Ted Ballantine | Pension360

Harvard Endowment Fund Under Fire For Bonuses, Other Investment Expenses

A group of Harvard alumni are voicing concern and anger over the compensation packages of investment managers who run the school’s endowment fund. From Chief Investment Officer:

Harvard Management Company (HMC), which runs the $32.7 billion fund, paid $132.8 million in salaries, bonuses, and benefits in the 12 months to June 30, 2013. This was more than double the $63.5 million it paid in 2010, according to Bloomberg.

HMC staff salaries and benefits were “increasing at a much faster rate than the endowment, which still has a long way to go before it reaches its pre-crisis peak”, they said in the letter.

A spokesperson for the Ivy League university told Bloomberg: “HMC’s unique hybrid model has saved the university more than $1.5 billion in management costs compared to what an equivalent external management strategy would have cost over the past decade.”

The nine alumni, who aired their concerns in a letter to Harvard’s president, said it’s not just the compensation packages that rub the, the wrong way. It’s also the performance. From Chief Investment Officer:

They criticized the pay hikes, which had come despite the endowment underperforming many of its peers. It has still to reach its pre-financial crisis peak of $36.9 billion in assets after losing 27% in the 12 months to June 30, 2009—although its 11.3% return for the fiscal year ending June 30, 2013 marked an outperformance of its benchmark.

According to AI-CIO, Princeton University also shoveled out the dough to its investment managers. They received $8.3 million in bonuses last year, which was a 39 percent increase over 2012.

Photo by Chaval Brasil

Chattanooga City Council Votes to Close Pension Contribution Loophole…For Most

Earlier this year, some Chattanooga city council members were surprised to learn that two of their colleagues, along with another city worker, were using a loophole to contribute to the city’s pension plan using pension checks they were already receiving from another plan they had from previous jobs.

If it sounds convoluted, that’s because it is. Regardless, the council voted Tuesday to ban the practice—for everyone but the two council members and the city worker. The Times Free-Press reports:

The Chattanooga City Council voted Tuesday to keep future retirees who are re-employed by the city from dipping into their current retirement while contributing to a new city pension.

But first council members gave an exemption to two of their colleagues and one other city employee.

The ordinance was drafted after the General Pension Board discovered Councilmen Moses Freeman and Yusuf Hakeem were drawing checks from their city pension, contributing to a new pension plan and making a salary that totaled close to $100,000. Another city employee in the Economic and Community Development Department, Countess Jenkins, was also drawing nearly $40,000 from her pension and paycheck.

After months of studying the discrepancy, the board voted that any future retirees re-employed by the city won’t be eligible to contribute to a new pension and draw their current pension.

But Hakeem, Freeman and Jenkins were allowed to keep drawing their pension and told to decide if they wanted to make the mandatory contributions of a new hired employee —2 percent of their salaries — toward a new pension plan. Or they could opt out of the plan and receive a refund for any contributions already paid.

The council voted yesterday 7-0 to pass the ban, along with the exemption for the three city workers. The council members who were exploiting the loophole did not participate in the vote.

One of the councilmen in question, Moses Freeman, had this to say about the vote:

“That was not the time to say you couldn’t [draw from your pension]. The way you do it is what they did now, it’s for anyone in the future,” Freeman said. “It’s fair and it’s appropriate. It’s moral. It’s legal and it’s ethical.”

Photo by Brent Moore

Moody’s Report Reveals Cost of Seven Counties Departure From Kentucky Pension System

Seven Counties, a mental health agency, removed itself from the Kentucky Employees Retirement Systems Non-Hazardous Plan earlier this summer in an attempt to avoid the mounting pension obligations it claimed would leave it insolvent.

Soon after, a judge affirmed that Seven Counties could indeed leave the system—a decision that sent shockwaves through Kentucky because of the precedent it set for similar agencies facing similar problems.

The problem for Kentucky, of course, is that it now has to contribute more money annually into the system to cover its growing funding shortfalls.

A new report from Moody’s delves deeper into the extra costs Kentucky faces in the wake of Seven Counties’ departure—and the costs that could come if other agencies follow in Seven Counties footsteps.

The Moody’s report is behind a paywall, but Insider Louisville did everyone the great justice of giving us the details:

Debt rating agency Moody’s Investor Services has just issued a new report finding the departure of mental health services provider Seven Counties Services from Kentucky Employees Retirement Systems Non-Hazardous Plan means the state now assumes an additional $1 billion or so in pension costs.

If the remaining mental health organizations leave the state pension system, that amount could rise to $2.4 billion, according to the New York City-based agency.

Which of course has sparked a big political battle, with legislators and state officials panicked at the thought all community health agencies could exit the pension systems, leading to a meltdown.

