Ted Ballantine | Pension360

Funded Status of Corporate Pensions Falls To Lowest Level In 13 Months

Pension360 focuses on public pensions, but the general landscape of pensions in the U.S. is important, as well.

On that note, an interesting piece of news surfaced Thursday: the funded status of U.S. corporate pensions dropped this month to the lowest level since August 2013. Plans’ funding levels fell from 90.1 percent to 89.9 percent. From MarketWatch:

The funded status of the typical U.S. corporate pension plan in September fell 0.2 percentage points, despite liabilities falling 2.6 percent, according to the BNY Mellon Institutional Scorecard. Assets for the corporate plans fell 2.7 percent, outpacing the fall in liabilities, ISSG said.

This funded status is now down 5.3 percent from the December 2013 high of 95.2 percent, according to the scorecard.

The lower liabilities for corporate plans in September resulted from the Aa corporate discount rate rising 20 basis points to 4.31 percent over the month. Plan liabilities are calculated using the yields of long-term investment grade bonds. Higher yields on these bonds result in lower liabilities.

“After benefiting from the first monthly decline in liabilities of more than one percent since November 2013, pension plans still failed to improve their funded status,” said Andrew D. Wozniak, head of fiduciary solutions, ISSG. “Although U.S. large cap equities outperformed the liabilities over the month, they were the only major equity class to do so. A sustained divergence between U.S. large cap equity returns and other public equity classes could continue the downward trend in funded status.”

ISSG also noted that public defined benefit plans missed their return targets in September by 3.5 percent, but have hit their return targets for the last twelve months, collectively.

Photo by Andreas Poike via Flickr CC License

CalPERS Board Election Results Are In; Taylor, Mathur Win Seats

The results are in: Theresa Taylor has won a spot as the newest member of the CalPERS Board of Administration, and incumbent Priya Mathur has been re-elected, as well. From the Sacramento Bee:

Theresa Taylor has won election to CalPERS Board of Administration and incumbent Priya Mathur has won re-election to the panel, according to an uncertified vote count by the retirement system.

Taylor, a Franchise Tax Board investigator who was supported by SEIU Local 1000, won the state-agency seat with 55 percent of votes cast. Mathur, a Bay Area Rapid Transit financial analyst first elected to the board in 2003, kept her public-agency seat with 56 percent of the vote.

Taylor and Mathur will serve 4-year terms that begin on January 16. The board oversees a $300 billion public-employee retirement system and health programs administered for 1.6 million current and retired government employees and their dependents.

Priya Mathur is a long-time veteran of the board who has run into trouble over the years as she has consistently failed to file conflict of interest documents and other financial statement on time. She turned in those documents late in 2002, 2007, 2008, 2010, 2012 and 2013.

“Historic” Ruling Expected in Stockton Bankruptcy Case; Can A Bankrupt California City Cut Pensions?

Can a bankrupt California city legally reduce both its payments to CalPERS and the pension benefits it promised to its workers?

Those are the questions that will likely be answered by the end of the day Wednesday in what’s already being called a “historic” ruling. From the Sacramento Bee:

After months of buildup, U.S. Bankruptcy Judge Christopher Klein is likely to rule on a protest filed by one of Stockton’s creditors, Franklin Templeton Investments. Franklin said the city can’t continue paying its full pension contribution every year to CalPERS while offering a meager payout on the $36 million owed to the investment firm.

At a July 8 hearing, Klein hinted that he was sympathetic to Franklin’s view. “I might be persuaded that … the pensions can be adjusted,” he said.

It’s not at all certain whether Stockton would reduce its pension payments, even if Klein says it can. Under state law, CalPERS says it would have no choice but to end Stockton’s pension plan. Pension benefits would drop by an estimated 60 percent, which city officials believe would trigger a mass exodus by police officers and other employees.

Regardless of what Stockton does, CalPERS has been fighting strenuously to avoid a legal ruling that says pension contributions are no longer untouchable. The giant pension fund’s lawyers say CalPERS is merely trying to protect a system that serves the public well.

