Author: Ted Ballantine

The Illinois Supreme Court in the last 18 months has struck down pension reform laws at the state and city level.

But Illinois and Chicago officials are likely to try again, and are still studying options for changing pension benefits and bringing costs down.

They are studying two options in particular. Crain’s Chicago explains:

One option involves offering workers something to give up part of their pension benefit, the so-called “consideration” model. Its major proponent is Senate President John Cullerton, who’s trying to line up the votes to pass it through his chamber later this spring.

Another plan would buy out pensions, offering workers a pile of money they would control and invest themselves in exchange for giving up their rights to a defined-benefit plan. The plan is particularly popular with Republicans and conservative groups.

But neither option would provide more than a fraction of the savings to taxpayers that earlier plans covering state workers and city laborers and white-collars employees would have. And the legal fraternity is divided over whether either will pass constitutional muster with the court, though the buyout option may have a fair shot.

[…]

Cullerton, however, points to a section in the most recent ruling—see paragraph 53—that says benefits could be reduced in exchange for another “additional benefit.”

Since nobody working for government ever is guaranteed a salary hike, the General Assembly can require workers to choose between having pay increases through the years included in their pension base or giving up the 3 percent compounded annual benefit hike that retirees now get each year to make up for inflation, he argues.

Bruce Rauner has all but endorsed Cullerton’s plan. But legal experts are split as to whether the plan would hold weight in the state Supreme Court.

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2015 was a roller-coaster year for pension plans, but the largest corporate pension plans ended up roughly in the same place as they started.

The funding status of the 100 largest U.S. corporate pension plans improved just 0.1% in 2015, according to a report from Milliman.

In a release, the study’s co-author remarked on the “strange” year:

“What a strange year for these 100 pension plans,” says Zorast Wadia, consulting actuary and co-author of the Pension Funding Study. “These pensions weathered volatile markets, unpredictable discount rate movements, adjusted mortality assumptions, pension risk transfers, and an industry-wide decline in cash contributions…and yet they still finished the year almost exactly where they began. Given all that transpired in 2015, plan sponsors may be relieved that plans did not experience funded status erosion like that of the prior year. But that doesn’t change the fact of a pension funded deficit in excess of $300 billion.”

Study highlights include:

Actual returns well below expectations. Actual plan returns were 0.9% for the year—just a fraction of the expected 7.2%.

Impact of updated mortality assumptions. Pension obligations at the end of 2015 were further reduced to reflect refinements in mortality assumptions. While we are unable to collect specific detail regarding the reduction in PBO, a 1% to 2% decrease has been anecdotally reported. Additional revisions to mortality assumptions may be published in the fourth quarter of 2016.

Cash contributions reduced by almost $9 billion. Approximately $40 billion was contributed in 2014, with that number falling to $31 billion in 2015. The likely cause of the decline: the continuation of interest rate stabilization (funding relief) courtesy of the Bipartisan Budget Act of 2015.

Read the full study here.

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The U.S. Department of Labor on Wednesday unveiled the final version of its fiduciary rule, which will apply to financial advisors and brokers who give retirement advice.

The rule, though it has been softened from previous iterations, puts in place more stringent rules requiring brokers to act in the best interest of their clients.

More from the Wall Street Journal:

About $14 trillion in retirement savings could be affected by the rule, which requires stockbrokers providing retirement advice to act as “fiduciaries” who will serve their clients’ “best interest.” That is stricter than the current standard, which only says they need to offer “suitable” recommendations, a standard that critics say has encouraged some advisers to charge excessive fees or favor investments that offer hidden commissions.

Still, reflecting intense lobbying from the financial industry that has fought the regulation since it was first proposed six years ago, the final version includes a number of modifications aimed at softening some of the most contentious provisions.

Among such changes: extending the implementation period of the rule beyond the end of the current administration; giving advisers more flexibility to keep touting their firm’s own mutual funds and other products; and curbing the paperwork and disclosure requirements.

[…]

The latest rule also clarifies that brokers and others can continue offering a wide range of guidance without having to clear the “fiduciary” bar for “advice.” It specifies that investor education isn’t considered advice, allowing companies to continue providing general education on retirement savings. Also excluded from the advice category are general circulation newsletters, media talk shows and commentaries as well as general marketing materials.