The chart at the top of this post illustrates the burden Kentucky is, and could be, facing.

Insider Louisville pulled out one jarring quote from the Moody’s report:

The Commonwealth of Kentucky (rated Aa2/stable outlook) has Moody’s third highest adjusted net pension liability for all states at 211 percent of its revenue.

But Moody’s was quick to point out that they don’t think Kentucky will be falling apart in the near future; the agency believes the state can “absorb” the mounting pension costs as a result of cost-cutting measures elsewhere.

SEC Tackles Asset Transparency, Conflict of Interest At Credit Rating Agencies

The SEC is finalizing two new sets of rules today: one that would increase the transparency of the asset-backed securities that caused much grief for investors, including pension funds, during the financial crisis.

The other set of rules would improve the reliability of the ratings issued by credit rating agencies.

Pension funds and other institutional investors were hit hard during the financial crisis in part because they purchased highly rated but opaque securities that seemed safe but eventually became worth pennies on the dollar.

The new SEC rules aim to increase the transparency of those investment instruments, as Reuters reports:

The new rules would lay out which information issuers would have to provide to investors on the underlying assets in the securities – which can bundle thousands of assets such as auto or home loans – in a standardized format.

The newly required information includes the credit quality and the collateral and cash flows related to each asset, said the SEC.

The SEC first proposed new rules on asset-backed securities more than four years ago. But it has struggled to craft rules that balance privacy concerns about the disclosure of sensitive loan-level data with investors’ desire to know more about the securities.

The new rules would also give investors a three-day waiting period to back out once they had agreed to a transaction, and in some cases remove references to credit ratings.

The SEC is also finalizing rules dealing with conflicts of interest at credit rating agencies. The rating agencies have been accused by investors and watchdog groups of letting business interests influence the AAA ratings they gave to bonds that would later lose significant value. From the News Observer:

To address the conflict of interest, the new SEC rules would prevent the sales and marketing departments of credit-rating agencies from having anything to do with firms seeking a rating for their financial product. Among the provision of the new rules are tighter look-back requirements designed to discourage ratings agencies employees from going to work for companies whose product they’ve rated. Investigations by McClatchy Newspapers and subsequently regulators showed how Wall Street firms played ratings agencies off each other, threatening to give competitors their business unless they got the AAA rating they sought.

The rules relating to rating agencies have not yet been completed, but the SEC said it hopes to have them finalized by the end of Wednesday.

Photo by the SEC

Chicago Fund Staff Racked Up Travel Bills With Trips to Las Vegas, Hawaii, San Diego

Staff members at the Chicago Transit Authority (CTA) pension fund have been hitting all the best vacation spots lately. But an investigation by the Better Government Association (BGA) raises questions about whether those trips—which were billed to the pension fund—were necessary.

The visits were work related—but they were also expensive, according to the BGA:

The newly released records show the agency’s expenses include more than $20,000 on a six-night trip to Hawaii for five people in 2010, $4,400 on a three-night trip to New Orleans for two people in 2011, $7,500 on a four-night, four-person trip to San Diego in 2012 and about $12,000 on a four-night trip to Las Vegas for six people in 2013.

The fund’s executive director, John Kallianis, was among those who went to Las Vegas and San Diego. He defended the trips, saying the conferences were “rigorous” and “very well worth the expense.”

Executive staff members at the CTA fund said that the trips were valuable because such conferences are educational for staff and trustees, and the distance travelled was necessary because the conferences don’t often come to Midwest locales.

But CTA pension officials did seem to know the travel information wouldn’t be received well if released to the public. Those officials initially refused to comply with Freedom of Information Act requests asking for the travel receipts and documents.

Eventually the BGA sued for access to the data, and CTA officials complied.

This isn’t the first time there have been questions around the governance of the CTA fund. From the BGA:

The fund’s governance came into question several times over the last year when we reported that its now-former investment adviser was under a U.S. Securities and Exchange Commission investigation and that one of the CTA pension trustees was soliciting donations for a union charity from pension advisers.

It would be helpful to see the travel expense totals for other pension funds of comparable size—it’s certainly not uncommon for staff to travel to conferences, but without seeing other data it’s hard to say whether the CTA staff’s travel expenses were excessive relative to their peers.

The CTA pension fund was 59.4 percent funded as of January 2013.

Photo by David Wilson

Survey: Most Expect to Keep Working During Retirement

For most people, retirement brings to mind images of beaches, hammocks and long days devoted to hobbies instead of work.

In fact, more work is probably last on the list of concepts associated with retirement. Or is it?

A survey by Consumer Reports found that the overwhelming majority of people close to retirement actually expect to keep working in some capacity after they’ve officially “retired”. From Consumer Reports:

Eighty-three percent of pre-retirees in our survey expected to work full- or part-time.