“Pensions secure financial futures and help the state and its local subdivisions recruit and retain valuable public servants,” CalPERS’ lawyers said in a recent court filing. “Putting a cloud over public pensions only invites worry and uncertainty about the security of those pensions.”

Public pensions have been considered ironclad for generations. State legislatures are free to reduce benefits for new workers, as California did in 2013, but it’s long been agreed that promises made to existing employees and retirees must be kept.

Those legal protections, however, have been under duress ever since Stockton filed for bankruptcy protection in 2012. Several of the city’s Wall Street bond creditors, who lent the city more than $200 million during the housing boom, warned that they would fight in court if they were left with peanuts and the city’s $29 million-a-year contribution to CalPERS was left intact.

A bankruptcy judge ruled earlier this summer that Detroit could indeed cut pension benefits as part of its bankruptcy proceedings.

But CalPERS argues that the ruling doesn’t apply to California, because California protects pension benefits under its constitution. Michigan doesn’t.

New Hampshire Supreme Court Limits “Double-Dipping”

A New Hampshire Supreme Court ruling Tuesday limited “double-dipping” – the term used when a public worker retires and later rejoins the public sector and earns a pension and a salary at the same time – but didn’t restrict it entirely.

Reported by SeaCoast Online:

The New Hampshire Supreme Court issued a decision Tuesday ruling that state pensioners cannot work more than 32 hours a week at a public job while collecting their state pensions.

The decision upholds current state law, but leaves an unanswered question about retirees who work public jobs for more than 32 hours a week and less than full time, said Marty Karlon, spokesman for the New Hampshire Retirement System.

The case was brought to the state’s highest court on appeal by Scott Anderson, a retired Plaistow police officer, who worked post-retirement jobs for the towns of Plaistow, Atkinson and Hampstead. Anderson argued that state law allowed him to work up to 32 hours a week for a municipality, while collecting his pension, so he believed that meant he could work up to 32 hours a week for each of the three towns.

Anderson previously lost his case in the Merrimack County Superior Court and appealed to the Supreme Court.

The retired police officer argued that because pre-2012 law referred to post-retirement work for “an employer,” instead of “one or more employers,” it allowed state pensioners to work for up to 32 hours a week for multiple employers. Tuesday’s Supreme Court decision notes that the Legislature intended the singular “an employer” to include the plural “one or more employers.”

“Thus, contrary to Anderson’s contentions on appeal, when he retired in 2011, he had no right, vested or otherwise, to work up to 32 hours per week or 1,300 hours per year for more than one NHRS employer,” Monday’s Supreme Court decision states.

Double-dipping has been an issue in New York and New Jersey as recently as last month.

Africa’s Biggest Pension Fund Has $800 Million Tied Up In Failing Bank

Public Investment Corp (PIC), the entity that handles money for Africa’s largest pension fund, has $800 million tied up in the failing African Bank Investments Ltd (ABIL), which collapsed in August.

PIC injected $440 million into the bank this month as part of a bailout project. The fund already had a $300 million ownership stake in the bank. Reported by Bloomberg:

The collapse of African Bank Investments Ltd. has forced the custodian of most of the South African government’s pension money to agree to invest 5 billion rand ($440 million) to rescue the lender.

Public Investment Corp., the continent’s biggest fund manager, owned 12 percent of African Bank when it failed last month. Abil, as it’s known, collapsed after it forecast record losses and said it needed at least 8.5 billion rand to survive. The central bank devised a rescue plan that involves buying the bad loans and recapitalizing the “good bank.”

“PIC has committed to provide up to 50 percent of the total amount required to recapitalize the ‘good bank,’ which cannot exceed 5 billion rand,” Finance Minister Nhlanhla Nene said in a written response to questions in Parliament from the opposition Democratic Alliance party.

As part of the South African Reserve Bank’s Aug. 10 plan to save Abil, six banks and the PIC were asked to underwrite 10 billion rand so that the lender could hold an initial public offering in Johannesburg early next year.

“The net exposure of the Government Employees Pension Fund to Abil currently stands at just over 4 billion rand,” which is 0.5 percent of the PIC’s investments,Nene said in a written response to questions from the opposition Freedom Front Plus party. “The PIC hopes to recover some of this through its participation in recapitalizing the ‘good bank.’”

