Ted Ballantine | Pension360

The Ethics of Plan Design

Retirement plan designers often encounter ethical dilemmas over the course of their careers.

A recent paper in the Journal of Pension Benefits, authored by Kelly Marie Hurd, dives into some ethical scenarios that might be presented to plan consultants.

First: Clients need to know the regulations surrounding the plan – even if they don’t necessarily want to hear them:

To a client, the laws and regulations can feel like a foreign language at best or at worst can seem like a hindrance. However, they also can be an excellent safety net to help clients understand the importance of avoiding discrimination issues. The various tests that must be performed each year help keep the plan on the right path, and taking the time to explain those requirements, at least in a general way, during the implementation stage can go a long way to ensuring that your client has a basic understanding of what is and what is not permissible.

It’s also important the plan consultant untangle the web of competing interests being brought to the table:

Different types of retirement plan professionals bring different perspectives to the plan design process, perspectives that may be complementary or competing…

An investment advisor may be primarily concerned with enrollment and access for employees to boost participation in the plan, as well as maintaining relationships with the participants to help them meet their financial goals. While all of these are reasonable perspectives, they also may lead to differences of opinion when it comes to plan design. For example, the investment advisor may want to push auto-enrollment, while the TPA has concerns about the possibility for missed enrollments that would then lead to potentially costly corrections. Rather than competing over such questions, the investment advisor and TPA should work collaboratively to communicate the pros and cons of the different design options to arrive at the design that is best for the client to target benefits, expand participation, etc., while ensuring that the client has a compliant and qualified plan.

Finally, the author presents this scenario:

There are many times you wish you could explain something to your client about how the plan works in simple language, but the solution leads you into an area where you are explaining discrimination to your client in a way that might influence his or her hiring practices. I have a client, a professional office, where the owner employs three staff members. The owner is nearing retirement and hoping to put away the maximum amount each year, although he does not draw a large salary. The plan is a cross-tested plan, which means that to get to a 70 percent coverage level, all three of the staff members need to benefit at the same percentage as the owner. And in this company, the office manager is only a few years younger than the owner.

It seems like such an easy suggestion to tell the client to hire a part-time college-age worker and make him or her eligible for the plan, but at the end of the day that is a potentially abusive manipulation of both the retirement plan regulations and age discrimination laws. Rather than suggest demographic changes, I revisit the plan design each year to see if there is a better option based on the existing demographics. There may not always be a cookie-cutter solution, but it is our illustrious burden to continue to strive for that perfection.

To read the entire paper, titled “The Ethics of Plan Design”, click here [subscription required].

Photo by Stephen Wu via Flickr CC License

Controversial Retirement Plan Becomes Issue In Illinois Treasurer Race

Former House Republican Leader Tom Cross and Democratic Senator Mike Frerichs are both vying to become the next Treasurer of Illinois, and the race has gotten a little more interesting in the past few days.

Cross says that an early retirement incentive (ERI) plan, passed under Frerichs when he was the auditor of Champaign County, cost the county millions of dollars. But others say the plan saved the county millions.

Reported by WUIS:

Back in 2003, Mike Frerichs was the Champaign County Auditor when the County Board passed a plan that allowed some county employees to take early retirement.

An early retirement incentive, or ERI, is sometimes used by city or county governments, often as a way to cut payroll costs. At the time, Frerichs also served as the county’s agent to IMRF, the Illinois Municipal Retirement Fund.

Now, Cross, the former House Republican leader, said Frerichs put Champaign County in a financial hole by pushing the early retirement incentive on the county board.

“He ran (the numbers) and said let’s do it – it’s going to save us money,” Cross said. “We’ve now found out it costs $2-to-3 million – the county had to go sell bonds. So if you’re a rank and file county board member, you’re relying on this guy who’s the county board’s representative of IMRF, and you relied on that data and that information and recommendation.”

Frerichs fired back at Cross and said the accusations were inaccurate. From WUIS:

“Tom Cross’ campaign told lies about who instigated it, they told lies about how much it saved, and they told lies about the authorized agent,” [Frerichs] said.

Frerichs called the accusations from the Cross campaign, ‘revisionist history’.

The Senator said he was approached eleven years ago by Champaign County Administrator Deb Busey to prepare some numbers, and find out how many county employees might opt to retire early.

Tom Betz, a Democrat and a Champaign County Board member at the time, said a group of county employees pushed for the plan.

“A lot of people lobbied – because they wanted to retire,” he said. “And they wanted an incentive to retire.”

