Author: Ted Ballantine

Last month, Pension360 covered a Kentucky bill that would give the state Senate the power to confirm certain high-ranking pension officials.

Just as controversially, the bill would require full disclosure of all investment fees and contracts – even those associated with PE and hedge fund investments.

The bill has already flown through the Senate. It currently sits in the House.

Kentucky Retirement Systems (KRS) executive director William Thielen spoke to CIO about his opposition to the bill, which he argues would politicize the hiring process and harm investment performance.

From CIO:

“Several provisions will make the systems less efficient, less competitive, and will result in the expenditure of additional funds,” Thielen argued.

The Senate would have final approval over executive director and board member appointments, and state government a significant role in KRS’s hiring process, including the last word on staffing and promotion decisions.

“We’ve got our issues here and it’s hard enough attracting applicants,” Thielen said, referencing KRS’s status as one of the worst-funded pensions in the country.

Thielen, who announced his intention to retire last year, has already had to stay on longer than planned due to a lack of qualified applicants for his position. Requiring Senate confirmation of executive director appointments would make finding a replacement that much more difficult, and more politicized, Thielen said.

[…]

Provisions regarding fee and holding transparency do also worry Thielen—but only because industry fee disclosure practices are not currently at the level that the bill would require.

“We are putting everything we have out there,” Thielen said, explaining that KRS already discloses fees by asset classes and reports returns as net of fees. “We just don’t want to be put in a position where we’re violating the requirement because we can’t get the information.”

Read the full story here.

KRS is among the worst-funded public pension system in the United States.

 

Photo credit: “Ky With HP Background” by Original uploader was HiB2Bornot2B at en.wikipedia – Transferred from en.wikipedia; transfer was stated to be made by User:Vini 175.. Licensed under CC BY-SA 2.5 via Wikimedia Commons

A group of Canadian institutional investors – including the Ontario Municipal Employees Retirement System and the Ontario Teachers’ Pension Plan – has agreed to buy the London City Airport.

The purchase price is just south of $3 billion, according to a source who talked to the New York Times.

More from the Times:

The airport, which handled flights for 4.3 million passengers in 2015, is relatively close to the City of London, the traditional home of London’s financial community, and to Canary Wharf, where many of the world’s biggest banks have their London offices.

Terms of the transaction were not disclosed, but a person with knowledge of the discussions, who was not authorized to discuss the matter publicly and who spoke on the condition of anonymity, said the purchase price was more than 2 billion pounds, or about $2.8 billion.

“London City Airport is a premium infrastructure company, operating in a very attractive market,” the consortium said in a news release. “We look forward to working closely with the airport’s strong management team to achieve the business’s full long-term potential.”

As well as the Ontario Teachers’ Pension Plan, the consortium includes the Ontario Municipal Employees Retirement System; Alberta Investment Management Corporation, a Canadian institutional investment manager; and Wren House Infrastructure Management, a unit of the Kuwait Investment Authority.

The Ontario Teachers’ Pension Plan is no stranger to airports; it holds stakes in three other airports around Europe.

 

Photo by Christian Junker via Flickr CC License 

A municipal pension fund in Michigan is leading a lawsuit against BHP Billiton Ltd, accusing the mining company of misleading investors about the safety of a particular project that ended in disaster last year.

BHP Billiton owns a dam in Brazil that burst in November 2015, leading to numerous deaths and criminal charges. It’s considered the worst natural disaster in the country’s history.

More from Reuters:

In a complaint filed on Wednesday in the U.S. District Court in Manhattan, investors led by the Jackson County Employees’ Retirement System in Michigan said BHP inflated the price of its American depositary receipts by ignoring safety risks and overstating its commitment to safety before the disaster.

Four BHP officials were also sued, including Chief Executive Andrew Mackenzie and Chairman Jac Nasser.

BHP said in a statement emailed to Reuters on Thursday that it disputed the allegations of the complaint.

[…]

Wednesday’s lawsuit follows the Nov. 5, 2015 dam burst in Minas Gerais, Brazil’s main mining state, at the mine run by Samarco, a joint venture between BHP and Brazil’s Vale SA.

The burst unleashed huge quantities of mud and waste that destroyed a nearby village and killed at least 17 people, in Brazil’s worst environmental disaster.

The price of BHP’s ADRs closed that day 20 percent below where they traded before the dam burst, and the complaint said BHP should compensate ADR investors for that decline.

“Defendants knew or recklessly disregarded the precarious condition of the Fundão dam and Samarco’s tailings facilities,” causing harm to investors when the truth came out, it said.

The lawsuit seeks class action status for ADR investors between Sept. 25, 2014, when BHP touted its focus on safety in a U.S. regulatory filing, and Nov. 30, 2015, when Brazil sued.