For a great explainer on the rule, check out this Reuters piece.

The Canada Pension Plan Investment Board (CPPIB) this week entered an agreement to buy 40 percent of Glencore’s agricultural unit.

Glencore is a commodity trading and mining company.

More from Reuters:

The sale values the agricultural unit as a whole at close to the initially expected $10 billion, including $0.6 billion in debt and $2.5 billion in inventories, and comes after Glencore said last month it was stepping up its debt reduction plan by unloading more assets.

[…]

The purchase is by the pension fund’s investment unit, Canada Pension Plan Investment Board (CPPIB), which seeks long-term low-risk investments.

“Glencore Agri complements our existing portfolio of agriculture assets, bringing global exposure, scale and diversification,” CPPIB’s global head of private investments, Mark Jenkins, said in a statement

Glencore expects the agriculture deal to complete in the second half of 2016. The business comprises more than 200 storage facilities globally, 31 processing facilities and 23 ports, allowing Glencore to trade grains, oilseeds, rice, sugar and cotton.

It generated core earnings of $524 million in 2015 and had gross assets of more than $10 billion.

Under the agreement, Glencore has the right to sell up to a further 20 percent stake. Glencore and CPPIB may also call for an initial public offering of Glencore Agri after eight years from the date of completion, the companies said.

CPPIB managed $282.6 billion (CAD) in assets as of late 2015.

Photo credit: “Canada blank map” by Lokal_Profil image cut to remove USA by Paul Robinson – Vector map BlankMap-USA-states-Canada-provinces.svg.Modified by Lokal_Profil. Licensed under CC BY-SA 2.5 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Canada_blank_map.svg#mediaviewer/File:Canada_blank_map.svg

This summer, Japan’s Government Pension Investment Fund will release its FY 2015-16 annual results.

The report is likely to contain some bad news: an annual loss of about $54 billion, possibly the largest loss for the pension fund since the financial crisis.

More from Bloomberg:

The $1.3 trillion Government Pension Investment Fund will on July 29 announce what may be its worst annual loss since the global financial crisis — about three weeks later than usual and after an upper house poll that must be held before July 25. SMBC Nikko Securities Inc. estimates the decline for the fiscal year ended March at as much as 6 trillion yen ($54 billion).

[…]

In 2014, GPIF announced a shift from bonds into stocks as it sought higher returns for Japan’s rapidly-aging population and assets that would do better in an inflationary environment. That initially worked well, with the fund posting a 12 percent return in the year through March 2015.

Since then, asset managers have struggled amid a global downturn in equities. Japan’s Topix index is down 24 percent from an August peak. GPIF lost 511 billion yen in the nine months through December, its quarterly results show. SMBC Nikko estimates the fund slumped by 5 trillion yen in the three months through March, as the Topix fell 13 percent and the yen strengthened.

“Having the announcement so late can only be out of a desire to reveal the losses after even a delayed House of Councillors election,” said Michael Cucek, an adjunct fellow at Temple University’s Japan campus. The extent of the damage it will cause to the administration is unclear, he said.

The GPIF oversees $1.2 trillion in assets.

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U.S. prosecutors on Tuesday announced charges against two former State Street executives who allegedly defrauded a handful of clients, including pension funds in the U.K. and Ireland.

Prosecutors allege that between 2010 and 2011, the two execs added hidden fees to transactions conducted by the pension funds. It didn’t take long for one of the funds to ask whether it had been overcharged.

More from Reuters:

Ross McLellan, a former State Street executive vice president, was arrested on charges including securities fraud and wire fraud, prosecutors said. The indictment was filed in federal court in Boston, where the custody bank is based.

The indictment also charged Edward Pennings, a former senior managing director at State Street who is believed to be living overseas and was not arrested, prosecutors said.

[…]

The case followed a 2014 settlement between State Street and the UK Financial Conduct Authority in which the bank paid a fine of £22.9 million (about $37.8 million) for charging the six clients “substantial mark-ups” on certain transitions.

According to the U.S. indictment, McLellan, Pennings and others conspired from February 2010 to September 2011 to add secret commissions to fixed income and equity trades performed for the six clients of a unit of the bank.

