Author: Ted Ballantine

Canada Pension Plan Investment Board (CPPIB) CEO Mark Wiseman is leaving his post next week. But he’s using his remaining time to defend his fund’s active investment strategy.

Wiseman and incoming CEO Mark Machin wrote a column in a major Canadian newspaper on Monday defending the fund’s active investment strategy.

Ai-cio.com has the highlights:

“We can say with confidence that our strategy is adding value,” Wiseman and Machin wrote.

Through active management, the incoming and outgoing CEOs said CPPIB has been able to capitalize on structural advantages including its long-term horizon, stable and predictable flow of contributions, and size. Additionally, they said active management has made it possible for CPPIB to address risks such as climate change.

“To ignore these advantages would be the sporting equivalent of benching Sidney Crosby, Connor McDavid, and Steven Stamkos for an Olympic gold-medal hockey game,” they wrote.

While critics have attacked the fund’s increasing costs, Wiseman and Machin argued that these costs need to be examined in the context of the additional long-term returns the fund has generated.

“Active management requires more resources, and therefore more expenses, than a passive strategy,” they concluded. “But we firmly believe that it generates significantly higher risk-adjusted returns.”

Read the column here.

 

On Monday, a NJ Assembly committee advanced a Democrat-backed proposal that would amend the state constitutional to lock in iron-clad, full, quarterly pension payments from the state.

Now, Republicans have offered up their own proposal – or rather, revived a plan initially proposed last year.

Their version would also amend the constitution to require annual contributions from the state. But it would pay for the measure by requiring workers to pay more of their health care costs.

From NJ.com:

Assemblyman Declan O’Scanlon’s legislation, introduced Monday, revives a dormant plan proposed by the governor’s special pension commission last year to overhaul public employees’ benefits and save their employers billions of dollars a year.

While it would require workers to pick up more of the cost for their heath care, they would be rewarded with a constitutional amendment obligating the state to contribute to the public pension system annually — unless tax collections are in trouble.

O’Scanlon (R-Monmouth) unveiled the sweeping legislation Tuesday, just one day after an Assembly committee voted in favor of a Democratic plan to grant workers that constitutional protection.

[…]

Broadly, active employees would be moved onto health care plans equivalent to gold plans under the Affordable Care Act, and retirees would be given retiree reimbursement accounts to cover the cost of purchasing coverage through a private exchange.

Active employees would pay lower annual premiums, because the total cost of the plan is lower, but higher out-of-pocket expenses.

The head of the Massachusetts Bay Transportation Authority (MBTA) pension fund on Monday revealed he’d be stepping down in August.

His fund has been at the center of controversy because, until recently, it was not subject to FOIA laws and does not hold open meetings. It has also had its accounting questioned.

Mass. Governor Charlie Baker signed a bill last month changing that. Additionally, a judge in March ruled that records should be public.

More from the Boston Globe:

A former bus driver who served as general manager of the transit authority before moving to the $1.5 billion pension fund, [Michael H.] Mulhern said he was leaving with “decidedly mixed emotions” after a decade in the job.

Mulhern, 57, has been under pressure from union and administration officials over the pension’s lack of transparency, after a $25 million hedge fund loss in 2012 went undisclosed for more than a year.

The pension fund for employees at the Massachusetts Bay Transportation Authority is organized as a private trust and has used that status to avoid disclosures that are typical of other pension funds for public workers in the state. The fund does not hold open meetings, for example, and for years has published late and incomplete annual reports.

[…]

There are other potential issues lurking in the projections, critics say, including the valuation of alternative assets such as hedge funds and private equity that the FTI report did not fully examine.

In addition, the fund disclosed in a recent audit that it assumes 100 percent of its employees are men, while, in reality, one-quarter are women.

A proposed constitutional amendment, which would require New Jersey to make full, quarterly contributions to its pension funds, passed a state Assembly committee on Monday by a 5-2 vote.

State Democrats, who have been championing the amendment for years, are pushing for placement on the November ballot.

More from Nj.com:

An identical resolution was passed by the Legislature last year and must pass again this year in order to qualify for the fall election, which is expected to see high turnout from the presidential race.

The measure (ACR109) was approved by a 5-2 vote along party lines, with Republicans expressing concerns that the mandatory payments could lead to steep tax increases.

[…]

Without the amendment, the size of the state’s payment — or whether the state makes one at all — is at the discretion of the governor and the Legislature. That’s part of the reason the state’s portion of the pension system is only about 48.6 percent funded.

The amendment also would force the state to make the contribution into the retirement fund in installments throughout the year. State Senate President Stephen Sweeney (D-Gloucester) has said waiting until the end of the year costs the state millions of dollars in investment earnings.

New Jersey Democrats are making another push – the latest of many over the past year – to create a (state) constitutional amendment that would force the state to make its pension contributions each year, and on a quarterly basis.

[Read the amendment here.]

New Jersey’s pension system is 48 percent funded, largely because numerous governors have elected to skimp on the state’s pension contributions over the last 20 years.

As far as the amendment, lawmakers are aiming for placement on the state’s November ballot.

More from NJ.com:

The state Legislature approved the ballot question last year and must pass it again this year with a simple majority in order to qualify for the fall election. The controversial question would ask voters whether they want to constitutionally protect those pension payments.

The measure goes before the state Assembly Judiciary Committee Monday morning.

[…]

Led by state Senate President Stephen Sweeney (D-Gloucester), proponents say that what is a hefty bill now will grow unmanageable later if payments are put off.

The Democrats who control both houses don’t need Republican support to put the question on the ballot. Christie also has no say in referendums.

