Ted Ballantine | Pension360

Zimbabwe Looks To Attract American Pension Funds

Zimbabwe is hoping the latest re-vamp of its stock exchange settlement times will attract traders from around the world – including American pension funds. Reported by All Africa:

ZIMBABWE is hoping for an increase in foreign traders on the local bourse following the launch of the Central Securities Depository which will reduce settlement time frames on trades.

Chengetedzai Depository Company CEO Mr Campbell Musiwa told a Press briefing yesterday that the launch of the CSD will heighten foreign participation from the current range of 60-70 percent boosted by the anticipated participation of US pension funds.

Mr Musiwa said American pension funds are not allowed to invest in any country where there is no CSD.

“Now that we have a CSD, American pension funds are going to invest in Zimbabwe. It’s interesting to note that 60-70 percent of our trades in Zimbabwe are actually coming from the foreigners,” said Musiwa.

“So by the implementation of the CSD we are hoping that there’s going to be an increase in terms of the trades that are going to happen on the stock exchange coming from the foreigners,” he added.

The launch of the CSD is a plus as it reduces settlement time frames. The country has set a target to operate at T+3 settlement time frame on trading of securities by June next year from the current T+7.

The T stands for transaction date denotes the day the transaction takes place while the number symbolises how many days after the transaction date the settlement or the transfer of money and security ownership takes place.

“Foreign investors look at Zimbabwe and when they see manual processes they say it’s not efficient. The CSD will bring efficiency,” said Mr Musiwa.

Zimbabwe officials called the faster transaction time a “historic” step, and officials indicated they will soon be working toward making transactions on cell phones.

Time To Blow Up the 401(k)? These Researchers Think So

A recent white paper by Russell Olson and Douglas Phillips, investment officers at the University of Rochester endowment, argues that its time to blow up the 401(k) plan and replace it with a new system—“Trusteed Retirement Funds”.

From Main Street:

The researchers say it’s time to simplify the system, noting that over 40 years more than 14 variations of employer-sponsored defined contribution (DC) retirement plans have evolved, including 401(k)s, 403(b)s, SEP IRAs, SIMPLE IRAs, Roths, Keoghs and more.

“Their proliferation has been complex and bewildering. Each has its own deduction or contribution limits, distribution restrictions, and nondiscrimination rules, and there are many variations of each vehicle,” Olson and Phillips write. “Some are available through employers, others not. Some workers have retirement assets in multiple DC plans as they change employers. While the details for each vehicle seemed to make sense when created, the resulting rules and options can be confusing for many workers, and this confusion can lead to insufficient or poorly invested savings.”

“Without radical reform, our nation will have a rapidly growing percentage of impoverished elderly in need of government support,” they say.

Citing the examples of countries with successful retirement strategies, the authors note that Australia, Denmark, Netherlands and Switzerland all mandate high-percentage employee deferrals to savings plans – without offering an “opt-out” choice.

“We don’t believe Americans would agree to the mandating of large pension contributions in addition to what we already contribute to Social Security (through FICA taxes),” the researchers admit. “But we believe we can best meet the challenge by establishing high levels of retirement contributions by employees to Trusteed Retirement Funds, from which employees have the right to opt out. And by adapting the best of Australia’s superannuation concepts, we can sharply improve the effectiveness of our retirement savings.”

More details of the Trusteed Retirement Fund from Main Street:

The “Trusteed Retirement Funds” would have several key features, including:

– Supervision by a fiduciary trustee with strict requirements regarding investment objectives and fees

– Employee contributions would automatically increase by 1% every time an employee received a pay raise, unless the employee directed otherwise

– At retirement, a portion of the assets would be placed into a deferred annuity to provide for guaranteed income later in life, unless the participant declined the option

Employers would have fewer responsibilities under this new system, and participant education would be mandated – and provided by the government, as it is in Australia.

Read the white paper, which was written last June but released this August, here.

Photo by TaxCredits.net

Pension Funds Sue Exchanges Over High-Frequency Trading

A handful of pension funds have joined a lawsuit against Nasdaq and other major stock exchanges, alleging that the exchanges favored high-frequency traders and in the process hurt other investors, including pension funds. From the New York Times:

The pension funds, including one in Boston and another in Stockholm, have joined a lawsuit originally filed by Providence in April, according to a filing in U.S. District Court in New York last week. They are taking aim at some of the biggest stock exchanges – including the New York Stock Exchange, Nasdaq and BATS Global Markets – as well as the investment bank Barclays, which operates a private stock trading venue known as a dark pool.