Frerichs said gathering data and presenting the information to the county administrator was the extent of his job as the county’s IMRF officer. After that, the proposal went to the full board for a vote, and passed 13-10, with bipartisan support.

The head of the pension fund backs Frerichs on that point. IMRF Executive Director Louis Kosiba said a city or county’s decision to implement the program — or not — has nothing to do with the authorized agent.

“To me it’s a kind of tempest in a teapot if you’re saying the authorized agent did something or didn’t do something vis a vis IMRF,” he said. “They’re just a communication conduit – they have no responsibility.”

ERI plans seek to replace highly paid employees with lower-paid employees. The plan is sometimes used by governments looking to downsize or cut costs.

WUIS further investigated the cost of the retirement program here.

John Bury: 4 Things The New Jersey Pension Panel Failed To Say

Over at Bury Pensions, actuary John Bury covers New Jersey pension developments as close as anyone. And there’s been a lot to talk about lately, as the New Jersey Pension and Health Benefit Study Commission just released their first report last week.

But what wasn’t in the report is just as important as what was. While the report served as a great primer on how New Jersey’s pension mess came to be, it fell short on some counts.

Here’s John Bury’s take on what was left out.

__________________

By John Bury

The report did a good job of piecing together available public information but anyone could have done that. What this panel of experts was supposed, and failed, to do is bring their knowledge of the truth of the situation to the general public. Perhaps some did not possess that knowledge and others who did wimped out but here is what should have been in the report:

Actuaries lie

A 54% funded ratio and $37 billion shortfall for the state portion of the New Jersey pension sounds bad enough but people should be aware that these figures are generated by actuaries whose sole responsibility to their politician clients is to keep contribution amounts low. Ask yourself how a plan returning 16.9% in trust earnings when it is assuming 7.9% worsens their shortfall. It’s primarily because of a flaw in basic actuarial math which is not being adjusted for since getting it right is not what public plan actuaries are paid for when right means higher contributions. Then there is the smoothing canard that the panel completely ignores, quoting the $44 billion actuarial value of assets as real rather than the $39.5 billion market value.

Politicians cheat

$14,9 billion in skipped ARC payments under Christie in cahoots with the legislature who not only get to decide how much they put in but they also get to brag that their selected mini-contributions are the full statutorily required amounts though they get to define what is statutorily required.

Benefits are protected

Hinted at on page 18:

One of the reasons the reforms described above have had little impact on the unfunded liability is that many of them do not apply to all current employees.

And the reason many recent reforms are not applied successfully (witness the COLA fiasco) is that Christie Whitman in 1997 exchanged constitutional protection of those benefits for the ability to reduce contributions to a desired level (i.e. nothing). That needs to be admitted and reforms must include either paying for all those promised benefits in full or coming up with some strategy to get public employees to agree to reduce their benefits voluntarily.

Hybrid plans won’t work here

Though a Defined Contribution plan is the only type of plan that governments, run by political considerations and without independent funding discipline, should be allowed to sponsor moving new employees into these plans would only worsen the underfunding since a valuable input into the ponzi scheme New Jersey currently runs (employee contributions) would be shut off and new hires who are typically younger could wind up getting even higher benefits than under an age-weighted defined benefit system. In the private sector the shift to cash balance plans worked because older employees could be forced (or tricked into) accepting them. It would take a massive amount of ‘creativity’ and will to work the same magic in the public sector where employees have more leverage and politicians are not bargaining with their own money.

Pension Funds React, Weigh Next Move After Bond Guru’s Departure From PIMCO

Bill Gross, bond guru and co-founder of investment management firm PIMCO, has left the company. Gross’ is only the latest in a string of high-level departures from the firm.

Some wealth managers had exited PIMCO earlier this year after sensing that the “team was falling apart.”

But how are pension funds reacting?

Here’s CalPERS’ take, from Bloomberg:

The California Public Employees Retirement System, the largest U.S. pension, said it doesn’t have plans to change its investments with Pimco, according to an e-mailed statement today.

“Calpers has respect for both Bill Gross and Pimco investment professionals,” the pension system said. Calpers, which has about 1.5 percent, or $1 billion, of its fixed-income assets in a Pimco international bond fund.

New Mexico PERS isn’t ready to make any decisions, either. But the Florida SBA, the entity that manages investments for the state’s pension funds, is watching PIMCO closely. Bloomberg reports:

Jon Grabel, chief investment officer of the Public Employees Retirement Association of New Mexico, said it’s too early to make a decision about moving assets. Pimco manages about $725 million for the association in a separate account, Grabel said.

“One person may get the headlines, but one person doesn’t manage trillions of dollars,” he said.

