Ted Ballantine | Pension360

Denmark Funds Ramp Up Alternative Investments

New government rules have led to a transformation in the asset allocation of Danish pension funds. Among the changes: more investments in alternatives. Reported by Reuters:

Pension funds in Denmark have had to gradually adapt to new solvency rules introduced by the Danish Financial Services Authority (FSA) since 2007, leading them to drop guarantees and take on more risk by investing in higher-yielding “alternative” assets, such as infrastructure projects, real estate and private equity funds.

Denmark’s top pension funds had on average invested 7 percent of their assets in alternative investments, excluding properties, by the end of 2012, the latest for which the Danish Financial Services Authority (FSA) has data for.

Out of the 152 billion Danish crowns ($26.4 billion) that the top funds had invested in alternative assets by end-2012, 59 billion crowns were in private equity funds, 44 billion in credit, 20 billion in infrastructure, 16 billion in agriculture and 13 billion in hedge funds.

As noted above, the average Denmark fund held 7 percent of their assets in alternatives in 2012.

The average U.S. fund holds 6.5 percent of its assets in alternatives, according to 2009 data from the Public Plans Database.

Public Retirement Plans For Private-Sector Workers Gain Momentum In States

The federal government has been throwing around ideas lately to create a publicly run retirement system that would cover private sector workers who don’t have access to retirement plans through their employers.

But states, including California, Illinois, Indiana, Minnesota and a dozen others, are developing and implanting similar ideas, as well. A breakdown of some of these programs from Investopedia:

California is looking to enact a plan that is still awaiting approval from the Internal Revenue Service. The law allows for the introduction of a retirement savings plan for the employees of small non-profit organizations. The plan would offer several investment options to its participants and allows for contributions to be made by employees or employers. (For more, see: Retirement Planning: An Introduction.)

Also in 2012, California’s governor Jerry Brown signed into law the California Secure Choice Retirement Savings Trust Act. The law allows for the launching of individual retirement accounts for employees who work at businesses that do not offer them a plan. The plan calls for employees to be automatically enrolled in the plan through a payroll deduction of 3%, while also giving them the option to opt out of the plan.

In Indiana:

State Senator Greg Walker introduced a bill that would establish a retirement savings plan for state workers who don’t have access to one. The bill is currently pending in the state’s Senate Tax and Fiscal Committee. Indiana Retirement Savings Board would run the program, and the plan, which includes a tax credit of up to $250 for participants, would allow both employees and employers to take part in the plan.

And in Minnesota:

The Minnesota Secure Choice Retirement Savings Plan Establishment was introduced by State Senator Sandra Pappas earlier this year. The bill requires the state to develop a retirement-savings program for state private-sector employees who work at companies that don’t offer them. Approved by two Senate committees, the bill is now awaiting action in a third one.

The Investopedia article also covers similar legislation in Illinois and West Virginia.

Photo by 401kcalculator.org

Investigating Gina Raimondo’s Ocean State Investment Pool

GoLocalProv today published the results of an investigation into an investment pool – called the Ocean State Investment Pool – set up by Rhode Island Treasurer Gina Raimondo to help towns and cities “maximize investment returns”.

GoLocalProv writes that the fund certainly saw gains – but it also racked up investment expenses:

The investment pool is being run by Pyramis Global Advisors, LLC, a company owned by Fidelity Investments. The firm was paid a fee of $757,701 for fiscal year 2013 to manage what was by the end of the year $545.1 million in assets, according to the annual report for that year. After the fee, the pool generated a net investment income of $698,263, according to the report. (The pool earned a total of $1,450,050 in interest income that year.)

For the first three months of the pool’s existence—from March to June 2012—Fidelity Investments fetched a fee of $199,690, almost as much as the $448,680 in interest earned by the pool, according to the last annual report.