Their legal action comes during a period of heightened scrutiny for high-frequency traders, which use computer algorithms to buy and sell shares in milliseconds. In recent months, Washington lawmakers have summoned financial executives to testify about high-frequency trading, the Securities and Exchange Commission has stepped up its scrutiny of the practice, and the New York state attorney general, Eric T. Schneiderman, has sued Barclays over high-frequency traders in its dark pool.

The pension funds and Providence, which are seeking class-action status, claim the exchanges ran afoul of their legal duties by providing certain advantages to high-frequency traders, “diverting billions of dollars annually from buyers and sellers of securities and generating billions more in ill-gotten kickback payments.” They are seeking an unspecified amount of damages.

Spokesmen for the defendants, which also include the Chicago Stock Exchange, all declined to comment.

Stock exchanges offer a number of paid services used by high-frequency traders, including detailed data feeds, special types of orders and the ability to place computer servers in the exchanges’ data centers. The lawsuit argues that such practices hurt other investors, and it claims the exchanges have a “financial incentive to create an uneven playing field.”

The pension funds that joined the lawsuit include the Employees’ Retirement System of the Government of the Virgin Islands; the State-Boston Retirement System; the Plumbers and the Pipefitters National Pension Fund in Alexandria, Virginia.

Photo by Terence Wright via Flickr CC License

Pension Policy: Taking Stock of Where Florida’s Candidates For Governor Stand

Pension policy has become an important issue in the race to be Florida’s governor, and the two major candidates (incumbent Rick Scott and challenger Charlie Crist) both have very different views on how the pension system should be altered, or not.

A rundown of their respective positions, from the Ocala Star Banner:

If Rick Scott is re-elected, you can expect a renewed push to move more public workers out of the traditional pension plan and into a 401(k)-type plan — which is currently an optional plan in the retirement system.

It was under Scott that public workers began making an annual 3 percent contribution to the state retirement fund in 2011. Scott’s criticism of the current system includes keeping a list of public workers who qualify for more than $100,000 in annual pension benefits on his state office website.

Under the changes, employees can choose whether their contributions and state contributions go into the traditional pension plan or into a 401(k)-type plan in which they can direct the investments.

If Charlie Crist wins, he is more likely to side with major labor unions that are supporting his campaign, including the Florida Education Association, which argue that Florida’s pension plan should not be changed.

The positive returns on the pension fund for the fiscal year that ended in June will bolster the argument that change is not needed.

Florida’s pension funds returned 17.4 percent in fiscal year 2013-14.

Photo by The 45th Space Wing via Flickr CC License

CalPERS’ Withdrawal From Hedge Funds Not Yet Indicative of Broader Trend

California is a bellwether for the rest of the country in many ways – and that sentiment applies to pension fund investment strategy, as well.

CalPERS made headlines this summer when it announced its decision to cut its hedge fund investments by nearly 50 percent. A handful of other funds, like the Los Angeles Fire and Police Pensions system and the Louisiana Firefighters’ Retirement System, have made similar decisions.

But those within the industry say none of that is indicative of a wider trend. From the Financial Times:

Alper Ince, managing director at Paamco, a California-based fund of hedge funds with $9bn of assets, believes that Calpers’ decision is unlikely to be indicative of a wider trend because “hedge fund investing has now become mainstream for pension funds”.

Arno Kitts, head of UK institutional at BlackRock, agrees: “People do pay attention to Calpers but there are plenty of hedge funds that have delivered consistent long-term performance with good risk-adjusted returns, which are uncorrelated with other assets.”

US public pension funds account for approximately 14 per cent of hedge fund assets owned by institutions, according to Preqin, the data provider.

Amy Bensted, head of hedge fund products at Preqin, says the shift by Calpers could fuel concerns that US public pension schemes are losing faith in the hedge fund industry.

“But I don’t think this is the start of a trend. The majority of US public pension schemes remain committed,” she says.