The Florida State Board of Administration, which manages $147 billion in its Florida Retirement System Pension Plan, has been monitoring Pimco since El-Erian left. The fund has $1.9 billion invested in Pimco and nothing in Janus, said Dennis MacKee, a spokesman for the pension.

Pimco is on the system’s watch list, which isn’t a precursor to redemption, MacKee said. It means the board is looking closely at the funds’ performance and operations and will meet with consultants and investment staff to decide what to do, he said.

New York’s Common Fund and Indiana PERS are taking a similar approach: they’ve not yet moved on from PIMCO, but have placed the firm on a ‘watch list’, reports Bloomberg:

New York City’s five pension funds are evaluating the situation at Pimco, the New York City Office of the Comptroller said in an e-mailed statement. Total assets of the funds for firefighters, police officers, teachers, school administrators and civil servants is about $160.5 billion.

The $30.2 billion Indiana Public Retirement System said Pimco remains on its watch list and it’s monitoring developments, Jennifer Dunlap, a spokeswoman for the pension fund, said in an e-mailed statement. The retirement plan had put Pimco on its list in January.

Gross left PIMCO to take a job at Janus Capital Group Inc.

Gross said he wanted to take a job that allowed him to get closer to his original passion: trading bonds.

Canada Pension Plan Invests $325 Million in U.S. Cancer Treatment Provider

The Canada Pension Plan has invested $325 in 21^st Century Oncology Holdings Inc., a cancer care service provider. The details, from Reuters:

Canada Pension Plan Investment Board (CPPIB), the investment arm of Canada’s national pension plan, said on Friday it has invested $325 million in privately held radiation oncology services provider 21st Century Oncology Holdings Inc through purchases of convertible preferred shares.

Fort Myers, Florida-based 21st Century operates the world’s largest integrated network of cancer treatment centers and affiliated physician practices. It has 179 treatment centers in the United States and in six Latin America countries.

The investment will give CPPIB the right to nominate two directors to 21st Century’s board.

An active global dealmaker, CPPIB manages net assets of C$226.8 billion on behalf of the Canada Pension Plan.

More details on 21st Century Oncology, from BusinessWeek:

21st Century Oncology Holdings, Inc., together with its subsidiaries, operates as a physician-led provider of integrated cancer care services.

As of February 19, 2014, 21st Century Oncology Holdings, Inc. operated 179 treatment centers primarily under the 21st Century Oncology brand, including 145 centers located in 16 states of the United States; and 34 centers located in 6 countries in Latin America. It was formerly known as Radiation Therapy Services Holdings, Inc. and changed its name to 21st Century Oncology Holdings, Inc. in December 2013. The company was founded in 1983 and is based in Fort Myers, Florida.

Photo by hobvias sudoneighm via Flickr CC License

New Jersey Investment Council Member Defends Robert Grady, Pension Investments

The New Jersey State Investment Council, the entity that oversees investments for the state’s pension fund, has lately been embroiled in controversy revolving around Council Chairman Robert Grady and allegations of conflicts of interest driving investment decisions.

On Thursday, one member of the Council, Guy Haselmann, defended Grady in a letter to the editor published in the Times of Trenton. The letter reads:

The chairman of the State Investment Council (SIC), Robert Grady, has done an outstanding job conducting the business of the council wisely, ethically, apolitically and with the utmost propriety. Recent criticisms levied against the chairman personally, and against the performance of the SIC and the Division of Investments (DOI) politically, are without merit.

The mission of the SIC, of which I am a member, is to provide policy and governance oversight of the DOI. In other words, the SIC does not make investment decisions or select outside managers; rather, it verifies that procedures and investment parameters are met, with the goal of maximizing return per unit of risk.

Disagreements or complaints regarding the governor’s stance on pension reform are matters completely separate from the management and oversight of the pension’s assets. Public input is always welcome; however, baseless attacks and misinformation disseminated via blogs and other means interfere with the timely and efficient work of the DOI and the SIC, and thus does a disservice to all involved, and especially to the 767,000 beneficiaries of the New Jersey Pension System.

The pension fund returned 16.9 percent in FY 2014, which ends June 30, well above benchmarks and the actuary return assumption. This is testament to the successful oversight and fiduciary duties of the SIC and the DOI.

Pension360 has covered the ethics complaint filed by a union over the alleged conflicts of interest.

Reporting by David Sirota sparked the controversy. His pieces on the topic can be read here.

CalPERS To Measure, Disclose Carbon Footprint of Portfolio

CalPERS and several other institutional investors signed the Montreal Carbon Pledge yesterday. The pledge mandates that the investors measure and publicly report the carbon footprint of their entire investment portfolio.