“If we don’t do this, by 2026 or 2027, when the pensions go broke, it’s nine or ten billion dollars. And that’s coming out of the budget. Directly out of the budget,” Sweeney has said. “That’s armageddon.”

The amendment also would force the state to make the contribution into the retirement fund in installments throughout the year. Waiting until year’s end costs the state millions of dollars in investment earnings, Sweeney said, and has left it vulnerable to last-minute cuts.

Christie twice vetoed such bills, calling it “an improper and unwarranted intrusion upon the longstanding executive prerogative to determine the appropriate timing of payments in order to properly match the timing of large annual expenditures with the timing of the actual receipt of state revenues.”

Two consultants disagreed slightly on how corporate pensions’ aggregate funding status changed in May; but the bottom line is that funding levels remained largely unchanged.

Mercer reports that the aggregate pension funding status of S&P 1500 companies increased 1 percent over the course of the month.
Meanwhile, Wilshire said the funding ratio of the same group decreased slightly.

More from BenefitsPro:

Mercer reported that S&P 1500 companies saw their pension plans’ estimated aggregate funding level increase, by one percent, to 79 percent as of May 31.

However, Wilshire Consulting said that the aggregate funded ratio for U.S. corporate pension plans decreased by 0.7 percentage point by the end of May to 76.8 percent. That, said Wilshire, matched the low point over the past twelve months and brought the year-to-date decline to 4.6 percentage points.

Wilshire said that the monthly change in funding resulted from a 0.8 percent increase in liability values versus relatively flat asset values (-0.1 percent). The year-to-date decrease in funding is the result of an 8.6 percent increase in liability values.

Increasing discount rates and relatively flat equity markets were responsible for the increase, according to Mercer, which said that as of May 31, the estimated aggregate deficit of $498 billion decreased by $6 billion as compared to the end of April.

The aggregate deficit is still up by $94 billion, it added, from the $404 billion deficit measured at the end of 2015.

Chicago’s new pension reform deal – which last week survived a Bruce Rauner veto – isn’t impressing Moody’s.

The deal gives the city a longer timeline to ramp up to making full payments to its Police and Fire pension fund. Chicago finance officials are wiping the sweat from their brows after the legislature overturned Rauner’s veto, because the savings from the bill has already been worked into the city’s 2016 budget.

Moody’s says the deal is a “credit negative” for the city, because it increases unfunded liabilities at the expense of smaller payments now.

From the Chicago Sun-Times:

“While the new law does provide short-term budget relief by reducing these pension plan contributions by $220 million, Chicago pension contributions will now fall far short of amounts needed to curb growth in its unfunded pension liabilities, a credit negative. By paying less now, Chicago risks having to pay much more later,” Moody’s wrote in its new Weekly Credit Outlook for Public Finance.

[…]

According to Moody’s, that means the city’s contributions to the two funds will be “insufficient to cover interest accruing on accumulated unfunded pension liabilities to continue growing.”

Based on current actuarial assumptions, Moody’s estimated that the unfunded liabilities of both plans will “now increase for almost 20 years, growing $3.3 billion over their reported year-end 2014 values.”

“If plan investment returns do not meet return assumptions, the risk of greater cost growth increases,” Moody’s said.

The report noted that 2015 investment returns for all four of the city’s pension funds “ranged from -1.5 percent to +1.8 percent.” That’s “far below assumed returns” of 7.5 to 8 percent.”

For anyone needing a refresher on the terms of the pension deal, here are the details via Reuters:

The measure alters a 2010 state law that boosted Chicago’s payments to its public safety workers’ pensions in order to reach a 90 percent funded level by 2040. Under that law, Chicago’s contribution will jump to nearly $834 million this year from $290.4 million in 2015, according to city figures.

The new law reduces the payment to $619 million and allows for smaller increases through 2020 than under the 2010 law. It also gives the police and fire funds until 2055 to become 90 percent funded. The police system is 26 percent funded and the fire system 23 percent funded.

Chicago’s fiscal 2016 budget assumed the bill’s enactment by lowering the city’s contribution to police and fire pensions by about $220 million.

 

At the Milken Institute Global Conference last week, several of the world’s top CIOs talked about taking the long view and the dangers of short-termism.

The panel included Chris Ailman, CIO of CalSTRS; Vicki Fuller and Scott Evans, CIOs for New York State and New York City, respectively; and Hiromichi Mizuno, CIO of Japan’s Government Pension Investment Fund.

Video credit: Milken Institute

 

 

The median U.S. public pension fund returned 1.24 percent in the 1^st quarter of 2016, according to a report from Wilshire.

That level of return, if annualized, would fall short of most funds’ assumed rate of return. Most of the public pension funds in the study have target returns of 7.25 – 8 percent.

More from Bloomberg:

The results mean that public pensions, which typically target annual returns of 7 percent or greater, will have to make up ground the rest of the year. If they don’t, governments eventually have to pump more taxpayer money into the funds to make up for the shortfall. The modest returns following gains of 2.73 percent during the fourth quarter and a losses of 4.6 percent in the three months through September.

“You’d be going back to the contributor and saying we need to have more funding,” said Robert Waid, a managing director at Wilshire Associates in Santa Monica, California.

The Standard & Poor’s 500 stock index returned about 1.3 percent during the first three months of the year, while the MSCI index of international equities lost 3 percent. The Barclays U.S. Aggregate bond index gained 3 percent.

Public pensions with more than $5 billion in assets, which have more invested with hedge funds and private-equity funds, performed slightly worse than others. Large pensions logged a median 1.15 percent for the quarter, dragged down by their investments in hedge funds. Those investment vehicles lost 3.3 percent before fees for the quarter and 5.9 percent for the year ending March 31, according to Wilshire TUCS.