Ted Ballantine | Pension360

Judge Gives New Orleans Another Month To Cover Pension Debts

New Orleans now has until October 3^rd to come up with a plan to cover the funding shortfalls facing the city’s firefighter pension fund after a judge today extended the city’s deadline.

A judge ruled last year that New Orleans had to pay back the firefighters’ pension fund for the annual payments the city had skipped between 2009 and 2013. That dollar amount could total up to $52 million. From The Times-Picayune:

The standoff between Mayor Mitch Landrieu and New Orleans firefighters showed small signs of a thaw Wednesday (Sept. 3) as Civil Court Judge Robin Giarrusso gave the city another month to produce a plan to cover its massive debts to the firefighters’ pension fund.

Tommy Meagher, secretary and treasurer of the pension fund’s governing board, said the firefighters are willing to refinance the city’s obligations in creative ways to help lower the monthly payments going forward.

“The pension board has gone above and beyond everything we can do,” he said.

Part of New Orleans plan will likely involve several accounting tactics, including pension smoothing. From The Times-Picayune:

He explained that the board had agreed to stretch the city’s future pension obligations over 30 years rather than 14.5 years — a tactic that he compared to refinancing a home mortgage. He also said the board is willing to extend “pension smoothing,” an accounting strategy that lets the fund’s actuary predict higher interest rates when calculating the fund’s future investment returns. Essentially, if the fund can show it will earn more on its investments down the road, the city can pay less to the fund each month.

The board was willing to extend its use of smoothing from three years to seven, Meagher said.

Andy Kopplin, Landrieu’s chief administrative officer, said he had been asking for such breaks since 2011 and expressed appreciation for the board’s willingness to bend.

“We commend the board for doing that,” he said.

When a judge originally ruled in 2013 that New Orleans had to recoup the payments it shorted the pension fund, the city tried to appeal the ruling to the Supreme Court. But the Supreme Court refused to hear the case.

Group Calls For Transparency In Canadian Pensions As Investment Expenses Rise

The Canada Pension Plan Investment Board (CPPIB) has been an active investor in private equity, real estate and infrastructure around the world. Pension360 has covered Board’s endeavors into infrastructure and real estate in India and warehouses in California.

But those kinds of investments carry fees and expenses, and one Canadian think tank is calling on the CPPIB to make those expenses clearer. From CBC News:

The report, by former Statistics Canada chief economic analyst Philip Cross and Fraser Institute fellow Joel Emes, says the Canada Pension Plan Investment Board should more clearly explain the added costs of its new approach to investing.

Beginning in 2006, the CPPIB broadened its holdings beyond traditional stocks and bonds to invest in areas such as international real estate and infrastructure projects.

That new approach resulted in an additional $782 million for external management fees and $177 million on transaction fees, the authors say.

The CPPIB, which manages the funds not needed in the near term to pay Canada Pension Plan benefits, has moved away from traditional holdings because of low interest rates that keep bond returns low, according to CEO Mark Wiseman. In the past year, it has also invested selectively in stocks because of their high valuations.

Wiseman says the “active investment” approach is needed to create value “over an exceedingly long investment horizon” and to diversify the CPPIB portfolio.

The CPPIB has invested in infrastructure projects in countries such as Brazil and India and real estate portfolios in the U.S. and Australia.

The strategy led to returns of around 16 percent in 2013. But investment expenses have spiked as a result of the active management. From CBC:

The Fraser Institute argues the CPP has faced a big hike in the cost of its investments as a result of its new strategy — from $600 million or 0.54% of assets in 2006 to $2 billion or 1.15 per cent of its assets in 2013.

That figure includes the cost of collecting the CPP from Canadian paycheques and sending benefits to pensioners.

It is being less than transparent in failing to report its external management fees and transaction costs as part of CPPIB accounts, the report says. Instead those costs appear in federal government public accounts and overall accounts for CPP.

“The CPPIB needs to be more transparent about the expense of designing and implementing its investment strategy; every dollar spent on behalf of the CPP is one less dollar available to beneficiaries,” the Fraser Institute says.

External management fees might include investment banking fees, consulting fees, legal and tax advice and taxes on transfer of real estate, which would apply to the new style of investing, but might not be as high in stock and bond investing.

The Fraser Institute, the think tank that produced the report, advocates for smaller government and greater personal responsibility.

The Difference Between Tom Corbett and Tom Wolf on Pensions

Despite a lack of voter engagement on the issue, pension policy continues to play a large role in the Pennsylvania race for governor.