The name of the case is Jackson County Employees’ Retirement System v. BHP Billiton Ltd et al, U.S. District Court, Southern District of New York, No. 16-01445.

 

Photo by  Lee Haywood via Flickr CC License

CalPERS this week took the first step toward finding a new CEO: they’ve hired a headhunting firm to conduct the search for its new top executive.

Current CEO Anne Stausboll announced in January she’d be stepping down at the end of this fiscal year.

More from a CalPERS release:

The California Public Employees’ Retirement System (CalPERS) officially launched its search for a new Chief Executive Officer (CEO) to lead and manage the pension fund, health benefit programs and its 2,700 employees.

The search is being led by New York-based Heidrick & Struggles. View a full description of the CEO career opportunity, including the ideal candidate profile and professional competencies. Interested parties may contact:

Heidrick & Struggles

c/o Renee Neri, Partner

1114 Avenue of the Americas, 24th Floor

New York, NY 10036

calpersceo@heidrick.com

The CEO of CalPERS is the leader of a highly visible and complex government organization. The successful candidate will be responsible for ensuring that the organization achieves the strategic objectives established by the Board of Administration, while cultivating a high performing, risk intelligent, collaborative, and innovative culture. The CEO is driven by the organization’s mission, vision, and values and will ensure that these are embraced by the employees who make up CalPERS’ dynamic workforce.

CalPERS is the largest pension fund in the United States by assets under management.

 

Photo by  rocor via Flickr CC License

The Florida Supreme Court on Wednesday sided with a state newspaper, settling a years-long dispute over whether Jacksonville and it’s pension fund skirted public meetings laws when it negotiated pension benefits in private meetings.

The Florida-Times Union originally sued the city in 2013, alleging that the city violated the state’s Sunshine Law when it collectively bargained pension benefits behind closed doors.

A circuit court had previously sided with the paper; on Wednesday, the state Supreme Court dismissed Jacksonville’s appeal.

From the Florida Times-Union:

In 2013, the city and the pension fund tried to reach a new pension benefit agreement in closed-door mediation sessions related to a federal court case.

The state’s Sunshine Law says collective-bargaining negotiations must be held in public. However, the city argued that the negotiations were court mediations, not collective bargaining.

[Florida Times-Union] filed suit, and the court ultimately determined the city and pension fund violated the Sunshine Law.

Circuit Court Judge Waddell Wallace in his 2013 ruling found the city and the Police and Fire Pension Fund had “confidential, non-public collective-bargaining negotiations” where public talks were required in violation of the state’s open-records law.

[…]

The Florida Supreme Court on Wednesday rejected a challenge to Circuit Judge Waddell Wallace’s 2013 ruling that the city of Jacksonville and the Police and Fire Pension Fund skirted the Sunshine Law when they negotiated pension benefits behind closed doors.

The Colombia government will soon allow the country’s pension funds to invest in alternatives such as real estate, private equity hedge funds and commodities, according to a report.

Colombian funds were previously barred from investing in alternative vehicles; pension portfolios in Colombia are largely made up of public debt.

More on the change, from Reuters:

The decision, aimed at diversifying risk and bolstering profit, will modify previous rules that only allowed pension funds to invest in public debt and other low-risk portfolios. It is set to be announced by decree before the end of March, government and pension fund sources said.

The change, made in consultation with pension administrators, will allow for about $10 billion in fund resources to go toward alternative investments. As of November, pension funds controlled some 165.2 trillion pesos ($49.8 billion).

“The international experience has shown how pension fund administrators have looked for non-traditional investment possibilities, taking into account the need for long-term profit and deposit security,” the finance ministry said in a technical bulletin that forms part of the draft decree and was seen by Reuters.

“These instruments have served to diversify the risks that portfolios confront in the face of low international interest rates.”

Analysts said the current restrictions limited profitability.

Pension funds are the largest holders of Colombian public debt, with 56.3 trillion pesos ($16.9 billion) under management at the end of January.

The alternative funds will have to comply with rating requirements, asset limits and other conditions.

Any fund’s allocation to alternatives will be capped at 20 percent.

 

Photo by  Horia Varlan via Flickr CC License

Vermont Gov. Peter Shumlin on Tuesday morning attempted to persuade the Vermont Pension Investment Committee to divest from investments related to coal, as well as its ExxonMobil holdings.

The Committee currently opposes divestment.

More details on Shumlin’s presentation, via Vermont Business Magazine:

• Financial Institutions Agree, Coal is a Bad Investment – Large financial institutions such as Wells Fargo, Morgan Stanley, Citigroup, Bank of America, and Goldman Sachs have pledged to “stop or scale back support for coal projects,” according to Bloomberg Business (link is external). A new report from Citigroup (link is external) shows that moves to combat climate change could lead to $100 trillion in stranded assets, with coal companies accounting for more than half of that potential loss in value. That’s “not the type of industry I would want my money invested in, or Vermont’s money invested in,” Gov. Shumlin said.