She points out that US pension funds in aggregate have been increasing their allocations to hedge funds steadily in recent years, a trend that has continued into 2014.

A recent Preqin survey found that 34 percent of hedge funds received more capital from pension funds in the first half of 2014 than they did in the second half of 2013.

Survey: 88% of Pension Funds Prefer Hiring Firms They’ve Already Worked With

A recent survey from consulting firm Aon Hewitt suggests that pension funds looking to hire consultants or outsource investment management duties will overwhelmingly consider firms they’ve already worked with over those they haven’t.

This survey comes from Britain—but it’s a safe bet that funds in the U.S. behave similarly.

Reported by Financial News:

Pension funds that are contemplating bringing in a fiduciary manager – a single firm to take on most, if not all, active investment responsibilities – are overwhelmingly more likely to employ a firm they already know rather than a newcomer, a survey for consultancy Aon Hewitt suggests.

Only 12% of 125 funds said they would bring in a firm they did not already employ.

In choosing among firms that already worked for them, 59% would go for their consultant and 30% for a fund manager.

[…]

Sion Cole, head of client solutions at Aon Hewitt, who is responsible for its £6.2 billion fiduciary business, said: “Fiduciary management has to be built on a level of trust. What we’re seeing is that pension trustees are going out to market, assessing their options and then appointing someone they know and trust to do that job.”

Controversy Surrounds Pensions of Retired Detroit-Area Politicians

Some Michigan residents are questioning the retirement package of Detroit-area politician Robert Ficano, who lost re-election last month after becoming embroiled in several scandals but still retired with a 401(k) worth between $1.5 and $2 million.

But experts say the retirement package is relatively “normal”, and the public’s outrage should be directed at a policy implemented by Ficano that sweetened the pensions of his appointees. From Detroit News:

[Ficano’s deal] allowed workers to use retirement savings to buy into defined benefit plans that guaranteed them a percentage of their best years’ salaries.

In 2011, he upped the offer to his appointees, waiving rules that required retirees to be at least 55 and allowing them to buy years of service at a discount.

Among others, the plan created pensions that paid former Ficano adviser William Wolfson $124,000 per year at age 50; personnel director Tim Taylor $118,000 per year; and former chief of staff Matt Schenk $96,711 per year at age 41. Schenk’s plan alone will cost taxpayers $4 million over its lifetime if he lives to be 82.

Pension officials say the deals strained the retirement system, which is funded at 48 percent.

The average pension for county retirees is about $22,000 per year. Retired workers don’t feel bad for Ficano, said Joyce Ivory, president of AFSCME Local 1659.

“Our workers suffered tremendously under Bob,” said Ivory, whose 700-member union represents clerks, wastewater treatment workers and others.

“So there’s no sympathy for his retirement plan. It’s just ‘goodbye.’ ”

Ficano declined requests for comment.

Documents obtained by Detroit News contain estimates that Ficano contributed about $100,000 to his 401(k) during his career.

Is There A Major Problem With the Endowment Model?

Over at Institutional Investor, Ashby Monk has posted a thought-provoking piece on the university endowment model and its shortfalls. An excerpt:

The endowment investment model, which is widespread among university endowments (hence the name), is often flagged as the best-in-class framework for long-term investors. This is an approach to institutional investment that is almost entirely outsourced and seeks to generate high returns through an aggressive orientation toward private equity and other alternative assets. In 2013 the average U.S. endowment had an allocation to alternatives of 47 percent, down from the previous year’s peak of 54 percent but still much higher than a decade before.

The model was pioneered by David Swensen, chief investment officer at Yale University, through the investment policies he implemented at the school’s endowment. Using this model, Swensen managed to generate a remarkable 15 percent internal rate of return over a 20-year stretch leading up to 2007. Because of Yale’s wild success, the endowment model was copied by hundreds (and probably thousands) of other endowments and institutional investors around the world. Although the model remains popular today, some institutional investors now see it as being at odds with long-term investing and perhaps even damaging to the long-term investment challenge.

Here’s why: The success or failure of this model seems to be based on access to top-performing managers, as endowments believe that certain managers can and do deliver alpha (returns above a market benchmark). The institutions that have privileged access to top managers see themselves as lucky passengers on an investment return rocket ship powered by hedge funds, private equity firms and other alternative managers.