The candidates harbor very different views on how to handle the state’s pension system going forward, but the Associated Press did the service of clarifying where both candidates stand on the state’s pension issues:

PENSIONS

-Corbett says the burgeoning cost of Pennsylvania’s public pensions is a crisis that requires prompt, decisive action. Wolf argues that it’s a problem that can be resolved in the years ahead.

-Corbett wants to scale back pensions for future school and state employees as a meaningful step toward savings. He says the taxpayers’ share of the pension costs for current employees — $2.1 billion this year — is crowding out funding for other programs and helping drive up local property taxes.

-Wolf contends that the pension problems are partly the result of the state contributing less than its fair share of the costs for nearly a decade and that a 2010 law reducing pension promises to future employees and refinancing existing obligations needs more time to work.

Read the rest of the article for further clarity on where each candidate stands when it comes to taxes, education funding, and more.

The Accounting Implications of Job-Hopping and the Shift to 401(k)s

Two trends have been building in recent years, and now they are set to collide: on one hand, employers are increasingly shifting workers into defined-contribution plans. On the other, workers are becoming more likely to move between companies numerous times over the course of their working lives. Those trends together are bound to butt heads. Canover Watson writes:

As with many other major Western economies, the US in recent decades has seen its pensions landscape shift away from “defined benefit” (DB) to “defined contribution” (DC) plans […] The move from the former to the latter is unmistakable. […] DB plans tend to favour long-tenured employees, are not transferred so easily between employers, and so are less suited to a highly mobile workforce.

The effective result of this transition is that individual savings accounts, originally intended to supplement DB plans, have ended up supplanting them. This has rendered the question of optimizing returns from investments a cornerstone of the pension debate, as these returns now directly dictate the employees’ eventual retirement income.

Present and future retirees’ exclusive dependence on 401(k)s has upped the ante for all stakeholders–these funds need to achieve consistent returns required to provide liveable, income during retirement. But different funds and managers operate in different ways, and those differences are amplified when a worker switched employers numerous times. From Canover Watson:

What is required is the consistent application of a single accounting approach to underpin accurate portfolio valuations. The answer to achieving this, as with many things in our modern world, lies partly with technology and automation-namely the adoption of a master accounting system at the level of the pension fund.

The shift to DC plans and the multimanager model, both represent a step forward: the creation of a more sustainable, efficient system for ensuring that citizens are able to generate sufficient income for their retirement years. Yet, unless these changes are met with a more sophisticated, automated approach to accounting, pension returns ultimately will be short-changed by the march of progress.

To read the rest of this journal article, click here.

The article was published in the Journal of Pension Planning and Compliance.

Photo by TaxCredits.net

Union Files SEC Complaint Alleging Pension Pay-To-Play In North Carolina

A North Carolina labor group has filed a whistleblower complaint with the SEC over what they believe to be a violation of the SEC’s pay-to-play rules.

The group alleges that Erskine Bowles held a fundraiser for state Treasurer Janet Cowell at his home in 2011. Just weeks later, Bowles’ investment firm was chosen to handle investments for North Carolina’s pension funds, of which Janet Cowell is the sole trustee. From Bloomberg:

Former White House official Erskine Bowles was accused by a North Carolina workers’ association of violating political fundraising rules for money managers.

Carousel Capital, the firm Bowles co-founded in 1996 and where he is listed as a senior adviser, was selected to manage state pension funds a few weeks after a June 2011 fundraiser for North Carolina Treasurer Janet Cowell was held at his home, the State Employees Association of North Carolina said today in a whistleblower complaint to the U.S. Securities and Exchange Commission.

The fundraiser violated the SEC’s pay-to-play rule that bars investment advisers from managing state funds for two years following a campaign contribution to political candidates or officials in a position to influence the selection of advisers to manage public pension funds, according to SEANC’s complaint.

SEANC, which has about 55,000 members, also questioned whether Bowles’ wife, Crandall Bowles, was in violation of pay-to-play rules because she is on the board of JPMorgan Chase & Co., which manages several hundred millions of dollars for the $87 billion North Carolina state pension fund, which Cowell oversees.

David Sirota talked to Cowell and Bowles about the allegations:

In a statement emailed to IBTimes, Cowell’s spokesperson Schorr Johnson said:

“More than two years ago, the Department of State Treasurer verified with outside legal counsel that neither Erskine nor Crandall Bowles were covered by SEC prohibition. The Department then took it a step further by ensuring contractually with Carousel that they were compliant with this SEC rule. If Carousel failed to comply with the rule, the investment would likely end.”

In a previous statement to IBTimes, Erskine Bowles said, “I have had no active role [in Carousel] since 2005 (and) I am not involved in the management of the firm nor do I [have an] office there.” He also said the fundraiser was held at his home by his wife, Crandall, but that he was not affiliated with the event.