[…]

Pyramis’ fee ranges from .138 percent to .148 percent of the average net assets. The rates for the fiscal years 2012 and 2013 were on the higher end of that range, at .147 and .148 percent, respectively. The rates decrease as assets increase, meaning that the more money that’s in the pool, the lower the cost.

More on the creation and purpose of the Ocean State Investment Pool, from GoLocalProv:

Known as the Ocean State Investment Pool, the program was launched in the spring of 2012. Two years later, just three municipalities have signed up: Bristol, Cranston, and Lincoln. The remaining six governmental members are all state entities and include the state pension fund and the Rhode Island Student Loan Authority, for which the treasurer is a board member. Money from the state general fund also accounts for more than half of the assets in the fund.

The Ocean State Investment Pool was designed to help cities and towns maximize investment returns on so-called liquid assets—cash that cannot be invested over the long-term because it needs to be used for day-to-day expenses, like payroll.

GoLocalProv reached out to several cities and towns, asking why they had not signed up.

Answers varied. In Warwick, a city official said the investment pool does not meet all the city’s criteria for its liquid investments. William DePasquale, the acting chief of staff for Mayor Scott Avedisian, said that after the 2008 recession the city had a adopted a policy of only making liquid investments that were FDIC-backed. For that reason, he said the investment pool was not considered by the city.

Read the entire investigation here.

Photo by TaxRebate.org.uk

New Jersey Lawmaker Pushes For Stricter Pay-To-Play Rules For Pension Investments

SEC rules prevent pension funds from investing with firms that have made political contributions to politicians with any control over the pension fund’s investment decisions.

But a New Jersey Senator wants the state to go even further. Reported by NorthJersey.com:

The law that restricts the state pension fund from investing in firms whose investment managers make political contributions to New Jersey candidates should be expanded to include donations to national political groups, a legislator said Wednesday.

Sen. Shirley Turner, D-Mercer, announced her intentions to broaden the state’s pay-to-play law a day after the Division of Investment confirmed the pension system had sold its stake in a venture capital fund with ties to a Massachusetts gubernatorial candidate who donated to the New Jersey GOP.

[…]

When the pension system approves an alternative investment — including venture capital firms and hedge funds — those firms are required to fill out disclosures listing the managers of the particular fund New Jersey is investing with and whether those individuals have made political contributions. But the state’s conflict of interest law does not cover political donations to groups outside New Jersey, like the Republican Governors Association, which Governor Christie heads.

“The method of investment should be selected based on performance and merit, not because of campaign contributions and investments should be made in the best interests of our retirees,” said Turner, whose district includes a significant number of state workers, said Wednesday in a statement. “There shouldn’t be even the appearance of political favorites.”

This is a hot-button issue in New Jersey. One union, the New Jersey AFL-CIO, filed an ethics complaint last week asking whether political donations have influence pension investments.

The issue was also raised at the meeting of the State Investment Council on Tuesday.

Photo by Truthout.org via Flickr CC License

Canada Pension Fund Gets In On Alibaba IPO, To The Tune of $160 Million

There’s been a huge demand from large investors to get in on the initial public offering of Alibaba Group Holding Ltd., the Chinese e-commerce giant that conducts nearly 80 percent of China’s online commerce.

But the Canada Pension Plan Investment Board (CPPIB) – the entity that invests assets for the Canada Pension Plan – isn’t one of them. That’s because the CPPIB revealed today that it invested in Alibaba years ago.

Reported by Bloomberg:

Canada Pension Plan Investment Board said it has invested $160 million in Alibaba Group Holding Ltd. (BABA), the Chinese e-commerce company that plans to go public tomorrow.

The country’s largest pension fund manager made two direct investments in Alibaba in 2011 and 2012 for a total of $136 million, Linda Sims, a Canada Pension spokeswoman, said in an e-mail.

The pension plan has another $24 million indirect investment through a private-equity fund managed by Silver Lake Management LLC, she said.

What’s the investment worth now? The CPPIB declined to disclose the figures, saying that they won’t release that information until they sell their stake.

