Ted Ballantine | Pension360

Russia Diverts Pension Contributions To Plug Other Budget Holes

pensii_941 — CREDIT: Natalia Mikhaylenko, RBTH

For the second straight year, Russia has decided to freeze its contributions to its pension funds and instead use the money to plug budget holes elsewhere.

Russia says the money will be used for more pressing needs elsewhere in the budget. But critics claim the action could be a costly one. Russia Beyond The Headlines reports:

For the second year in a row, the Russian government has decided to freeze the portion of pension contributions allocated for investment.

Contributions for 2013, amounting to some 550 billion rubles ($15.2 billion), have already been frozen, with the government intending to do the same with a further 700 billion rubles’ worth of pension savings for 2014.

The move, which the Ministry of Labor and Social Protection says is necessary in order to finance current pension payments, will leave major Russian companies without investment and will force banks to raise interest rates.

The negative effects are already being felt by ordinary Russians: At the end of last year, minimal interest rates for individuals started at 8 percent, whereas in 2014 loans have become 2 percent more expensive, with interest rates starting at 10 percent.

This year’s situation will be further exacerbated by the departure of foreign investors, Baranov adds.

“This will result in the cost of loans and debt refinancing growing in 2015 for banks and corporations, for the federal and regional finance ministries. It is hard to estimate the exact figure that they will have to pay extra, but it will be comparable with the amount of frozen funds, i.e. the very same 700 billion rubles or maybe even more,” Baranov says, predicting the potential consequences.

Russia’s pension funding is experiencing turbulence due to a demographic shift that has more people retiring and less people contributing to the system. From RBTH:

Sergei Khestanov, an economist for the ALOR Group, explains that the deficit in the Pension Fund has occurred because of the country’s demographic decline. The population is aging, and while 20-30 years ago there were 6 workers to one pensioner, now there are fewer than two, and their contributions do not cover current needs.

That demographic shift won’t be reversing itself anytime soon. So while the pension freeze helps plug current shortfalls, it only exacerbates future problems.

Reuters reported earlier this month that there was “deep disagreement” among Russian officials regarding the contribution freeze.

Union Coalition Wants Illinois Court To Act Faster In Case Against Reform Law

A coalition of some of the largest labor groups in Illinois filed a motion today calling on the court to speed up its ruling regarding the constitutionality of Illinois’ pension reform law.

The coalition, We Are One Illinois, says the Supreme Court’s July decision—where the court ruled retirees’ health benefits are protected under the state’s constitution—confirms that Illinois’ pension reform law is illegal.

From CapitolFax:

Yesterday, the We Are One Illinois coalition, along with other plaintiffs, filed a motion in Sangamon County urging the Circuit Court to enter judgment in the plaintiffs’ favor on the State’s affirmative defense in light of the recent Supreme Court decision in the case of Kanerva v. Weems. The We Are One Illinois coalition and other plaintiffs assert that the Kanerva decision confirms that the Pension Protection Clause in the Illinois Constitution is absolute and without exception, even with respect to the fiscal circumstances alleged by the State in its defense.

Illinois says its dire fiscal situation gives it the authority to cut to pension benefits, even if they are constitutionally protected. From Reuters:

The state has contended that its sovereign powers allow it to act in a fiscal emergency. Illinois has a $100 billion unfunded pension liability and the country’s worst funded state retirement system. Illinois’s credit ratings are also the lowest among U.S. states.

But the court’s July decision doesn’t bode well for the state’s case. At the time, the court wrote:

“[I]t is clear that if something qualifies as a benefit of the enforceable contractual relationship resulting from membership in one of the State’s pension or retirement systems, it cannot be diminished or impaired … Giving the language of article XIII, section 5, its plain and ordinary meaning, all of these benefits, including subsidized health care, must be considered to be benefits of membership in a pension or retirement system of the State and, therefore, within that provision’s protections.”

We Are One Illinois issued the following statement after filing the motion:

“The Kanerva decision confirms what we have always argued, that the state’s constitutional language guards against any diminishment or impairment of pension benefits that Senate Bill 1 imposes. We believe, then, that the State’s defense is without merit and so have asked the Court in this motion to rule in our favor on the State’s defense that seeks to justify Senate Bill 1. We maintain that the constitution protects the hard-earned and promised retirement savings of our members and remain ready to work with any legislator willing to develop a fair and legal solution to our state’s challenges.”