ABIL was Africa’s largest provider of loans to low-income workers. It had over $1.5 billion worth of bad loans on its books when it failed.

Missouri Audit Reveals Systems In “Most Trouble”

Missouri’s auditor released an all-encompassing audit yesterday of Missouri’s 89 public pension systems. The auditor, Tom Schweich, said the good news was that some systems were performing much better than their peers across the nation.

But the audit also revealed 15 plans that were in the “most trouble.” From MissouriNet:

“We consider them to be a problem if their funding ratio is either below 70 percent, so it’s ten points below what’s considered reasonably safe,” says Schweich, “and anything below 95 percent of required contributions, because we think they should be funded at 100 percent … if it’s anything below 95 percent, that’s a downhill trend.”

Those 15 plans include the Missouri Department of Transportation and Highway Patrol employees’ retirement system and plans covering police and firefighters in Columbia, Joplin and Springfield, and plans covering Kansas City transportation authority and public school employees. Other plans on that list cover some employees of St. Louis County, Bridgeton and nonuniform employees of University City.

Missouri’s plans were 78 percent funded collectively, lower than the 80 percent cut-off that typically marks a “healthy” plan.

But Schewich said the audit showed many of Missouri’s pension systems to be healthier than their peers in other states. That doesn’t mean, however, that those systems are out of the woods by any stretch. From MissouriNet:

Schweich says the survey found that in funding ratio, annual contributions toward solvency, and pension costs as a percentage of payroll, “Missouri is above average but in none of these areas is Missouri safe.”

Missouri recorded a 94 percent contribution rate but the survey found 34 of Missouri’s plans didn’t receive the full contribution recommended by actuaries. The percentage of payroll costs devoted to pension plans rose between 2003 and 2012 in Missouri and nationally, but again Missouri fares better than the national average.

Schweich says the main reason some plans are below an “acceptable” fund ratio is the recession of 2008 and 2009. He says some had high investment return assumptions and some didn’t have employees contributing.

This report marks the first wide-reaching audit of Missouri’s pension systems in 30 years.

Photo by Paul Sableman

Video: Hedge Fund Manager On “Tweaking” Fee Structure

The video above features John Paulson, founder of $22 billion hedge-fund firm Paulson & Co., talking about the fee structure of hedge funds and whether he feels “pressure” to change that structure to appease fee-averse investors.

“Institutions are becoming a little more demanding…they are putting pressure on the management fee and the incentive fee,” Paulson says during the video.

The footage was taken during a panel discussion at New York University’s Stern School of Business.

Video courtesy of the Wall Street Journal.

Corbett Promises Special Pension Session If Re-Elected

Pennsylvania‘s incumbent candidate for governor, Tom Corbett, has made pension reform his campaign’s rallying cry.

But Gov. Corbett’s calls for reform haven’t been met with much enthusiasm. So Corbett announced this week that, if he is re-elected, he will call a special legislative session specifically to deal with pension reform on the state and municipal level.

From New Castle News:

Gov. Tom Corbett, if re-elected this year, plans to call for a special session of the Legislature specifically to deal with Pennsylvania’s pension issues.

He would like to see the meeting address state, municipal and school district concerns.

“I’ve been trying to fight the pension battle,” Corbett, a Republican, said during a meeting with The Tribune-Democrat Friday.

“I don’t know that we’re going to even get the little bit that we’re trying to get now. I’ve already announced, I’m going to call, in my second term, right away, a special session on pensions; not just the state pension, we might as well bring in the municipal pension, too, because I can tell you, all municipalities are coming to us, saying, ‘Take a look at this.’ Is that a big one to bite off? Yes. But, if we don’t do it, who’s going to do it? I know one thing, my opponent (Tom Wolf ) is not going to touch it.”

Pennsylvania has $47 billion in unfunded pension liabilities, according to the state’s budget office.

Standard & Poor’s and Fitch Ratings both cited pension concerns when they dropped the state’s general-obligation debt rating this week.

“The downgrade reflects our view of the state’s diminished financial flexibility and growing expenditure pressures due to inaction on pension reform and limited revenue growth,” S&P said in its report.