Growth Slower, But Still Steady For World’s Largest Funds in 2013

The annual pension fund survey from Pensions & Investments and Towers Watson contains news for both optimists and pessimists.

Glass half-empty: The world’s largest pension funds saw less growth in 2013 than they did in 2012.

Glass half-full: 2013 still marks the 5^th consecutive year of positive growth for those funds.

All the details from Pensions & Investments:

Assets of the world’s largest 300 retirement funds increased 6.2% in 2013, growing at a slower pace compared with 2012’s 9.8% rate, according to an annual survey conducted by Pensions & Investment sand Towers Watson & Co.

That is the fifth year in a row of positive growth for the top 300 funds across the globe, with aggregate assets in defined benefit and defined contribution plans at $14.86 trillion. These funds represent 46.5% of global pension assets, according to Towers Watson’s most recent Global Pension Asset Study, declining slightly from 47% in 2012.

“Some funds are experiencing strong net inflows, some are experiencing increasing returns due to buoyant stock markets — that is true of Australia, Canada, the U.S. and the U.K.,” said Gordon Clark, professor and director of the Smith School of Enterprise and the Environment at the University of Oxford, Oxford, England.

“Indeed, we are in the midst of what some people think is maybe a nascent bubble in the stock markets, promoted by, in part, quantitative easing.”

Amid stubbornly low interest rates and a poor year for emerging markets strategies, developed markets equities followed up a strong 2012 with an even stronger 2013.

The Russell 3000 index returned 33.55% over the year, compared with 16.4% in 2012, while the MSCI All-Country World ex-U.S. index gained 15.97% vs. 16.5% in 2012.

Read the full breakdown of the survey here.

Photo by Horia Varlan via Flickr CC

CalPERS, CalSTRS See Results From Initiative To Add Women To All-Male Boards

Earlier this summer, CalPERS and CalSTRS teamed up to try to improve the diversity of all-male corporate boards in California. The funds’ research had shown that 131 California-based companies had no women on their boards, so the pension giants sent letters to those companies to gauge their interest in improving the male to female ratio of their boards.

Early returns are in, and the initiative is already producing results. From IR Magazine:

At least 15 companies based in California have added a female director to their all-male boards and 35 have indicated a willingness to do so after a board gender diversity campaign launched by state pension giants CalSTRS and CalPERS targeting 131 companies in the state.

CalSTRS, the largest educator-only pension fund in the world with $187 bn in assets under management, along with CalPERS, which manages some $301 bn, began the campaign four months ago to target companies in its home state with all-male boards.

As part of the campaign, the two pension funds sent a letter to the companies offering their expertise to help them appoint women to their boards. Along with the letter, the campaigners included a copy of the National Association of Corporate Directors report ‘The Diverse Board: Moving from Interest to Action’ to illustrate the potential advantages of appointing women to a board.

CalPERS and CalSTRS started the campaign after learning that nearly 25 percent of the 400 largest publicly traded companies in California had no women on their boards. Only two of those 400 companies had boards where a majority of members were female.

Hawaii Labeled “Sinkhole” State by Watchdog Group

A few names consistently pop up in any discussion of states with the most pension debt—Illinois, New Jersey and a handful of other states are frequently cited as shouldering the heaviest pension burdens.

Hawaii isn’t always on that list. But according to one watchdog group, Truth in Accounting, the state’s pension burden is among the worst in the country. The Hawaii Reporter recaps:

Only Massachusetts, New Jersey, Illinois and Connecticut are in worse fiscal condition that Hawaii.

Donna Rook, president of StateDataLab.org, a division of Truth in Accounting, said Hawaii has been one of the five worst states since this annual study was started in 2009.

“The average Hawaii taxpayer’s share of the state’s debt is $27,000 after available assets are tapped. Since we set aside both capital assets and debt related to capital, the remaining debt is primarily unfunded pensions and retirement health,” Rook said.

The $27,000 per taxpayer is about 57 percent of the average resident’s annual income, Rook said.

Sheila Weinberg, founder and CEO of Truth in Accounting, said Hawaii financial statements show $4 billion in retirement liabilities, but the state actually has nearly $15 billion of unfunded retirement promises.

Hawaii has only $5 billion to pay the state’s bills, which total $18 billion, Weinberg said.

The same Truth in Accounting report also shared some better news: Hawaii has vastly improved the timeliness of its year-end financial reports.

For more data on Hawaii, visit Truth in Accounting’s data lab here.