So most (though not all) endowments won’t do anything to rock the boat with these managers. Thanks to this fear of restricted access, the asset managers would seem to hold the power to discipline and influence asset owners. It’s for this reason that many university endowments are more secretive than the most-secretive sovereign wealth funds. They are protecting their external asset managers from scrutiny. In addition, they are protecting themselves from having to inform their stakeholders about how much they are paying in fees (if they even know what they’re paying managers).

And therein lies a fundamental problem with the endowment model: The agents seem to be in charge of the principals.

Read the full piece here.

Photo by Chaval Brasil

CalSTRS Weighs Worst-Case Scenarios in Latest Meeting

CalSTRS' Projected Funded Ratio. Credit: Chief Investment Officer and PCA — Credit: Chief Investment Officer and PCA

California’s pension reforms are designed to fully fund CalSTRS in the next 35 years. But that timeline assumes the fund will meet or exceed its assumed rate of return – 7.5 percent – year in and year out.

But what if CalSTRS doesn’t meet its investment return targets?

That was the topic of the fund’s most recent investment board meeting. Reported by Chief Investment Officer:

CIO Chris Ailman posed that question [of failing to meet return expectations] during the fund’s September 5 investment board meeting. A number of top asset managers and economists have predicted market returns below historic averages for the coming years, and CalSTRS has chosen to confront that possibility head-on.

Economic growth risk is the foremost factor determining asset returns, according to Pension Consulting Alliance (PCA), CalSTRS’ primary investment adviser. Weak growth brought on by cyclical recessions, another financial crisis, or geopolitical events pose the largest threat to the fund’s short-term returns. In turn, these draw-down events present the likeliest path to sub-7.5% returns over the long term and, taken to an extreme, plan insolvency.

“Mitigating short-term drawdown risk may improve the likelihood that the long-term pension reform measures will succeed,” PCA said in its presentation. But CalSTRS faces a “key tradeoff” in hedging. “Addressing major crisis risks could push the long-term expected rate of return lower,” the consultancy continued.

During the discussion, PCA Founder Allan Emkin, Ailman, and others expressed trepidation over equities’ long bull run and lofty valuations. According to research by Investment Officer Josh Diedesch, the US stock market’s price-to-earnings ratio (20) suggests annual returns below or barely surpassing the 7.5% threshold for the next five years.

As Ailman put it during his opening CIO report, the “US bull market is getting long in the tooth.”

The topic will be broached again at the next board meeting, according to Chief Investment Officer.

Moody’s: Illinois Pension Debt Is Worst In Country

Moody’s released a report last weekend measuring the pension liabilities of all states relative to state revenue. By that measure, Illinois has the worst pension debt in the country, according to the report. From the Sun-Times:

Illinois’ pension liability as a percentage of state revenue is far and away the nation’s highest, according to a new report from a major credit-rating agency.

The state’s three-year average liability over revenue is 258 percent, Moody’s Investors Service says.

The next closest? Connecticut, at about 200 percent.

The Moody’s report averaged the Illinois percentage from 2010 through 2012. In 2012 alone, the state’s rate was 318 percent.

The state has a $100 billion deficit in the amount of money that should be invested in the portfolios of five state-employee pension accounts.

[…]

In the latest report, Moody’s sets [the median] level at 51 percent.

Several larger states, similar to Illinois, are well below the median and rank in the 10 lowest percentages of adjusted net pension liability, including Ohio, Florida and New York. The group also includes Illinois neighbors Iowa and Wisconsin — the latter having the lowest level next to Nebraska.

Only three others states — New Jersey, Hawaii and Louisiana — have rates higher than 120 percent.

The report acknowledged the state’s pending pension reform, which currently sits in court. From the Sun-Times:

Lawmakers adopted an overhaul plan last fall that cuts benefits and increases worker contributions to significantly cut that debt.

But the law has been challenged in court. A Sangamon County judge indicated last week he wants the case moved swiftly to appellate courts, suggesting the Illinois Supreme Court’s rejection in July of a law affecting retiree health insurance could prove a model for the pension challenge.

Moody’s points out that even if the pension overhaul gets constitutional approval from the state’s high court, it still will take decades for Illinois government to dig out of its financial hole.

Photo by Chris Eaves via Flickr CC License

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