Corbett wants to pass a plan that would shift new hires into a hybrid-type plan that more resembles a 401(k) than a defined benefit plan.

Funded Status Of Canadian Pensions Falls in Third Quarter

The funded statuses of Canada’s defined benefit plans collectively fell in the third quarter to 91.1 percent, marking a 4.9 percent decline over the last three months; at the end of the second quarter, plans were 96 percent funded.

The data comes from Aon Hewitt, who surveyed 275 of Canada’s defined benefit plans, both public and private.

From MarketWired:

[The DB plans’] median solvency funded ratio — the market value of plan assets over plan liabilities — stood at 91.1% at September 26, 2014. That represents a decline of 4.9 percentage points over the previous quarter ended June 30, 2014, a 5.5% drop from the peak of 96.6% reached in April 2014, and a 3.1% increase over the same quarter in 2013. With the decline, this quarter’s survey results reverse a trend throughout 2013 and 2014 of improving solvency positions for the surveyed plans. As well, approximately 23% of the surveyed plans in Q3 were more than fully funded at the end of the third quarter this year, compared with 37% in the previous quarter and 15% in Q3 2013.

[…]

“Canadian DB plans have strung together a nice run of winning quarters, but as we have been saying for some time now, market volatility continues to present significant risks and plan sponsors should be implementing or fine-tuning their de-risking strategies in order to stay current and optimized in the face of ever-changing capital market conditions,” said William da Silva, Senior Partner, Retirement Practice, Aon Hewitt.

“Now that we have seen plan solvency decline for the first time in over a year and a half, hopefully this will serve as a wake-up call to all plan sponsors to consider their funding and investment strategies with risk management as their key objective. Overall Canadian plan solvency is still relatively strong compared to where things stood just a few years ago, so there is still time to act. But with new mortality tables coming into effect, we expect material increases in liabilities for many plans. Clearly, that is another signal that the time to act is now.”

The 4.9 percent drop in funding was the first funding decline in nine quarters, or over two years.

United Nations: Increased Pension Coverage Key To Future Global Development

The International Labour Organization (ILO), a UN agency, released a report yesterday warning that 48 percent of the world’s population didn’t have access to a retirement benefit of any kind in 2013.

The report, titled Social Protection for older persons: Key policy trends and statistics, said that retirement benefits make “good economic sense” and aid global economic development—but many countries are cutting back on benefits due to austerity measures. From the United Nations:

According to ILO, although more than 45 countries have reached 90 per cent pension coverage and more than 20 developing countries have achieved or nearly achieved universal pension coverage, the trend of fiscal consolidation spurred by austerity has led to a contraction in social protection for older persons with consequent adjustments.

These include cuts in health and other social services, the reduction of benefits and increase in contribution rates and the raising of the retirement age.

“These adjustments are undermining the adequacy of pension and welfare systems and reducing their ability to prevent poverty in old age,” Ms. Ortiz noted.

“The long-term liabilities of austerity take time to show up. Depressed household income levels are leading to lower domestic consumption and slowing down economic recovery. It is alarming that future pensioners will receive lower pensions in at least 14 European countries by 2050,” she added.

Meanwhile, a handful of countries have expanded pension coverage dramatically in recent years. From the UN:

At the same time, a number of countries have registered positive trends in their social protection systems. China, Lesotho, Thailand, Timor-Leste, and Tunisia, for instance, have experienced what the ILO described as “remarkable successes” in the reach of their coverage with gains ranging from 25 to more than 70 per cent of the population.

Pointing to China, in particular, Ms. Ortiz observed that the country had achieved nearly universal coverage of pensions and increased wages while other countries, such as Argentina, Bolivia, Chile, Hungary, Kazakhstan, and Poland, were reversing the earlier privatization of their pension systems as they were too expensive and had not expanded coverage.

“Public social security systems with strong social protection floors are essential for economic recovery, inclusive development and social justice, and therefore must be an integral part of the post-2015 development agenda,” concluded Ms. Ortiz, referring to the new development agenda that will succeed the landmark Millennium Development Goals (MDGs), set to expire in 2015.

Read the full report here.

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