and to include risk monitoring practices (RMP) policies or guidelines relating to derivatives investments.

– Risk mitigation strategies for over-the-counter (OTC) derivatives should include an evaluation of pricing and other terms and conditions to ensure they are appropriate, and standardized netting agreements. Administrators should also consider appropriate collateral requirements for all derivatives, impose “specific and unambiguous” quantitative limits on a fund’s exposure to derivatives (including “soft limits, where positions must be analyzed, and hard limits, where positions must be liquidated”), and ensure compensation for staff involved in derivatives activities is set to avoid undue risk-taking.

– Risk monitoring for derivatives is expected to be more precise and frequent than for other investments, including monitoring of market risk, liquidity risk, counterparty risk, basis risk and operations and systems risk. Scenario analysis and stress testing are expected to be carried out.

A notable aspect of FSCO’s expectations regarding risk management and monitoring is the setting of a 10% limit on exposure to derivatives transactions with the same counterparty or associated counterparties. This is similar to the 10% diversification rule for investments under Schedule III to the Pension Benefits Standards Regulations, 1985, which is adopted in Ontario. FSCO’s expectation is that prudence may require a limit lower than 10% to be set. Such a rule would require new levels of monitoring of OTC derivative and repo contracts to ensure that they do not exceed this limit (or such other lower limit as is set by the administrator).

Read the draft of the guidelines here.

The FSCO is seeking public comment on the draft until November 24.

What Tom Wolf’s Win Means For Pennsylvania Pensions

Tom Wolf and Tom Corbett had two very different visions for Pennsylvania’s pension system. If newly-elected Governor Wolf attempts to reform the state’s retirement system, it will look very different than what Pennsylvania residents have experienced over the last few years under Corbett.

If Corbett had won, he would have pushed the legislature adopt a “hybrid” pension plan that incorporates qualities of a defined-benefit plan and a 401(k) plan.

Described by Institutional Investor:

In the 2013 legislative session, Corbett sought to pass pension reform as part of a package of three initiatives (the other two involved privatizing state liquor stores and a state transportation funding plan). Corbett’s pension plan would have enrolled future employees in a defined contribution plan and lowered future defined benefit payouts for current employees. Corbett’s office estimated that these changes would save the state $12 billion in employer contribution costs and $40 billion in plan costs over the next 30 years.

[…]

Corbett’s pension proposal did not pass the legislature. This June Representative Mike Tobash, a Republican, proposed a hybrid pension plan in which new employees would be enrolled in a combined defined benefit, defined contribution fund. This would start the state on the road to a DC system but lessen up-front costs by not shuttering the DB plan.

[…]

Almost immediately, Corbett came out and said he was in “full support” of Tobash’s plan. If reelected, Corbett says, he will call a special session of the General Assembly to tackle the pension problem. Opponents of the plan have taken to calling the plan the Corbett-Tobash pension plan.

But Tom Wolf doesn’t support the hybrid plan. What will the pension system under Wolf look like? He hasn’t offered much in the way of specifics, but he staunchly supports the state’s defined-benefit system. From Institutional Investor:

According to his campaign, Wolf “absolutely opposes changes to current employees’ pension plans, and he believes that a defined benefit retirement plan is the most effective tool for ensuring that our public workers have a financially secure retirement.” Wolf believes that to attract workers and create good private sector jobs, Pennsylvania must offer an attractive and competitive compensation package, which includes a defined benefit pension.

If elected, Wolf has said he will work with the legislature to find a solution to the pension-funding problem. But exactly what that solution might look like, with a governor so “absolutely opposed” to benefit cuts, remains to be seen. The General Assembly is likely to remain Republican, meaning the most probable scenario is a legislature favorable to benefit reform and a governor who is not. Unable to find a solution under four years of a pro-reform governor, a different approach maybe can work.

Pennsylvania’s pension systems are 63.9 percent funded, collectively. Pension liabilities have been the subject of several credit rating downgrades for the state.

New Jersey Lawmaker Wants to Reduce Pension Tax to Keep Retirees From Leaving State

In light of a recent poll that found 25 percent of New Jersey residents are “very likely” to leave the state when they retire, one lawmaker wants to reform the way the state taxes pension benefits.

The goal is to keep middle-class retirees in New Jersey.

More details from the Burlington County Times:

New Jersey Senate President Stephen Sweeney says he’s interested in changing the way the state taxes pension income to help keep retirees from leaving New Jersey for less expensive states.

New Jersey does not tax Social Security or military pensions, but requires residents to include pension income when they file their income tax returns.

Residents age 62 or older can qualify for a pension tax exclusion of up to $20,000 of their income for couples or $15,000 for individual filers, provided their gross income doesn’t exceed $100,000.

Speaking to seniors during a telephone town hall meeting hosted by AARP-NJ, Sweeney said he was interested in reforming the pension tax to help entice residents to remain in New Jersey during their retirements.

“We’re looking at raising the threshold to keep people in New Jersey,” Sweeney, D-3rd of West Deptford, said Tuesday.

[…]

The issue of seniors fleeing New Jersey has prompted several lawmakers to propose repealing the state’s inheritance tax or raising the state’s threshold for paying an estate tax from $675,000 to the federal level of $5.34 million.

Sweeney didn’t dismiss those proposals during the town hall, but said he also wanted to pursue changing the pension tax because it would assist more middle-class retirees.

“It really hits the middle class hard,” he said.

New Jersey taxes pension benefits at a rate of 3.6 percent; that number has grown from 3.1 percent since 2000.

But it’s not the only reason retirees are thinking about leaving. The state’s housing costs for seniors are the highest in the country, and healthcare costs are the third-highest.

Unions Expect Battle Over Pension Benefits to Intensify In Wake of Election

Unions and other labor groups say they expect the fight over retirement benefits, specifically public pensions, to intensify as the election saw Republican make gains in many state-level legislatures and governor’s offices.

From Reuters:

Defenders of public pensions say they will be particularly focused on Colorado, Florida and Nevada, where they expect moves to reform pensions will gain steam after Republican gains on Tuesday.

“This fight is not going away,” said Jordan Marks of the National Public Pension Coalition, a national union-funded group that seeks to protect public pensions. “There are a number of states, including Colorado and Nevada. We are looking at next year.”

[…]

In Nevada, Republicans wrested control of both the state assembly and senate from Democrats. Lawmakers reconvene in February.

A Republican bill to switch Nevada’s pensions to a hybrid system was killed by Democrats in 2013. Analysts expect Republicans to reintroduce the measure next year.

In Rhode Island, Gina Raimondo, the state treasurer who spearheaded pension reform measures in 2011, was elected governor despite union opposition. Wisconsin’s Governor Scott Walker, an avowed enemy of unions after taking them on in 2011, was re-elected.

In California, an effort to get a measure on the 2016 ballot that would give local governments more leeway to cut public pension plans will also be renewed, according to the outgoing mayor of San Jose, Chuck Reed, the measure’s main proponent and a rare Democratic advocate for pension reform.

Victory for Reed’s successor in San Jose, Democrat Sam Liccardo, another vocal pension reformer, means a fight between police and the city over retirement benefits will continue unabated.

Labor leaders identified Colorado as another key state in the battle over pensions. Democrats control the House, but control of the Senate is still up in the air.

Deprecated: Function get_magic_quotes_gpc() is deprecated in /home/mhuddelson/public_html/pension360.org/wp-includes/formatting.php on line 3712