But according to some back-of-the-envelope calculations, the initial investment could have ballooned by up to 500 percent. From Bloomberg:

At the time of the initial investment in 2011, the Hangzhou-based Alibaba was valued at about $32 billion, people with knowledge of the matter said at the time. In May 2012, when Yahoo! Inc. sold part of its stake in Alibaba the transaction valued the company at about $35 billion.

Alibaba is expected to price its IPO at between $66 and $68 a share when it debuts on the New York Stock Exchange Friday, valuing the company at about $168 billion.

The estimated five-fold increase in Alibaba’s share price would make Canada Pension’s direct investment worth about $680 million based on the time the investments were made.

The fund manager’s indirect investment in the company is harder to calculate because the fund, Silver Lake Partners III LP, is invested in more than just Alibaba.

Alibaba’s IPO may be the world’s largest ever. The company conducts more transactions than Amazon and EBay – combined.

CalPERS Sticking With Commodities After Considering Pullback

CalPERS is not exiting commodities, a fund spokesman said this week, although it had slashed its commodities portfolio earlier this summer. CalPERS’ complete pullback from hedge funds made some observers wonder whether other allocation shifts were on the horizon.

But for now, the fund says its commodities investments will continue as planned. From Reuters:

The $300 billion Calpers…has maintained a portfolio of commodity futures tied to the S&P GSCI since 2008.

[…]

“This [hedge fund] decision does not impact … commodities, or any other program, at Calpers,” he said in an email, referring to Calper’s decision to pull out of hedge funds entirely.

Some of the hedge funds on Calpers list may have commodities exposure and dropping them could indirectly affect sentiment in the sector, investment advisers said.

[…]

The Calpers’ commodities portfolio has fluctuated in value since its 2008 inception, due to both the performance of the S&P GSCI and portfolio adjustments made by Calpers.

From $1.4 billion at end-June 2008, it plunged nearly 60 percent in value over the next year to around $600 million after the financial crisis. After rising to $700 million in 2010 as commodity markets rebounded from the crisis, the portfolio suddenly rocketed in value, reaching a high of $3.2 billion at end-June 2012, apparently from new money channeled by Calpers.

But as commodity markets struggled again in 2013 and Calpers realized little earnings from the investment, it slashed the portfolio, bringing it to $1.3 billion by June this year, a preliminary report for 2014 showed. Much of the funds were diverted to inflation-linked bonds, Calpers data showed.

Reports had surfaced back in August that CalPERS was seriously considering cutting back its commodities investments. The Wall Street Journal wrote:

One of the more-dramatic moves under consideration is a complete pullback from tradable indexes tied to energy, food, metals and other commodities, according to people familiar with the discussions. Calpers began making such investments in 2007 as a way of diversifying its portfolio…

[…]

The discussions are taking place between the fund’s interim Chief Investment Officer Ted Eliopoulos and Calpers’s other top investment executives. The Calpers board hasn’t yet been informed about any possible changes and no final decisions have been made, the people said.

Obviously, CalPERS never pulled the trigger on a commodities exit. But the fund has shown a willingness to quickly shift its investment policy and a preference for low-cost investments.

Do Illinois’ Candidates For Governor Need A Pension “Reality Check”?

Pensions are one of many issues taking a prominent hold in the race for the Illinois governorship.

Both candidates, Pat Quinn and Bruce Rauner, recently sat down in front of the Chicago Tribune’s editorial board for an informal debate on, among other issues, how they would each handle the state’s pension crisis.

One member of the Chicago Tribune’s editorial board, Eric Zorn, listened to both sides. Now he says both Quinn and Rauner need to stop living in their “pension fantasies”.

On Quinn, Zorn writes:

Gov. Pat Quinn says he doesn’t need a “Plan B” to address the problem because he believes the Illinois Supreme Court will uphold the pension reform law he signed in December.