The phenomenon of a gradual retirement isn’t so new. Each year since 2007—before the economic downturn—about a quarter of our fully retired respondents have reported starting their retirement by working less, not stopping entirely. They reduced hours at their main job, worked part-time at a new one, or started a business. They worked for a median of four years. The most satisfied partly retired respondents worked 9 hours or less per week.

Laboring longer provides more income and delays when you begin withdrawing from savings, allowing more time for growth. And for many, it keeps those synapses firing.

It’s interesting to note that although 83 percent of respondents said they expected to keep working, past data from the same survey shows only 25 percent actually do.

Perhaps part of the reason for that disconnect are the implications that working has for other retiree benefits—sometimes, more work means less Social Security and pension benefits:

If you haven’t reached full retirement age but have claimed your benefit, Social Security holds on to $1 for every $2 you earn above $15,480. When you reach full retirement age, it gives that deferred amount back, adding to your monthly benefit.

Working shorter hours at the same employer could affect pension benefits or employer-based group health insurance, so check with human resources before you commit to part-time work.

The survey data is part of a larger piece over at Consumer Reports about how to “Stop Freaking Out About Retirement”. It’s worth a read.

South Carolina Pension Investment Commission Names New Executive Director

The South Carolina Retirement Investment Commission hopes it has found long-term leadership with its newest hire today.

The Commission, which oversees the state’s pension investments, has hired Michael Hitchcock to be its executive director. As reported by the Associated Press:

For the second time in three months, the agency investing South Carolina’s pension portfolio has named an executive director.

The Retirement Systems Investment Commission voted 4-2 on Tuesday to hire Michael Hitchcock, who takes the job Sept. 8. Hitchcock has been the chief attorney and assistant clerk of the South Carolina Senate since 2001. His salary will be $230,000.

Pension360 had previously covered the resignation of Sarah Corbett, who became executive director on June 3 but resigned from the position after two months.

Previous to Corbett, the Commission didn’t have an executive director position. It created the position last Spring.

The Commission manages nearly $30 billion worth of assets

Retirees Grapple With Tough Question: Should Pension Payments Be Taken Monthly Or As Lump Sum?

Many people facing retirement ask their financial advisor the same question: is it more advantageous to receive a pension in monthly payments or to take the entire pension as a lump sum to be put in an IRA?

There are big implications attached to either option. And the stakes are high; once you opt for a monthly payment there is no reversing course. As advisor Kevin McKinley writes:

Once the client submits the request to receive the monthly pension payments, there is no turning back. He or she can’t change the time and beneficiary calculation options down the road, and it’s virtually impossible to get an “advance” on future payments.

That could be a problem in several instances, including a need to cover a large emergency expense, the desire to help out a family member, or the emergence of a more attractive investment opportunity.

A big part of the decision to take monthly payments should be how confident you feel in your pension fund’s investment portfolio. A retiree, or his/her financial advisor, might be able to construct an investment portfolio that makes the retiree more comfortable taking the lump sum:

Since the portfolio has to be managed on behalf of thousands of recipients, plus other interested parties, it’s a safe bet that the pension plan’s managers will have to make decisions that may go against what individual clients would like done with their portion of the money.

You can probably tailor a portfolio that is better aligned with the client’s needs and risk tolerance. You certainly can design and manage one that is much more flexible and transparent than if it were left in the pension.

And then there are the tax implications that come with both options, as McKinley writes:

A pension payment is generally going to be fully taxable as ordinary income. But if the funds are instead rolled over into an IRA, the client has several opportunities to reduce his income tax bill each year.

He can take just enough to keep him under a particular federal income tax bracket. Or, he can roll over some (or all) of the account into a Roth IRA, paying the taxes now to hopefully reduce what he pays down the road.

Another option is to take nothing at all and avoid the taxes completely for the time being. The client will likely have to take required minimum distributions after reaching age 70½, but those won’t greatly exceed what a pension payment might otherwise be.

The article notes that, when it comes down to it, retirees need to ask themselves two questions: Are they confident their pension is going to exist as long as they’ll need it?

And, are they confident in their pension fund’s ability to invest and manage their money?

If a retiree lacks confidence in both of those questions, perhaps a lump sum would offer better peace of mind.

Fitch Upholds ‘A’ Rating for California General Obligation Bonds

When CalPERS moved last week to implement 99 new types of pensionable compensation, Fitch publicly mused whether the action was a “step backward” from the state’s recent pension reforms.

But the rest of California’s economy, combined with provisions in the most recent budget which increase state funding to CalPERS and CalSTRS, was enough for Fitch to uphold its ‘A’ rating on the state’s GO bonds.