Photo credit: “Gfp-illinois-springfield-capitol-and-sky” by Yinan Chen, Via Wikimedia Commons

Defined benefit pension plan distribution decisions by public sector employees, by Robert L. Clark, Melinda Sandler Morrill and David Vanderweide

Authors: Robert L. Clark, Melinda Sandler Morrill and David Vanderweide

Journal: Journal of Public Economics

Abstract: Studies examining pension distribution choices have found that the tendency of private-sector workers is to select lump sum distributions instead of life annuities resulting in leakage of retirement savings. In the public sector, defined benefit pensions usually offer lump sum distributions equal to employee contributions, not the present value of the annuity. Thus, for terminating employees that are younger or have shorter tenures, the lump sum distribution amount may exceed the present value of the annuity. We discuss the factors that may influence the choice to withdraw funds or not in this environment. Using administrative data from the North Carolina state and local government retirement systems, we find that over two-thirds of public sector workers under age 50 separating prior to retirement from public plans in North Carolina left their accounts open and did not request a cash distribution from the pension system within one year of separation. Furthermore, the evidence suggests many separating workers, particularly those with short tenure, may be forgoing substantial monetary benefits due to lack of knowledge, understanding, or accessibility of benefits. We find no evidence of a bias toward cash distributions for public employees in North Carolina.

Get access to the entire article here: http://www.sciencedirect.com.flagship.luc.edu/science/article/pii/S0047272713001126

An analysis of critical accounting estimate disclosures of pension assumptions, by Mark P. Bauman and Kenneth W. Shaw

Authors: Mark P. Bauman and Kenneth W. Shaw

Journal: Accounting Horizons

ABSTRACT: Accounting for defined-benefit pension plans is complex, and reported financial statement amounts are significantly impacted by a myriad of assumptions. In its interpretative release FR-72 (2003), the SEC called for more informative and transparent Management Discussion and Analysis (MD&A) disclosure of critical accounting estimates (CAE), including those regarding pension plans. This paper uses a random sample of 147 firms with relatively large defined-benefit pension plans to analyze firms’ MD&A pension-related critical accounting estimate disclosures.

Get access to the rest of the article here: http://aaajournals.org/doi/abs/10.2308/acch-50823

Which Pension Fund Is Best At Investing In Private Equity? The Results Are In

Reuters PE Hub recently surveyed 160 public pension funds across the country in an attempt to pinpoint the fund with the highest-performing private equity portfolio.

The results of the survey were released this month, and the fund with the best performance from private equity was the San Diego City Employees Retirement System (SDCERS). From KUSI News:

SDCERS’ private equity portfolio consists of 45 different funds, with commitments of $580 million. The survey noted 47 percent of SDCERS’ funds performed in the top 25 percent of all funds surveyed. The private equity program invests in all types of assets and strategies globally, including buyouts, special situations and venture capital funds.

“The success of SDCERS’ private equity program can be attributed to the thoughtful way in which the program was constructed, and the quality of the dialogue between staff and consultants,” SDCERS CEO Mark Hovey said. “I am proud of our investments team and the Board of Administration, who work tirelessly to secure a retirement future for more than 200,000 members through an effective investment strategy focused on delivering long-term results.”

SDCERS shouldn’t be confused with the San Diego County Employees Retirement Association, which gained notoriety this week when the Wall Street Journal reported on the fund’s heavy reliance on alternative investments.

SDCERS was 68.6 percent funded as of 2013.

Would You Sell Your Future Pension For a Lump Sum of Cash? These Businesses Are Banking On It

You’ve heard of payday advances. But pension advances?

Believe it or not, businesses are popping up that allow retirees to do just that: “sell” a portion (or all) of their future retirement income in exchange for a lump sum of cash today.

The owners of these businesses admit that their service isn’t for everyone. But if you need to pay bills now, they say, then why not sell a portion of your pension for cash? More from Today:

Their pitch, aimed at military and government retirees with generous pension benefits and those with bad credit, is mighty appealing: cash now to pay today’s bills.

Of course, to get tomorrow’s money today, you have to sign over your future pension payments for a specified number of years.

Mark Corbett runs the website Buy Your Pension, which helps facilitate pension sales. He told TODAY that a pension advance is not for everyone, but he believes it can be beneficial for some people.

“You should not sell your pension unless it saves you money,” he said. “For example, you are using it to pay off bills.”

Four years ago, Corbett got an advance on his private pension — selling a $237,000 nest egg for $89,000 — to pay off his mounting bills. He called it “a godsend” that reduced his stress and probably added years to his life.

