Author: Ted Ballantine

The funding ratio of the typical corporate pension plan dropped to 80% in the second quarter of 2016, down from 83% in Q1.

The data comes from UBS’ US Pension Fund Fitness Tracker, which aggregates data from 500 large corporate pensions.

More on the funding change from UBS:

The fall in Treasury yields during June caused liability values to increase in the second quarter of 2016. Investment returns of 2.1% could not keep up with the return on liabilities over the quarter, causing funding ratios to once again decrease. These estimates are based on the average corporate plan’s reported asset allocation weightings from the UBS Asset Management Pension 500 Database and publicly available benchmark information.

The rather unexpected outcome of the recent referendum in the UK, where voters requested that the UK leave the European Union, has been the main headline in the financial press. Economic estimates suggest that the UK will be the country that will lose most from the voters’ decision. Some negative effects in Continental Europe are likely, while the other continents can expect minimal impact.

The US economy has continued to thread along without big surprises. A rather weak employment number in June encouraged the data-driven Fed to wait a little longer before increasing the target rate. At least one rate increase, maybe two, before the end of 2016 is possible because the labor market is tightening, the fundamentals of the economy remain solid, and inflation is converging toward the expected range around 2%.

Employees of asset manager American Century filed a class action suit against their employer this week for myriad of 401(k)-related allegations, including charging excessive fees, self-dealing and more.

Read the court filing here.

From Investment News:

The class-action lawsuit, Wildman et al v. American Century Services, LLC et al, alleges breach of fiduciary duty under the Employee Retirement Income security Act of 1974 for excessive investment management and record-keeping fees, imprudent fund selection and for self-dealing by American Century, which plaintiffs contend filled the retirement plan with proprietary investment options for its own benefit. Steve Wildman and Jon Borcherding, former American Century employees, are the named plaintiffs representing the class of plan participants.

Since 2010, fiduciaries of the $600 million American Century Retirement Plan populated the plan’s investment menu solely with American Century funds, using a selection process “tainted by self-interest” rather than a prudent one that would have led fiduciaries to use less-expensive funds with similar or better performance, the complaint said.

“Defendants have used the Plan as an opportunity to promote American Century’s mutual fund business and maximize profits at the expense of the Plan and its participants,” the plaintiffs said in the complaint, claiming the firm earned millions of dollars in fees by retaining proprietary investments.

Plan fiduciaries also allowed “grossly excessive” revenue-sharing payments to be made to JPMorgan Retirement Plan Services and Schwab Retirement Plan Services Inc., the plan’s two record keepers over the relevant time period, according to the complaint, filed Jun. 30 in the U.S. District Court for the Western District of Missouri, Western Division.

As some U.S. Treasury yields sank to new lows this week, corporate pensions might consider selling bonds in order to raise cash to pay out to beneficiaries, said Bank of America analysts.

From Reuters:

The average funded ratios of the top 100 U.S. corporate pensions are expected to fall to the lows seen in 2012 as the U.S. 30-year yield has fallen half a percentage point and yield premiums on corporate bonds too have declined since April, according to Bank of America analysts.

“Corporate bond yields are so low that corporates could consider issuing debt to make their pensions whole and come out ahead,” Shyam Rajan, Bank of America’s interest rates strategist, wrote in a research note.

The average yield on A-rated U.S. corporate bonds is about 2.52 percent, while that on BBB-rated corporates is 3.4 percent, according to Bank of America Merrill Lynch data.

If the U.S. Treasury 30-year yield stays in the low 2 percent level, the top 100 domestic corporate pensions worth $3 trillion would be running a funding deficit of $500 billion, Rajan said.

Companies may not want to their pensions to be stuck in such a funding situation because they would have to pay more insurance premiums on them.

Norway’s massive sovereign wealth fund has joined a lawsuit against Volkswagen, led by CalSTRS, seeking reparations for the stock price drop that followed the company’s emissions scandal.

The SWF, Government Pension Fund Global, manages about $825 billion – $10 billion of which were Volkswagen shares.

From Investments and Pensions Europe:

Norway’s sovereign wealth fund has joined the California State Teachers’ Retirement System (CalSTRS) and around 800 other institutional investors in suing Germany’s Volkswagen.

Norges Bank Investment Management (NBIM) issued a short statement on behalf of the Government Pension Fund Global, confirming it joined the lawsuit on 20 June, which follows last year’s revelation Volkswagen used ‘defeat device’ software to underplay the emissions of diesel vehicles.

The NOK7.1trn (€745bn) fund added that it would be represented by Quinn Emanuel Urquhart & Sullivan, which filed the suit claiming around €2bn in damages, backed by CalSTRS and others, in the Braunschweig District Court.

NBIM said in May it planned to sue Volkswagen over last year’s emissions scandal, which saw the company’s share price drop from €162.40 to as little as €92.36 at the beginning of October.

The Miners Protection Act, federal legislation supported by Ohio senators Sherrod Brown and Rob Portman, is facing a rough road to passage despite bipartisan support, reportedly due to Senate Majority Leader Mitch McConnell’s opposition.

The measure, if approved, will shift federal money from the Abandoned Mine Land Fund to the 1974 United Mine Workers of America Pension Plan — which is deeply distressed — to help ensure the benefits for about 6, 500 retired mine coal workers.

From Trib Live:

Ohio’s two U.S. senators — Democrat Sherrod Brown and Republican Rob Portman — are among those pushing for a legislative fix that supporters say would protect the coal miners’ hard-earned benefits without costing taxpayers anything. The bill has broad bipartisan support, with Democrats and Republicans from Pennsylvania, Indiana and West Virginia leading an aggressive push to pass the measure before the end of the year.