From a Fitch release:

Pension funded ratios have declined and there is a history of inadequate contributions to the teacher system; however, the state has instituted some benefit reforms and the fiscal 2015 enacted budget provides the first installment of a long-term plan to increase funding of the teacher pension system.

Full actuarial contributions to the public employees’ system are legally required, but not for the teachers’ system, leading to persistent underfunding of the latter. The state addressed teachers system funding with legislation enacted in June 2014 that will increase statutorily required contributions to the system from the state, school districts, and teachers beginning in the current fiscal year. The legislation gradually increases funding requirements, with the first installment funded in the fiscal 2015 budget, and expects that it will be fully funded by 2046.

Fitch notes that it doesn’t believe California’s two main pension funds, CalPERS and CalSTRS, are necessarily as healthy as their current funding ratios indicate. Still, a diverse economy and the hope of “improved fiscal management” were among the factors that led Fitch to avoid downgrading the state’s debt.

Fitch explains:

System-wide funded ratios on a reported basis for the state’s two main pension systems, covering public employees and teachers, have eroded due to investment losses. Based on their June 30, 2013 financial reports, the public employees’ plan reported an 83.1% system-wide funded ratio, and the teachers’ plan reported a 67% system-wide funded ratio.

Using Fitch’s more conservative 7% discount rate assumption, funded ratios for the two systems fall to 78.8% for public employees and 63.5% for teachers. On a combined basis, net tax-supported debt and pension liabilities attributable to the state at 8.3% are above the state median of 6.1%, ranking the state 31st.

The state adopted a broad package of pension reforms in 2012 that affect most state and local systems, including through benefit reductions for new workers and higher contributions for employees. While changes are expected to generate only modest near-term annual savings for the state and for local governments whose pension plans are subject to the reforms, annual savings are expected to grow considerably over time.

Fitch considers California’s GO bond outlook to be “stable”.

Photo credit: “GoldenGateBridge-001″ by Rich Niewiroski Jr. Licensed under Creative Commons Attribution 2.5 via Wikimedia Commons

Raimondo, Taveras Continue Throwing Pension Punches in Race for Rhode Island Governorship

The pension system continues to occupy center stage in Rhode Island’s race for governor. In one corner is current state Treasurer Gina Raimondo, whose 2011 pension reforms were among the boldest in the country and are the subject of numerous lawsuits from labor groups.

In the other corner in Angel Taveras, the current mayor of Providence who has been critical of the pension system’s investments under Raimondo and has accused the Treasurer of being in bed with Wall Street.

Raimondo released a new campaign ad yesterday – you can watch it above – that responded to Taveras’ claims. The Providence Journal reports:

In a new one-minute TV ad released to the media on Monday morning, Raimondo, the state’s general treasurer, looks into the camera and says of her leading rival in the Democratic primary race for governor:

“I’m Gina Raimondo and you might have heard about Mayor Taveras attacking pension reform, claiming I did it to enrich Wall Street. Nothing could be more wrong.”

“I was 11 years old when my dad lost his job at Bulova. I have never forgotten how hard that was. So when I became treasurer and inherited the pension crisis, I knew if we didn’t face up to the problem a lot of people were going to get hurt. And we couldn’t let that happen” she says in the video.

Raimondo, who is being sued by the state’s public-employee unions, next says: “Our reforms passed by overwhelming majorities in the legislature and, in the end, most of our changes were agreed to by every union except one.”

The Taveras campaign has been extremely critical of the hedge funds investments and accompanying investment fees incurred by the state’s pension system under Raimondo’s watch.

A Taveras spokesperson responded to Raimondo’s new ad:

“As a former venture capitalist who raised fees to Wall Street to $70 million, the Treasurer [Raimondo] has taken over $500,000 from the financial industry. The Treasurer received a no bid, secret contract managing taxpayer money that ensured that her venture capital firm was paid whether they made money or not. Rhode Island deserves a governor who has a record of standing up to Wall Street.”

Raimondo has been adamant that most unions were receptive to her reforms. But several union leaders have gone on record to say that is not the case. As the leaders told the Providence Journal:

Leaders of several of the state’s public-employee unions — including Council 94, American Federation of State, County and Municipal Employees — accused Raimondo of misrepresenting their position in the high-stakes pension fight headed for trial next month.

“Council 94, AFSCME vigorously opposed the pension changes. The treasurer’s process was a farce,” said Council 94 President J. Michael Downey, a Taveras backer.

“Our ideas and suggested amendments were ignored. She broke her word about taking care of people with the least amount of pension benefits, in her words: ‘the little guy.’ And she harmed many municipal employees whose pensions were healthy,” Downey said.

Added Paul Reed, president of the Rhode Island State Association of Firefighters: “She never negotiated with us on any of these things.”

Both of those union leaders support Taveras.

Watch Taveras’ original ad below:

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