Author: Ted Ballantine

The Central States Pension Fund may cut its members’ benefits this month under rules brought forth by the Multiemployer Pension Reform Act (MPRA) of 2014.

The Act allows multiemployer pension plans to voluntarily cut their members’ benefits to improve solvency.

A new bill, introduced by Senate Democrats last week, adds a Yankee Wrinkle to the whole situation: it proposes that if a plan aims to cut its members’ benefits, the plan’s executives should also have their pay frozen.

More from the Hill:

A group of Democratic senators want to see pension executives suffer a pay cut if the plans they monitor cut benefits.

A new bill unveiled Tuesday takes square aim at executives of pension plans that are considering cutting benefits, as lawmakers want to ensure that top officials feel some of the resulting pain as well.

The cuts would impact hundreds of thousands of union workers, but the senators contend that top executives should have some skin in the game too. In a press release announcing the bill, the senators noted that the fund’s top executive made nearly $700,000 in 2014 and that the fund has also hired lobbyists to help make its case in Washington.

[…]

Under the new bill, pension fund executives would face a cut in their pay proportional to the steepest benefit cuts any retiree would face under their pension plans. Furthermore, no executives would receive a bonus while benefit cuts are in place, and pension plans seeking benefit cuts would be barred from spending money on lobbyists.

“Fund assets shouldn’t be spent on excessive salaries and compensation for Washington lobbyists while critical retirement benefits for ordinary folks are slashed,” added Sen. Claire McCaskill (D-Mo.), another sponsor. “That’s basic fairness, and it’s appalling that executives would give themselves a pat on the back and a bonus while hurting retirees.”

The bill – which sits in a Senate controlled by Republican lawmakers – is unlikely to go very far. But lawmakers from both parties are interested in limiting the pain of the multi-employer pension cuts.

Investment staffers at public pension funds are under-compensated relative to the market — and that’s dangerous to the long-term prospects of the funds, according to several top CIOs who spoke at the Milken Institute Global Conference this week.

If public pension funds don’t begin giving their staff higher wages, they won’t have the talent to meet return targets, according to the panelists.

U.S. pension funds could look to their Canadian peers for a roadmap.

More from ai-cio.com:

“If it doesn’t get fixed, no, you won’t meet the target rates of return. You won’t have the talent,” said Vicki Fuller, CIO of the $185 billion New York State Common Retirement Fund.

On a $1 billion private equity mandate, for example, New York’s fund might spend $30 million to $50 million in fees per year. The employee responsible for that mandate? “$150,000,” Fuller pointed out. “It doesn’t make sense.”

The net investment of increasing staff wages to effectively manage assets in-house would be paid off many times over, according to panelist Chris Ailman, CIO of California’s $187 billion teachers’ retirement system. He knows from experience.

“In the public markets, it costs us about one-tenth the cost to run money in-house as it does to hire an external manager,” Ailman said. “If we could run money in private markets and do direct deals, it would probably be 25 times cheaper.”

Ailman and Fuller lauded Canadian pension funds for solving the issue through arm’s-length governance structures and market-competitive wages.

Ron Mock, CEO of Ontario Teachers’ Pension Plan, earned C$4.3 million (US$3.4 million) in 2015, for example. His predecessor took home double that in 2013. At $133 billion, the fund has among the best long-term track records of any pension investor worldwide, net of expenses.

In its first U.S. transportation investment, CalPERS has bought a 10 percent stake in the Indiana Toll Road Concession Company LLC, which operates the 157-mile Indiana Toll Road.

It bought the share from IFM Investors.

More from a release:

“This solid, long-term investment represents our first foray into a transportation asset in the United States,” said Paul Mouchakkaa, Managing Investment Director for CalPERS’ Real Assets program. “We continue to make progress building up this important program, and the ITRCC aligns well with our recently adopted strategic plan for real assets.”

The ITR spans northern Indiana, from its border with Ohio to the Illinois state line near Chicago. ITRCC has the exclusive right to collect revenues from the toll road for the next 65 years. IFM Investors continues to hold more than 85 percent of ITRCC. Pricing and details of the purchase are not being released at this time.

The role of CalPERS’ Infrastructure program is to hold ownership of essential infrastructure assets that provide predictable returns with moderate long-term inflation protection. Infrastructure also acts as an economic diversifier to equity risk in the portfolio. With this purchase, the program makes up slightly more than one percent of the total fund, with a net asset value of approximately $3.1 billion.