[…]

Quinn’s faith in the Illinois Supreme Court is farfetched. In July, the court issued a thumping 6-1 ruling striking down a previous legislative effort to cut health care subsidies to state retirees and employing language that seemed to serve as a funeral oration for the pension reform law.

Addressing the state’s “but we can’t afford to provide the benefits we promised!” argument, the majority wrote that the unequivocal pension protection clause in the Illinois Constitution “was aimed at protecting the right to receive the promised retirement benefits, not the adequacy of the funding to pay for them.”

Even if Quinn genuinely has hope that the court will gymnastically OK the pending law nevertheless, he still owes it to us to reveal what he proposes to do when — I mean if — those hopes are dashed.

Zorn then shifts to Rauner and his plan to shift Illinois workers into a 401(k)-style system:

Rauner owes it to us to explain why his ideas — he admits they’ve yet to rise to the level of a plan — are any more likely to survive court challenges than the bipartisan reform law, which he strenuously opposed.

…When I asked if joining such a plan would be mandatory, spokesman Mike Schrimpf echoed word-for-word the dodge Rauner employed in his Tribune candidate questionnaire: “We need to wait to see the parameters of what the Supreme Court says in order to carefully craft a plan that will pass constitutional muster.”

Mandatory enrollment of current public employees into 401(k)-style accounts by which they will ultimately fund their own retirements would likely not pass that muster. They’re generally not as lucrative for employees as plans that guarantee monthly pension payments.

Rauner knows this. It’s why he’s promised to allow police officers and firefighters to keep their “special retirement” that includes a standard pension, and why he projects “billions” in savings.

Zorn also decried the administrative costs associated with 401(k) plans. You can read his full editorial here (subscription required).

Photo by Chris Eaves via Flickr CC License

Idaho Fund Increases COLAs, Lowers Contribution Rates After “Banner” Year

For the Public Employee Retirement System of Idaho (PERSI), fiscal year 2013-14 was a historic one. That’s because the fund returned 17.2 percent – not a staggering return (the S&P 500 returned around 30 percent over the same period), but still one of the best performances in the history of the fund.

The pension fund’s board has rewarded its members in light of the news. The reward includes a significant COLA boost for most retirees. From the Idaho Statesman:

The PERSI board approved a cost-of-living increase for retirees that includes the state-required 1 percent increase, an additional 1 percent increase and up to 2 percent more depending upon when pensioners retired.

Employees who retired between July 1, 2010, and July 1, 2014, will get a 2 percent increase.Employees who retired between July 1, 2008, and June 30, 2010, will get a 2.08 percent increase. Employees who retired before July 1, 2008, will get a 4 percent increase.

The increase is contingent upon a likely 2 percent increase in the consumer price index, which is to be released Wednesday. If it’s less than 2 percent, the PERSI COLA may be slightly adjusted.

Both employees and employers are now looking at lower contribution rates, as well. From the Idaho Statesman:

The PERSI board also voted Tuesday to eliminate two future planned contribution rate increases for active employees and the Idaho government agencies that employ them.

This means employees do not have to worry about a reduction in take-home pay, employers will avoid an increase in their PERSI costs and the contribution rates stay at a lower percentage of pay than 15 years ago, PERSI officials said.

[…]

The PERSI board voted to lower firefighter fund contributions from 17.24 percent of payroll to 5 percent because the fund, which has been closed to new members since 1980, has reached 110 percent of its anticipated benefits. That means the 22 firefighter departments will collectively save $7.75 million every year.

PERSI members since 2007 had been limited to 1 percent cost-of-living increases.

You’ve Heard of Minimum Wage. What About a Minimum Pension?

Minimum wage laws are designed, in theory, to give every worker a livable wage and a decent standard of living. But what if the same concept was applied to retirement savings?

Third Way, a moderate think tank, has proposed just that: a minimum, mandatory “pension” that all employers would give their employees based on hours worked.

