Author: Ted Ballantine

Trustees for the California State Teachers’ Retirement System next month will discuss whether to lower the pension fund’s assumed rate of return from 7.5 percent to 7.25 percent.

CalSTRS’ current rate is right at the nationwide median; but many public plans — including CalPERS — are continuing to lower their assumptions.

More from Reuters:

The California State Teachers’ Retirement System will consider lowering its expected return rate to 7.25 percent from 7.5 percent, based on economic factors and improvements to beneficiaries’ life expectancies.

CalSTRS Board is scheduled to consider the move during its February meeting. The recommendation was published late on Wednesday on the public pension fund’s website.

The changes are based on new lower assumptions for price inflation and general wage growth, which reduced the probability that CalSTRS would achieve its 7.5 percent return to 50 percent over the long-term, according to the report.

[…]

CalSTRS must also take into account improvements in beneficiaries’ life expectancies, the report noted.

Under the proposed changes, CalSTRS’s funding ratio would drop to 63.9 percent from 67.2 percent, and contribution rates would rise.

CalSTRS estimates that under a 7.25 percent expected return, the state contribution rate would increase by 0.5 percent of payroll for each of the next five years. Currently, the state contribution rate is 8.8 percent of payroll.

Rising interest rates and a potentially shrinking corporate income tax could lead to a higher percentage of companies closing their defined-benefit plans in 2017, according to Willis Towers Watson.

From Employee Benefits Advisor:

Michael Archer, leader of the Client Solutions Group at Willis Towers Watson’s North American retirement practice, says that an expected drop in the corporate income tax and an expected rise in interest rates will make it easier for defined benefit plan sponsors to terminate their retirement plans in 2017.

[…]

“If we get tax legislation that reduces corporate income taxes and is retroactive to the beginning of the year, we will see many plan sponsors make contributions in advance and fund their plan balance. They will do it because they are faced with PBGC premiums, which are increasing at a rapid rate, and those increases affect the cost of debt in retirement plans,” he says. “Now there are two incentives to fund and fund now because of the bigger deduction and they get out of paying the variable premium.”

The report also has some words for 401k plan sponsors. From EBA:

Archer encourages 401(k) plan sponsors to pay attention to the fees that are charged and the investment options they offer and also keep abreast of general compliance issues in the new year.

Regulatory bodies like the IRS and Department of Labor have increased the number of audits they are doing and the amount of attention they are paying to retirement plans.

“The focus on compliance is really important,” he says.

Archer pointed out that the Department of Labor has been sending letters to plan participants who are over the plan’s normal retirement age reminding them they can start their benefits.

“That kind of outreach hasn’t been seen before,” he says.

Last month, hedge fund Albourne Partners revealed in a white paper a new fee structure it had been working on with the Texas Teachers’ pension fund.

It’s unclear how the “1 or 30″ structure will catch on in the U.S.; but it’s already gaining steam in Asia.

Institutional Investor explains the structure:

1 or 30 is designed to ensure that the investor gets 70 percent of the economics from its hedge fund investment, while recognizing the need to pay a performance fee to asset managers in lean times. Under the proposed fee model, the management fee gets paid back through a discount to the performance fees (applied over time if the hedge fund fails to perform in any given year), and Texas will pay performance fees only after reaching an agreed-upon hurdle rate. The maximum that a manager can make is 30 percent of the alpha, or performance after the benchmark, minus the one percent management fee.

The simplest way to consistently meet an investor’s 70% alpha share objective would be a fee structure with no management fee and a 30% performance fee, paid only on alpha. Such a fee structure, however, could result in significant business risk to the manager during any prolonged period of underperformance as there could be long periods without any certain revenue for the manager from either management or performance fees, wrote Albourne portfolio analyst Jonathan Koerner in the paper. To eliminate this risk, 1 or 30 structure guarantees regular management fee income to the manager on a consistent ongoing basis, identical to current traditional management fee mechanics. A reduction of the same amount is then made to the performance fee to return total fees to equilibrium at 30% of alpha.

In Hong Kong, at least two hedge funds are implementing the “1 or 30″ model. According to Albourne, over two dozen managers globally are adopting the structure.