But critics say pension advance services are dangerous and financially unwise. The Federal Trade Commission, Financial Industry Regulatory Authority and other consumer protection agencies are already cautioning people to be know the implications of selling your pension. Today writes:

“There are serious financial consequences down the road for taking the money in a lump sum now,” said Gerri Walsh, FINRA’s senior vice president of investor education. “You are getting less money than if you waited and got those monthly pension payments.”

Unlike a traditional loan, you can’t get out of the deal early. If you signed up for a six-year payout, the company gets your pension for a full six years.

“A pension advance is unlike any other type of financing, because you’re required to sign over part of your future income stream,” said Leah Frazier, an attorney for the FTC.

“You could find yourself in a situation down the road where you need money for your basic expenses, but you don’t have it because you took it as an advance.”

And remember: Getting a lump sum pension payment is likely to have some serious tax implications.

“It could push you into a higher tax bracket,” said Lisa Greene-Lewis, lead CPA at TurboTax. “I could see people doing this and getting shocked by the additional taxes they now have to pay.”

The Government Accountability Office (GOA) recently did some secret shopping at nearly 40 pension advance businesses. Based on their experiences, they released a report indicating that they’d found numerous “questionable business practices”.

Last month, Missouri banned pension advances for public employees. They are the only state thus far to do so.

Photo by: www.SeniorLiving.Org

New Jersey Bill Would Make Corrupt Politicians Pay For Court Costs—From Their Pensions

In 2013, New York paid $600,000 in pension benefits to politicians who were occupying jail cells instead of offices.

That’s because New York’s constitution makes it nearly impossible to take away a person’s pension benefits—even if that person is a corrupt politician who was booted from office and sent to jail.

The same is true around the country, as at least six states protect pension benefits under their constitutions. It’s a well-meaning provision, but in the case of corrupt politicians it often has unintended consequences.

New Jersey has been paying attention to New York’s conundrum, and it wants no part of that game.

Three state legislatures (Sen. Christopher J. Connors, Assemblyman Brian E. Rumpf and Assemblywoman DiAnne C. Gove) recently proposed two initiatives that would shield taxpayers from the expenses that come with corrupt politicians—and force those politicians to pay for their court costs, among other things, by garnishing their pensions. From The Sand Paper:

The delegation’s first reform measure would make public officers or employees convicted of crimes affecting their office or found at fault in certain civil actions liable for the cost of prosecution and legal representation if received through the expense of public funds. Under the legislation, convicted persons would be subject to pension garnishment to satisfy the liability.

The second measure would allow a public employer to levy a judgment for restitution of illegally obtained funds against a convicted public employee’s retirement allowance. Provisions of the legislation would apply to any official’s or employee’s pension contribution to principal state-administered retirement systems.

One interesting segment from the lawmakers’ joint statement on the initiatives:

“When holding public office, you are answerable to the people whose tax dollars fund the operations of government,” the statement said. “Therefore, it would be appropriate to garnish the public pension of convicted politicians as a means of recovering the cost of their prosecution and legal defense as well as funds illegally obtained through the use of their government position. To do so would mitigate the cost of corruption on taxpayers, whose interests should be put first as the victims of such crimes.”

Illinois, Kentucky Pension Funds Benefit From $17 Billion Bank of America Settlement

A handful of pension funds will be receiving large chunks of change after Bank of America agreed today to pay $17 billion to end a Justice Department probe into the bank’s sale of toxic mortgage securities.

The Justice Department alleged that Bank of America violated federal law when it marketed and sold investment vehicles tied to shoddy home loans and misled investors about the quality of the investments.

Many pension funds were major investors in such investment vehicles and sustained major losses on those investments during the financial crisis.

But some funds will be getting a chunk of that money back, including numerous Illinois funds and the Kentucky Retirement System. From Red Eye Chicago:

For Illinois, the $16.65 billion national settlement means a cash payment of $200 million for the state’s pension system, making it whole for losses sustained as a result of the risky investments.

…

The Illinois pension entities that will receive the payments under Thursday’s deal are the Illinois Teachers Retirement System, the State Universities Retirement System and the Illinois State Board of Investment, which oversees pension plans for state employees, the General Assembly and judges.