From the proposal:

We propose a minimum pension law—a requirement that employers contribute a minimum of 50 cents per hour worked, for every worker, into a retirement plan. A minimum pension would provide all workers with the opportunity to create their own personal wealth—providing for a more secure retirement and a reduction of the current wealth disparity in our country. With improved access to simple investment vehicles and tax breaks that aid small businesses, employers would largely benefit too.

And from International Business Times:

“A minimum pension sounds like a minimum wage, and it is,” David Brown and Kimberly Pucher, the authors of Third Way’s report, wrote. “The minimum pension requires that, in addition to wages, employees must receive at least 50 cents an hour in retirement contributions.”

That’s a minimum contribution of $1,000 a year to full-time, full-year workers, to be indexed for inflation.

Third Way drafted the proposal, in part, because of a recent barrage of statistics suggesting many Americans aren’t nearly as ready for retirement as they’d like. From International Business Times:

The public sector and most private sector companies offer retirement plans, but about 30 percent of non-retired Americans have no money saved for retirement, the Federal Reserve reported last month. Most workers who aren’t saving for retirement have lower incomes and two-thirds of them work for companies that don’t offer a retirement savings plan, according to Boston College’s Center for Retirement Research. Many of those who are saving aren’t saving enough, so though Americans pay $140 billion each year subsidizing retirement accounts, millions are nearing retirement with little or nothing saved.

You can read the entire proposal here.

Photo by 401kcalculator.org

Is Now the Time For Pension Funds To Push Back On Fees?

CalPERS cut ties with hedge funds because, among other reasons, the fees associated with those investments.

Some money managers and pension fund staff are saying that now is the perfect time for other pension funds to speak up about their aversion to fee-heavy investments. The managers told Reuters:

“Pension funds and everyone else would be remiss not to push on fees now,” said Brad Balter, Managing Partner of Balter Capital Management, which invests in hedge funds and is now offering its own liquid alternatives fund that mimic hedge fund performance with a lower fee structure.

[…]

Joelle Mevi, who has long been arguing for lower fees, first as chief investment officer at New Mexico’s pension fund and now as executive director and CIO at the City of Fort Worth’s pension plan, agreed that Calpers’ move could be a wakeup call.

“Top hedge fund managers could see that this is a trend and it could strike fear in their hearts,” she said.

Hedge funds reached by Reuters declined to comment. But the industry has in the past rebuffed criticism over fees and performance by saying returns tend to outperform when markets fall. It has also pointed to strong demand: hedge funds which manage $3 trillion attracted $30.5 billion in new money during the second quarter alone.

Stephen Nesbitt, who runs consulting firm Cliffwater LLC and works with prominent pension funds, said hedge fund performance, like stock performance, can vary greatly – underscoring the need for investors to make careful choices.

“There are many investors who are happy with the results. It works for some and it has to do with implementation,” he said.

It’s not out of the ordinary for pension funds to negotiate with hedge funds on the matter of fees. The Massachusetts Pension Reserves Investment Management Board (PRIM) was doing exactly that even before the CalPERS news came out. From Reuters:

Massachusetts, which invests roughly $5.6 billion with hedge funds, is pushing to move some of that money into separately managed accounts and may even invest, at a lower cost, in liquid alternative strategies.

“Moves by the big leading pensions like Calpers only reaffirms liquid alternatives are the wave of the future,” said Brad Alford, chief investment officer at Alpha Capital Management, which has put money into hedge funds and also now offers liquid alternative funds.

“Smart investors are no longer willing to pay these high fees for single digit returns,” Alford said. “High fees, little transparency, limited liquidity, light regulation plus hard to measure risk from leverage and derivatives are not a good investment solution.”

The Los Angeles Fire & Police Pension System chose to drop hedge funds long before CalPERS made headlines; they made the move early this summer when they removed $550 million from hedge funds.

Photo by www.SeniorLiving.Org

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