But the bill faces at least one powerful foe in Congress: Senate Majority Leader Mitch McConnell, R-Ky., who portrays himself as a staunch defender of his home state’s coal industry.

“McConnell … has opposed this because he doesn’t like the United Mine Workers union… We could win this on a straight up-or-down vote,” the Ohio Democrat [said], but McConnell has blocked such a move.

A spokesperson for Senator McConnell said:

“Senator McConnell has been and remains committed to helping ensure the retirement security of our nation’s retirees, including coal miners,” [Robert] Steurer said in an emailed statement. “He appreciates the importance of this issue to many affected coal communities in Kentucky and around the country and continues to believe this issue deserves an open, transparent debate through regular order.”

But government affairs director of the mine workers union Phil Smith said time is running out. “If we don’t get new money into this pension plan through this legislation within the next 12 to 18 months, that fund will be past the point of no return,” he said.

CalSTRS CIO Chris Ailman joined CNBC this week to talk about the long-term impact of Brexit and the affect on the pension fund’s investment strategy — particularly its exposure to Europe.

Credit: CNBC video

Japan’s Government Pension Investment Fund is expected to announce about $50 billion in investment losses from the fiscal year ended March 31, 2016, according to a report from CNBC.

With $1.4 trillion in assets, GPIF is the world’s largest pension fund.

The loss comes as GPIF shifts to a more aggressive investment strategy, which includes higher allocations to domestic equities.

More from CNBC:

Portfolio losses for the Government Pension Investment Fund for the 12 months through March were between 5 trillion and 5.5 trillion yen, the person told Reuters on Friday, speaking on condition of anonymity as the results are not public.

The $1.4 trillion GPIF has taken a more aggressive investment stance in recent years, shifting towards stocks and away from low-yielding Japanese government bonds, in line with Prime Minister Shinzo Abe’s push to deploy more of Japan’s huge financial assets in riskier investments and boost economic activity.

The Nikkei stock average fell 13 percent last fiscal year.

The GPIF plans to announce the fiscal-year results on July 29, the source said. That is later than the usual early-month timing – and after a July 10 national election.

There was doubt as to whether Chicago Public Schools would make its annual pension contribution on time this year; however, with no time to spare, CPS indeed met the deadline for the $676 million contribution.

However, the big payment has left the school with just about a week’s worth of cash on hand.

More from Reuters:

The Chicago Public Schools met a Thursday deadline to complete a $676 million contribution to its teachers pension system, a school spokeswoman said.

The nation’s third-largest public school system had to fully tap an $870 million bank line of credit to make the payment, according to Emily Bittner, the spokeswoman.

With fiscal 2016 ending at midnight Thursday, Bittner said the district has about $83 million in cash, which is up from a projection of just $24 million CPS made after it sold $725 million of bonds in the U.S. municipal market in February.

She added that the $83 million cash on hand estimate represents less than a week of operating expenses for the district.

[…]

CPS received a potential $555 million revenue boost from the Illinois legislature on Thursday mainly for pensions that came out of marathon negotiations this week between Illinois Governor Bruce Rauner and legislative leaders.

“This agreement will place our schools on stronger financial ground so that our parents, our teachers, and our principals can focus on the fundamentals of our children’s academic success,” Chicago Mayor Rahm Emanuel told reporters.

New York Comptroller Thomas DiNapoli – the sole trustee overseeing New York state’s retirement system – has ordered staff of the $178 billion Common Fund to begin identifying companies in its portfolio who are boycotting Israel.

Once identified, the pension fund may restrict further investment in those companies or divest entirely.

New Jersey lawmakers pushed this week for a similar move from its state pension; New York Gov. Cuomo already signed an order barring the state from doing business with companies involved in the boycott.

More from the NY Daily News:

Companies that take part in an anti-Israel boycott campaign may find themselves boycotted by New York’s pension fund, the state controller warned Wednesday.

“Attempts to harm Israel’s economy can put our investments there at risk,” DiNapoli said. “We’re putting companies engaged in BDS activities on notice that there will be consequences if their anti-Israel activities expose our investments to financial harm.”

The campaign is meant to put economic pressure on Israel for its treatment of Palestine. But critics charge it is anti-Semitic and an attack on the legitimacy of Israel.

DiNapoli said any existing investment in a company taking part in the BDS movement will be reviewed and could ultimately be liquidated if the company does not change its ways.

Other companies taking part in BDS activity could be added to a restricted list that prohibits future investment, added DiNapoli, who visited Israel in November 2015.

Public employees are paying more into their public pension plan, and that trend is expected to continue, according to a report on pension reforms from NASRA.

The St. Louis Post-Dispatch summarizes:

To combat increasing employer pension costs, U.S. states enacted pension plan reforms that mainly reduced benefits for new hires and increased employee contribution rates for new hires and current workers.

After nearly a decade at 5 percent, the median employee contribution rate increased to 5.7 percent in 2012 and further to 6 percent in 2014, according to a March 2016 National Association of State Retirement Administrators report.

The U.S. Census Bureau will release its quarterly report on state and local government public pensions on Thursday.

“For many years in (NASRA’s) data set, the median employee contribution rate held constant despite a number of states passing increases to their employee contribution rates,” said Alex Brown, a research manager at NASRA.

Nearly all states have made pension reforms since 2009. More than 35 states have passed increases to required employee contribution rates, Brown said.

Quarterly employee contributions averaged about $10.8 billion in 2015, the highest amount ever, and an increase of 1.39 percent from the 2014 average and 7.69 percent from the 2013 average, according to data taken from the U.S. Census Bureau.