Strong Global Equities Performance Drives Ontario Pension Return

The Ontario Public Service Pension Plan (PSPP) returned 12.5 percent overall in 2013. But a new report from the Ontario Pension Board, which handles investments for the fund, gives more details on the performance of individual asset classes.

Strong global equities performance (37 percent return) drove the fund’s returns in 2013. Reported by Pensions & Investments:

In the pension fund’s annual report released Thursday by the Ontario Pension Board, which administers the defined benefit plan, global equities returned 37% last year, while Canadian equities returned 18%, compared with 35.9% for the MSCI World (Canadian dollar) and 13% for the S&P/TSX Composite indexes.

Real estate returned 12.9% vs. its custom benchmark’s 9.7% return; infrastructure, 12% vs. 0.9% for its custom benchmark; emerging markets equities, 5% vs. the MSCI Emerging Markets (Canadian dollar) index’s 4.3%; and Canadian fixed income, 1.8% vs. -1.2% for the DEX Universe Bond index.

Private equity, which returned 17.8%, was the only asset class to underperform its benchmark, which was 30.2%.

The pension fund’s asset allocation as of Dec. 31 was 28.2% fixed income, 23.7% developed markets equities, 15.5% emerging markets equities, 14% real estate, 8% cash and short-term investments, 7.6% Canadian equities, 2.5% infrastructure and 0.5% private equity.

The plan improved its funded status from 94 percent to 96 percent, according to the report.

The fund handles $18.9 billion of assets.

Report: Maryland Fund Lost Billions Due To Underperformance

The Maryland State and Retirement Pension System returned 14.4 percent last fiscal year – a return that the Chief Investment Officer praised as “strong” and that doubled the fund’s expected rate of return of 7.75 percent.

But a new report from the Maryland Public Policy Institute claims that the returns weren’t good enough From the Maryland Reporter:

In a report, Jeffrey Hooke and John Walters of the Maryland Public Policy Institute say the failure to match the 17.3% return on investment made by over half the public state pension funds cost the state over $1 billion. As they have in the past, they also complained about the high fees paid to outside managers of some of the funds used by the State Retirement and Pension System, which covers 244,000 active and retired state employees and teachers and their beneficiaries

“As the table shows, the underperformance trend is not only continuing but worsening as the percentage divide widens,” said Hooke and Walters. “Part of problem may be due to the fund’s large exposure to alternative investments, such as hedge funds and private equity funds, that have tended to perform worse in recent years than traditional investments such as publicly traded stocks and bonds.”

A spokesman for the Maryland pension fund offered his response to the report:

[Spokesman] Michael Golden said the institute’s report was “flawed,” “not supported by facts,” and mischaracterized the agency’s investment performance.

“These returns have resulted in greater progress toward full funding of the system that was projected last year,” Golden said. The five-year return on investment was 11.68%, while the target for the fund is 7.7%.

[…]

Golden admitted that Maryland’s investment performance is “unimpressive” compared to other state funds.

“However, the reason for this ranking is not due to active management and fees,” Golden said. “After the financial crises of 2008-2009, the board determined that the fund had too much exposure to public equities, which historically has been one of the riskiest, most volatile asset classes, and wanted a more balanced and diversified portfolio.”

See the chart at the top of this post for a comparison between the returns of Maryland’s pension fund versus the Wilshire’s Trust Universe Comparison Service (TUCS), a widely accepted benchmark for institutional assets.

Illinois Pension Board Director to Retire; Search for New Director Begins Soon

William Mabe, executive director of the State University Retirement System of Illinois, has announced that he will retire on March 31.

The System plans to hire a firm to search for and secure a new director by the time Mabe leaves his post.

From the Chicago Sun-Times:

William Mabe, executive director of the State University Retirement System, will retire on March 31, and five of the 11 board members’ terms will expire next summer.

[…]

The board expects to hire a search firm at an Oct. 30 meeting to find a new executive director, and intends to choose the new leader by the time Mabe retires, a spokesman said.

Mabe, 67, said in an interview Thursday that he could have stayed on for another three years, but chose to retire now to do other things with his life.

“I’ve been here for five years and I’ve stayed as long as I had planned to stay,” Mabe said. “The pension issue had nothing to do with it. It’s still lingering in the courts, and (the SURS leadership) did the heavy lifting we had to do. … I wanted to retire when that was completed and things were quiet.”

There may be further turnover on the board, as the terms of five more trustees expire in June 2015.

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