As Workers Grow Older, Their Retirement Contributions Get Bigger

As one grows older, one also grows wiser. Perhaps that explains the findings of a recent survey, which found that workers contribute more to their retirement accounts–both in terms of dollar amount and percentage of salary–as they get older. From Pension Benefits:

Our study revealed that 60.2% of employees were saving for retirement at an average salary deferral rate of 6.7%.
As employees aged and drew closer to retirement age, a higher proportion of them elected to make contributions to their retirement plan, with participation increasing from 48.4% for employees aged 20 to 29 years to 64-4% for employees aged 61 to 69 years (Exhibit 1). Salary deferral rates similarly increased with age, with employees aged 20 to 29 years deferring on average 4-9% of salary and employees aged 61 to 69 years deferring on average 9.2% of salary. The pattern of older workers saving more than younger workers was true for both genders.

Predictably, a worker’s income bracket plays a large role in how much he/she decides to save. From Pension Benefits:

Overall, more of those in higher compensation groups were saving, and they saved at higher rates. Among those earning $20,000 to $29,999, 36.8% of employees were saving, and they saved on average 4-7%. Among those earning $110,000 to $199,999, those percentages rose to 81.8% and 7.9%, respectively.
When considering compensation groups individually, the research showed that more females were saving for retirement than males and they saved at a higher rate than males in most compensation categories.

The full survey results can be found here (registration required).

Photo by http://401kcalculator.org

Fact-Checking Pension Claims in Rhode Island’s Race For Governor

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Amidst all of the pension sparring going on in the Rhode Island governor race, one question recently came to the forefront: Which candidate more effectively managed their respective pension system?

In a recent debate (the video of which can be seen above), Raimondo made the claim that Taveras did very little to improve the health of Providence’s pension system since he’s been in office.

“The pension fund in the city of Providence is only 30-percent funded, about the same level as when he [Taveras] took office,” she said at the debate. “[I] fixed a system for the long term. He made small changes and the pension system in Providence is still in crisis.”

But is that claim true? PolitiFact checked the facts.

We asked the Raimondo campaign for its evidence.

Spokesman Eric Hyers sent us links to two documents. The first was a Jan. 19, 2012 report from Providence’s pension adviser, Buck Consultants, which tracks funding going back to 1994, when the city had 57.4 percent of the pension money it needed.

Since then, the overall trend has been down. The funded ratio had plummeted to 39.3 percent by the last full fiscal year Vincent A. “Buddy” Cianci Jr. was in office. It had dropped to 34.1 percent by June 30, 2010, when David Cicilline, now a U.S. representative, was in his last year.

A year later, when Taveras had been in office for six months, the funded ratio had dropped to 31.94 percent.

The second document was the Jan. 31, 2014 valuation report by the city’s new pension adviser, Segal Consulting.

It reports that as of June 30, 2013, with Taveras in office two and a half years, the funded ratio was virtually the same — 31.39 percent. And this was after Taveras won union concessions to reduce pension costs.

But PolitiFact also contacted the Taveras campaign to hear their side of the story.

Michael D’Amico, Taveras’ former director of administration who is now a budget consultant for the city, said it was “a complete oversimplification” to imply that the changes were small because the funded ratio didn’t change significantly.

The actual cost of the pension system was reduced substantially by negotiating changes such as a 10-year suspension of cost-of-living raises and the elimination of 5- and 6-percent compounded cost of living adjustments, D’Amico said.

“We got just about as much as we possibly could have without cutting pensions,” said Taveras spokesman David Ortiz. “In a sense, the administration faced a choice: do we push Providence into bankruptcy to give a receiver the ability to cut pensions?

“The mayor believed the cost and collateral damage of pushing Rhode Island’s capital city into bankruptcy was not worth extra pension savings we would have been able to pursue,” Ortiz said.

Said D’Amico: “If we hadn’t done anything, the funded ratio would have been much lower.”

PolitiFact’s final verdict: Raimondo’s claim regarding Providence’s pension fund is “mostly true.” From PoltiFact:

When Raimondo said, “The pension fund in the city of Providence is only 30 percent funded, about the same level as when he [Taveras] took office,” she was only off by one percentage point, according to the most recent audit of the fund. That funded ratio has not increased since Taveras was sworn in on Jan. 3, 2011.

But that percentage was on a downward spiral at the time, so having it stabilize at 31 percent doesn’t necessarily reflect “small changes,” as Raimondo claimed in the debate. And the changes negotiated between Taveras and the city’s unions are intended to gradually increase the funding ratio.

Because the statement is accurate but needs clarification or additional information, we rate it Mostly True.

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