From Bloomberg:

As investors worldwide are balking at hefty fees, Hong Kong hedge funds Myriad Asset Management and Ortus Capital Management are crafting alternatives that mark a radical departure from the industry practice of charging 2 percent of assets in management fees and 20 percent of profits.

Myriad, which manages more than $4.1 billion, is adding a new share class in its hedge fund that charges the greater of a 30 percent cut of profits or 1 percent of assets under management to better align its interests with those of investors, said a person with knowledge of the matter. Ortus in July started a fund that takes a 33 percent share of profits without charging any management fee, according to a newsletter to investors obtained by Bloomberg.

[…]

Globally, at least two dozen “well-known” managers with institutional investors have either adopted or are working on a so-called “1-or-30″ fee model that was introduced to the industry in the fourth quarter, according to Jonathan Koerner of Albourne Partners, which advises clients on more than $400 billion of alternative investments globally.

A Willis Towers Watson official last week indicated the consulting giant will soon require asset managers to provide data on the gender composition of their employees.

There have been numerous studies in recent years that indicate gender diversity is linked to better financial performance.

From IPE:

Willis Towers Watson will require fund managers to provide data about the gender composition across their workforce, a move that responds to evidence that more women in the workforce improves financial performance.

The plan was mentioned by Luba Nikulina, global head of manager research at Willis Towers Watson, at an MSCI event on the subject of women in finance in London last week. She spoke of “hardwiring this into the process of allocating money”.

“If asset owners add their voice it will help to move things forward,” she added.

She was responding to a comment from a representative of a local authority pension fund about asset owners wanting better data on gender representation in roles below board level.

[…]

Linda-Eling Lee, global head of ESG research at MSCI, highlighted three possible connections between female representation in the workforce and financial performance benefits.

These benefits could stem from women being “better suited to today’s economy”, Lee suggested, from a greater diversity of thinking, or “human capital arbitrage”.

The latter is the idea that, given the barriers they face, “the women who end up at the top are extraordinary so the performance edge may erode as the pipeline to the top opens up”.

The U.S. Supreme Court said Friday it will review an appeal by CalPERS that seeks to revive a lawsuit brought by the pension fund against Lehman Brothers.

CalPERS lost $300 million when the bank went bankrupt, and has only recovered about $118 million from other lawsuits.

Details from SFGate:

[CalPERS’] suit against other underwriters and financial institutions, whom it accused of misrepresentations in the investment offerings, was dismissed by federal courts in New York, where all Lehman-related cases were transferred. The courts said the three-year legal deadline for filing securities lawsuits had started to run in July 2007, when the bank made its first securities offering, so CalPERS’ February 2011 suit was too late.

CalPERS argued that the deadline should have been suspended when it joined the class-action suit, which was filed before the three-year deadline. The Supreme Court had ruled nearly 43 years ago that plaintiffs who take part in a class action can be allowed more time to file their own suits, but hasn’t yet decided whether such an extension applies to securities cases.

The justices indicated they would resolve that issue when they announced Friday that they had granted review of CalPERS’ appeal. The court has only eight members, following the death of Justice Antonin Scalia in February, so it may wait until the term that starts in October before hearing the case.

A month after his arrest, the head of Korea’s National Pension Service was indicted by prosecutors on Monday.

Moon Hyung-pyo was indicted on charges of perjury and abuse of authority. The charges are the result of an ongoing investigation into whether Mr. Moon illegally pushed the pension fund’s board to vote in favor of a merger of two Samsung affiliates.

More from the Wall Street Journal:

South Korean prosecutors on Monday indicted the head of the country’s National Pension Service, as investigators tightened their focus on a 2015 merger of two Samsung affiliates that has pulled the Samsung conglomerate’s heir apparent into a wide-ranging political corruption scandal.

[…]

Prosecutors late last month arrested Mr. Moon for allegedly illegally ordering the fund, the world’s third largest, to vote in favor of a controversial $8 billion merger of the Samsung affiliates in 2015. NPS, which held an 11% stake in Samsung C&T at the time, had the deciding vote in the deal, which strengthened the control of Samsung heir Lee Jae-yong over Samsung Electronics Co., the crown jewel of South Korea’s largest conglomerate.

The merger was opposed by proxy-advisory firms as well as by U.S. activist hedge fund Elliott Management Corp.