• Coal Use and Mining is on the Decline – In the mid-2000’s coal represented 50 percent of America’s power supply. Today it accounts for only 35 percent according to the Energy Information Administration (link is external), a trend that is likely to continue because few coal plants are being built – in 2015 (link is external), only one new coal plant came online. “The market has spoken and it’s divesting itself of coal,” Gov. Shumlin said.

• Coal Companies are Failing – The second-largest coal company, Arch Coal (link is external), filed for bankruptcy earlier this year, following bankruptcy filings by other major coal companies such as Walter Energy, Alpha Natural Resources, and Patriot Coal.

You can read the governor’s full testimony here.

 

Photo by  Paul Falardeau via Flickr CC License

Canada’s public pension funds weathered a volatile year as their collective portfolios returned 5.4 percent in 2015, according to a report.

The performance is impressive considering the funds’ U.S. peers returned just 0.36 percent in 2015.

More from Reuters:

Canadian pension funds achieved a return of 5.4 percent on their investments in 2015 as their strategy of diversifying internationally helped mitigate volatile market conditions, research by RBC Investor & Treasury Services showed.

[…]

The funds have pursued a strategy of directly investing in assets globally, including investments in infrastructure and real estate. Pension experts say that has provided them with a buffer against market volatility and challenging economic conditions.

“Canadian pension plans clearly benefited from global diversification portfolio strategies,” David Heisz, chief executive officer of RBC Investor Services Trust, said in a statement on Thursday.

Heisz said the positive 2015 performance could largely be attributed to a lift from global equities, offsetting downward pressure from weaker domestic sectors, particularly commodities, resources and energy over the course of the year.

Canadian funds’ performance was buoyed by a strong 4^th quarter, where the funds achieved a 3.1 percent return.

 

Photo by www.SeniorLiving.Org via Flickr CC License

Almost half of the world’s pension funds are looking to add talent to their internal investment teams in the near future, according to a State Street report.

The State Street 2015 Asset Owner Survey interviewed 400 pension executives across 20 countries.

More on insourcing, from the report:

Funds are ramping up their internal specialist talent, with nearly half planning to increase their internal risk teams (48%) and investment teams (45%) over the next three years, particularly as they gear up for increased ESG investing.

However, funds will remain reliant on external partners with 65% of all funds agreeing that their consultants are essential to guiding their investment process.

[…]

In an effort to gain returns, funds will continue to diversify investment strategies. 83% expressed moderate or high interest in environmental, social and governance (ESG) investments. Of those interested in ESG, 80% of respondents in North America and 78% of respondents in EMEA say they are more likely to appoint a manager with ESG capabilities.

Alternatives are seen as key to boosting returns. Fund of hedge funds and real estate emerged as favorites, with 51% and 50% of funds planning to increase investments, respectively. Yet 46% say they lack transparency on the risks stemming from alternatives.

Download the full report here.

 

Photo by  Dirk Knight via Flickr CC License

A 2014 California law – designed to make sure the state’s Teacher Retirement System remains funded in good markets and bad – is very likely to have a positive effect on CalSTRS’ health in coming years.

But there’s a downside: California’s annual pension payment now swings up and down with the market, leaving the state in a place of uncertainty.

From Bloomberg:

Beginning in mid-2017, California would pay less if the system bests its earnings assumption and more if it falls short, due to a formula that divides the responsibility for the unfunded liability between the state and districts, according to the Legislative Analyst’s Office, a nonpartisan agency that conducts research for lawmakers.

[…]

In a down market, “not only is the state getting less money from the way the tax structure is comprised, but it also forces them to increase their payments for their unfunded pension liability,” said Howard Cure, head of municipal research in New York at Evercore Wealth Management, which oversees $6.2 billion of investments. “It compounds the vulnerability of their tax structure.”

There is a limit to how high the state’s contributions could rise: 0.5 percent annually. That could slow the state’s progress toward eliminating the pension shortfall if the markets reverse course after a period of good years that allowed California to cut its contributions, said Ryan Miller, principal fiscal and policy analyst at the legislative office.

[…]

“This could certainly add to fiscal pressure on the state in the event of a down market,” Gabriel Petek, a credit analyst in San Francisco for Standard & Poor’s, said of the pension overhaul.

The provision is designed to bring CalSTRS up to 100 percent funding in 30 years.

There’s also a clause which allows the governor and lawmakers to review the terms of the measure every five years and make adjustments. That could lead to less volatility for the state; but it could also derail the stated funding goal for CalSTRS.