The commissions came on top of fees the clients had agreed to pay and despite written instructions to the bank’s traders that the clients should not be charged trading commissions, prosecutors said.

Both McLellan and Pennings took steps to hide the commissions from the clients and others within the bank, prosecutors said. They said the scheme had come to light after one client in 2011 inquired whether it had been overcharged.

The case is U.S. v. McLellan, U.S. District Court, District of Massachusetts, 16-cr-10094.

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On May 7^th, retired members of the Central States Pension Fund will find out whether their previously ironclad pension benefits will be cut or preserved.

The cuts were proposed by the plan itself. A 2014 federal law allows multiemployer plans to propose pension cuts in order to stave off insolvency; the cuts must be approved by the Treasury Department via mediator Kenneth Feinburg.

More details from the Columbus Dispatch:

A federal mediator will decide by May 7 whether to accept a proposal from the Central States Pension Fund to slash benefits for thousands of retirees to keep the fund from going broke, according to Bloomberg.

Kenneth Feinberg, appointed by the Treasury Department to review the plan, has held town-hall style meeting with retirees in eight states to get their input into the plan, including one in Columbus in last December.

A law passed by Congress in 2014 gives struggling pension funds that serve multiple employers like Central States a way to cut benefits to help them survive. The pension fund provides benefits to retired Teamsters members, many of whom were truck drivers for several companies.

How Feinberg rules figures to be significant. Central States is the first fund to ask to cut benefits and other struggling multi-employer plans will be watching closely to see what Feinberg will do and whether they should take similar actions.

This case is interesting because it’s the first of its kind.

Feinburg previously mediated victim compensation during the BP oil spill disaster.

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The Pension Benefit Guaranty Corp. risks becoming insolvent within a decade – or sooner – if premiums paid by multiemployer plans aren’t raised, according to the agency’s latest Five-Year report.

The PBGC is required to file the report to Congress every five years.

Premiums were recently raised by a significant margin; but they will need to be raised again to keep the PBGC solvent, according to the report.

More details from BenefitsPro:

In 2016, enrollees pay a $27 per-participant premium. The Multiemployer Pension Reform Act of 2014 doubled premiums to $26 for 2015.

PBGC’s 2014 projections report estimated that the agency’s premium levels and returns on assets will be enough to sustain the multiemployer program for the next five to nine years.

As of September 2014, the program held $1.8 billion in assets, and had $44.2 billion in expected liabilities. PBGC projects that the program has a greater than 50 percent chance of going insolvent by 2026.

In 2015, PBGC reported the multiemployer plan deficit had widened to $52.3 billion.

The report does not recommend how much premiums need to be increased.

The White House’s 2017 budget proposes giving PBGC authority to increase premiums, and set a variable rate premium that would assess higher rates on financially troubled plans. It estimates that would raise $15 billion for the program.

The budget also proposes a new “exit” premium for sponsors that leave plans.

Under existing law, Congress sets premiums.

Read the full report here.

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The new President of Japan’s Government Pension Investment Fund pledged this week to take a long-term view on investing; he also dropped several other tidbits, including his intention to not push to manage stocks internally.

Norihiro Takahashi took the reins of the pension fund on Friday.

More from Bloomberg:

Japan’s $1.2 trillion Government Pension Investment Fund is willing to ride out market turbulence, said its new head, who pledged to maintain the asset manager’s long-term strategy.

Norihiro Takahashi, 58, takes over as president of the world’s biggest pension fund from Friday. Being a responsible steward of the nation’s retirement savings is a top priority, Takahashi said at a press conference in Tokyo. GPIF should diversify across asset classes including non-traditional ones, he said.

“For an organization to achieve long-term returns, they need to approach their portfolio management the same way,” said Takahashi, speaking after the health ministry appointed him to the top job on Friday.

[…]

Takahashi won’t push to manage stock investments internally after a proposal to do so was deferred, he said. He joins GPIF with a pedigree including managing a debt portfolio at Norinchukin Bank, an agricultural cooperative lender. He was most recently president of closely held JA Mitsui Leasing Ltd.

GPIF oversees $1.2 trillion in assets.

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