A new bill, filed on Tuesday by Illinois Sen. Daniel Biss, aims to make private equity agreements more LP-friendly.

HB6292 bears resemblance to a recent California bill, but goes even further.

Naked Capitalism describes the bill:

It is a vastly more ambitious and painstakingly drafted bill than its California counterpart, AB 2833.

A key difference is that Biss’ bill opens new terrain by requiring disclosure of some of the most troubling terms of private equity limited partnership agreements, specifically, the indemnification provisions, the clawback language and management fee waivers.

[…]

HB6292 also lifts the veil on management fee waivers. […] HB6292 requires both that the management fee waiver provisions in limited partnership agreements (including all definitions necessary to understand how the provision operates) be among other things, published material on its website, and “the amount of all management fee waivers made” be disclosed annually.

The bill also provides for disclosure of the signature block of the executed limited partnership agreement.

On the fee transparency front, while the Illinois bill focuses on issues similar to Chiang’s legislation, the approach is dramatically different. HB6292 has an exacting set of definitions. I spoke to Senator Biss about his approach and whether he had conferred with Chiang’s office. Biss said that he’d not known about the shortcomings with private equity disclosure until Chiang announced his intention to sponsor legislation last fall:

I thought I should learn more about it. I spoke to as many people as I could. The more I learned, the more troubling I found it. I didn’t think it was sustainable in the long run. I thought there was an opportunity and I wanted to play a role in this change.

Among large investors, pension funds are leading the way on mitigating climate risk in their portfolios, according to a recent study.

On the sidelines of the Milken Institute Global Conference on Monday CalSTRS CIO Chris Ailman spoke to Bloomberg about investing and climate change.

 

Video credit: Bloomberg

 

Whether through engagement, risk management or low-carbon investments, the largest pension funds in the world are leading the way on addressing climate risks, according to a new report from the Asset Owners Disclosure Project (AODP).

The same can’t be said for many of the world’s largest investors. In fact, AODP found that nearly half of the world’s 500 largest investors aren’t doing anything to address those risks.

AODP graded the world’s largest investors on the actions they’ve taken to mitigate the risk of climate change to their investment portfolios. The 10 highest-graded entities were all pension funds (see above chart).

More info on the laggards, from ai-cio.com:

Of the funds that scored the lowest on AODP’s index, the largest were predominately sovereign wealth funds from oil-producing nations and Asian insurers, including the Abu Dhabi Investment Authority, which manages approximately $773 billion, and Japan Post Insurance, worth $602 billion.

“I would encourage all of them to pick up the pace and ramp up their ambition in respect to a low carbon transition,” said Christiana Figueres, executive secretary of the UN Framework Convention on Climate Change. “It is the key to reducing risk and securing the health of their portfolios now and over the long term.”

[…]

AODP’s annual Global Climate 500 Index, which tracks the 500 largest funds in the world, found that 246 investors managing $14.3 trillion are doing nothing to address the investment risks related to climate change.

Read the full report here.

At the Berkshire Hathaway Inc. annual shareholders meeting over the weekend, Warren Buffett ripped into hedge funds and other investment vehicles associated with investment fees.

He specifically mentioned pension funds’ appetite for those vehicles.

From the Chicago Tribune:

After telling shareholders that he would offer “probably the most important investment lesson in the world,” he said Wall Street salesmanship has masked poor returns for years. Consultants, he added, have steered pension funds and others to high-fee managers who, as a group, underperform what you could get “sitting on your rear end” in index funds. The arrangements “eat up capital like crazy,” he said.

Buffett was building on an argument he’s been making for years about why backing U.S. businesses in aggregate, through low-cost funds, is the more certain way to prosper over the long haul.

[…]

Compounding the problem are middlemen who charge fees to pick managers, Buffett told shareholders.

“Supposedly sophisticated people, generally richer people, hire consultants. And no consultant in the world is going to tell you, ‘Just buy an S&P index fund and sit for the next 50 years,'” he said. “You don’t get to be a consultant that way, and you certainly don’t get an annual fee that way.”

That’s the key to the argument, said Richard Cook, a fund manager in Birmingham, Alabama, who made the trip to Omaha. Buffett still believes that some active investors can beat the S&P 500 over time, Cook said, but in a fund of funds “the fees on fees just destine you to lose.”

Hedge funds have experienced outflows of $16.6 billion over the last two quarters, according to Hedge Fund Research.