Kansas Gov. Sam Brownback budget proposal would achieve short-term savings by decelerating the state’s pension payment schedule, pushing full funding back by 10 years and raising long-term costs by $6 billion, according to retirement system officials.

The budget would also cancel the repayment of $97 million that lawmakers shifted out of the pension system in 2016.

Officials from the Kansas Public Employees Retirement System this week briefed lawmakers on the long-term consequences of the Gov.’s plan.

From the Kansas City Star:

Alan Conroy, the executive director of the Kansas Public Employees Retirement System, on Thursday briefed the Senate budget committee on the long-term impact of the governor’s budget proposal.

Brownback wants to slow down the state’s pension payment schedule to save money as the state faces a budget shortfall. Conroy compared that to refinancing the mortgage on your house.

“If you don’t pay it now, you’re going to pay more later and over a longer period of time,” he said.

KPERS has an $8.5 billion unfunded liability. If the state keeps its current payment schedule, it would pay that off by 2033. Brownback’s budget proposal would delay that by 10 years, which Conroy said would increase the long-term pension costs by $6.5 billion through 2043.

New classes of lawmakers in several states are making their priorities clear as new legislative sessions begin; and altering pension benefits appears to be on the docket in Michigan and South Carolina.

In Michigan, the GOP majority has plans to close the state’s Teachers Retirement System to new hires, and instead shuffle those workers into a 401(k)-style plan.

But they might have trouble doing so, because Gov. Rick Snyder isn’t on board. From Detroit News:

Michigan’s Republican-led Legislature could be on a crash course with GOP Gov. Rick Snyder over plans to eliminate teacher pensions for new hires.

[…]

The incoming speaker has a powerful ally in the upper chamber, where Meekhof led a recent lame-duck push for legislation that would have closed Michigan’s teacher pension system to new hires and instead limited offerings to 401(k)-style retirement plans.

The legislation stalled out in late December amid opposition from the Snyder administration, which said the transition could cost the state $25 billion over the next 30 years.

The legislation was not a “cost-effective approach” to pension reform, said Snyder spokeswoman Anna Heaton, adding the governor is “open to working with the Legislature on this issue and reviewing the data again.”

Meanwhile in South Carolina, lawmakers are already drafting a bill that would increase contributions for workers and public-sector employers, and reduce the retirement system’s assumed rate of return.

From the Independent Mail:

A panel of S.C. House and Senate members kicked off the legislative session Tuesday by working to draft a bill to fix the state’s ailing system.

To begin addressing that $20 billion gap, lawmakers agreed Tuesday to include in a bill:

A bill aiming to improve the funding levels of two distressed Chicago pension funds breezed through the Illinois Senate on Monday.

But Gov. Rauner promptly sounded off on the bill, expressing his dissatisfaction and signalling a likely veto.

The bill aims to boost funding of two Chicago pension funds by increasing the contribution rates of new workers. Recently hired workers (post 2011) would have the option of increasing their contribution rates in exchange for an earlier retirement age.

From the Chicago Tribune:

Under the mayor’s proposal, newly hired employees would start paying 11.5 percent of their salaries toward their retirement, which is 3 percent more than current employees. In later years, that amount could be reduced if an independent number cruncher agreed that less was needed to meet the city’s goal of having 90 percent of the assets needed to pay benefits over the next 40 years.

Employees hired from 2011 to 2016 already receive lower retirement benefits, and would have the option of increasing their contributions to 11.5 percent. In exchange, they would be eligible to retire at age 65 instead of 67. Employees hired before 2011 would see no changes.

But Rauner expressed his dissatisfaction with the bill on Tuesday. From Reuters:

“The bill essentially authorizes another property tax hike on the people of Chicago and sets a funding cliff five years out without any assurances that the city can meet its obligations,” Rauner spokeswoman Catherine Kelly said in a statement. “The governor cannot support this bill without real pension reform that protects taxpayers.”

Under normal circumstances, the state House and Senate — which overwhelmingly approved the bill — could overturn a Rauner veto.

But the new class of lawmakers are sworn in on Wednesday and a new session begins. This group won’t have the power to overturn a Rauner veto; they’d have to start from scratch.