Kentucky’s payout is substantially smaller than that of Illinois, but the KRS will still see some relief. From the Lexington Herald-Leader:

Kentucky Retirement Systems will get $23 million from Bank of America’s $16.65 billion national settlement with the federal government over accusations that the bank improperly dumped “toxic” mortgage-backed securities on the market, helping fuel the economic recession of 2008.

This isn’t the first major settlement stemming from toxic investments that have benefited pension funds. Earlier this year, CalPERS and CalSTRS received over $100 million combined when CitiGroup agreed to a $7 billion settlement.

Illinois was a beneficiary of the CitiGroup settlement as well, as three Illinois funds received a combined $45 million as reparations for their investment losses.

Photo by Mike Mozart via Flickr CC License

California Governor Calls Out CalPERS On Pension Tweak

Today CalPERS approved 99 types of “special pay”, or additional income that can be included in calculating a worker’s pension.

California Governor Jerry Brown was receptive to most of the “special pay” items—except for one. But it was enough to compel him to send a letter to CalPERS urging the board not to approve the pending changes.

At issue is a section of the CalPERS proposal that allows pension benefits to be increased based on temporary pay increases and ad hoc payments.

That contradicts a section of Jerry Brown’s 2012 reform law which states that pension benefits can only be based on “normal monthly pay”, and not “short-term” pay increases. From Reuters:

Although Calpers approved 99 types of extra pay that can be factored in to a worker’s income when calculating their pension, Brown only objected to one of those: allowing temporary upgrade pay to be counted as permanent, pensionable income.

Brown, a Democrat, sent a letter to Calpers last week asking them not to allow temporary upgrade pay to count toward pensions.

On Wednesday, the Calpers board rejected Brown’s opposition and voted to pass all 99 pay provisions, including that temporary pay hikes can be factored into a final pension.

“Today Calpers got it wrong,” Brown said in a statement. “This vote undermines the pension reforms enacted just two years ago. I’ve asked my staff to determine what actions can be taken to protect the integrity of the Public Employees’ Pension Reform Act.”

Read the full letter below, courtesy of the Sacramento Bee:

[A quick PSA, in case you don’t live in California: Edmund is the legal first name of Gov. Jerry Brown.]

Troubled Dallas Fund Returns 4.4 Percent For 2013

The Dallas Police and Fire Pension Fund (DPFPF) knew 2013 wasn’t going to be a great year for investment returns. They knew this because 2012 wasn’t a great year, and neither were the five years prior.

Even as numerous funds across the country have struggled with maintaining strong investment returns over that period, the DPFPF was performing worse than most.

Bad investment results are what led to the June firing of top administrator Richard Tettamant. Still, the fund had hoped a 13 percent return was in the cards for 2013—not an overly impressive number, given the S&P 500 had returned around 25 percent over the same period.

But that didn’t come to fruition. DPFPF’s return data was released this month, and the fund posted a grim 4.4 percent return for 2013, failing to meet its lofty 8.5 percent assumed rate of return.

What makes DPFPF different from other funds? For one, asset allocation.

According to the Center for Retirement Research, the average public pension fund allocates around 49 percent of its investments to equities, 7 percent to real estate and 27 percent to fixed-income strategies.

The DPFPF, on the other hand, invests significantly less in equities and bonds and significantly more in real estate. Its real estate investments did not do well.

Nor did its private equity investments. The fund says 45 percent of its private equity allocation is placed in two investments: Huff Energy and Red Consolidated Holdings.

Red Consolidated Holdings was flat on the year. But Huff Energy returned a negative 29.7 percent for 2013, which brought down the entire private equity portfolio.

This year isn’t an anomaly for the DPFPF. The fund has consistently under-performed its peers. From Dallas News:

Over the past five years, it has earned an annual return of 8.6 percent, according to preliminary figures from its consultant. That placed it 97th among about 100 similar-size funds, the consultant reported. The median annual return during that period was 12.2 percent.

In 2012, the fund earned 11.4 percent on its investments. The median annual return for similar funds was 12.2 percent.

The fund’s investment staff received big bonuses in 2013 nonetheless. That’s because the bonuses aren’t determined by how the fund performs relative to its peers. Instead, staff receive bonuses if investment performance beats the assumed rate of return.

Since the assumed rate of return for the DPFPF sits at 8.5 percent, the 2012 investment performance (11.4%) triggered the bonuses even though the fund under-performed relative to its peers.

Tettamant’s base salary in 2012 was $270,000, and he received over $100,000 in bonuses between 2012 and 2013.

Photo by Taylor Bennett via Flickr CC License

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