Author: Ted Ballantine

CalPERS’ de-risking strategy is a long-term proposition, and still leaves the fund vulnerable in the short-term, according to a new Moody’s report.

But the shift in investment policy is still an overall credit positive for the pension fund, according to the report.

More from Moody’s:

CalPERS is trying to reduce the volatility of its returns, as aging demographics increase the risk to participating governments of any adverse investment performance. To achieve this goal, the pension fund intends to gradually lower the discount rate that it uses to value its liabilities, and invest in less risky assets to reduce its exposure to market volatility.

However, this process will take years to fully implement, and a sharp fall in CalPERS’ asset performance could impact participating government fiscal positions, according to the report, “Higher For Longer – California Pension Cost To Remain Elevated Under CalPERS’ Risk Reduction Plan.”

“Government exposure to pension asset investment earnings declines grows as the CalPERS plan demographics mature,” said Tom Aaron, an Assistant Vice President at Moody’s Investors Service. “Fiscal conditions for California and participating local governments remain highly susceptible to CalPERS’ asset investment performance, even under the new policy.”

CalPERS’ move to less volatile assets does have a positive credit impact on the state and participating local governments. However, the pension plan’s associated changes in discount rates do not impact Moody’s adjusted net pension liabilities for these governments, since we use a discount rate tied to a bond index as of the plan’s measurement date.

Read the full report here [subscribers only].

 

Photo  jjMustang_79 via Flickr CC License

The Pennsylvania House this weekend overwhelmingly voted down a bill that would have overhauled the state pension system.

The bill was passed by the Senate and would have been signed by Gov. Tom Wolf. The House was the bill’s only obstacle, and it failed to pass as it was met with bi-partisan hostility.

The bill, which Pensino360 covered last week, would have radically altered the state pension system, enrolling new hires in 401(k)-style plans and changing benefit formulas.

But pension officials had come out against the bill because of a provision that would have allowed the state to reduce its annual contributions to the pension systems.

From the Pittsburgh Post-Gazette:

As Democrats voted against the bill first in committee and then on the floor, they said they had never agreed to the pension portion of the deal.

“This was a Republican initiative inserted into the framework, and it’s their ball to get across the goal line,” said Bill Patton, spokesman for House Democrats.

Across the aisle, Rep. Eli Evankovich, R-Murrysville, said the state should change its pension systems in a way that would be “a bigger win” for taxpayers.

It was unclear what will happen next. The House called a meeting of the Appropriations Committee but then canceled it so leaders could have further talks. A plan for the House to meet in session Sunday was pushed off to Monday.

Mr. Corman, who has advocated for changes to the pension systems, seemed deeply disappointed by the vote.

“We could have had everything today,” he said. “We could have walked through the door, had major accomplishments, got a budget that sustained us for the future and moved Pennsylvania in the right direction fiscally, with great public policy victories, helping our consumers of wine and spirits getting into the private sector.

“Instead, they walked away from it,” he continued. “It’s unbelievable to me that they would do that.”

The final vote count was 149 – 52.

 

Photo by Governor Tom Wolf via Flickr CC License

JP Morgan Chase & Co on Friday settled a 2012 class action securities fraud suit for $150 million.

Several institutional investors were lead plaintiffs in the case, including Sweden’s AP7 fund, the Ohio Public Employees Retirement System, and pension funds from Oregon and Arkansas.

More from Reuters:

The lawsuit stemmed from oversight by JPMorgan’s Chief Investment Office of a synthetic credit portfolio that caused the $6.2 billion loss and was linked to traders in the bank’s London office including Bruno Iksil, the so-called London Whale.

Shareholders accused JPMorgan of knowingly hiding increased risks at the Chief Investment Office, including on an April 13, 2012, conference call when JPMorgan Chase & Co Chief Executive Officer Jamie Dimon called reports about the synthetic portfolio a “tempest in a teapot.”

The settlement covers anyone who bought JPMorgan stock from April 13 to May 21, 2012, a time when JPMorgan’s share price fell by roughly one-quarter and wiped out more than $40 billion of market value.

[…]

Ohio Attorney General Mike DeWine in a statement on Monday said the deal would help the state’s Ohio Public Employees Retirement System recover its losses and discourage future fraud.

“Misleading investors with wrong or incomplete information is unacceptable and causes real damage,” DeWine said.

JP Morgan has admitted wrongdoing in the case.

 

Photo by Joe Gratz via Flickr CC License

Last year, Kentucky lawmakers established a Public Pension Oversight Board – a group made up of lawmakers, experienced financial analysts and state officials.

The Board’s mandate is to “review, analyze, and provide oversight” to Kentucky lawmakers on matters of benefit administration, pension funding and retirement legislation.

On Thursday, the Board delivered 23 recommendations to the state General Assembly.

Details from the State Journal:

The Public Pension Oversight Board had its last meeting Thursday making 23 recommendations, which included how the General Assembly should proceed in fixing the billions of dollars in unfunded liabilities for the state’s pension systems.

[…]

Out of the 23 recommendations by the Public Pension Oversight Board, the most notable ones would be those legislative recommendations.

The board recommended the General Assembly should evaluate the KTRS workgroup findings in finding a funding solution; both the General Assembly and Gov. Bevin should include contribution rates from the state based on the new KRS assumed rate of 6.75 percent; legislation should be enacted requiring Senate confirmation of both KRS and KTRS executive directors and all non-elected board members; placement agents disclosure policies and the General Assembly provide funding for a performance audit of KRS that would be conducted by state auditor-elect Mike Harmon.

“We will be pushing for a performance audit of all the retirement systems,” Harmon said. “We will be getting with the governor’s people and try to determine what direction we will take in that regard.”

The Board learned on Thursday that the funding ratio of the Kentucky Retirement Systems (KRS) non-hazardous fund currently sits at 17.7 percent.

 

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On Wednesday, the Federal Reserve announced its first rate hike in 9 years.

The move could help to eliminate billions of dollars in unfunded liabilities from the books of non-financial corporate pensions, according to Moody’s.

From ai-cio.com:

Credit rating agency Moody’s estimated the move would “help eliminate” roughly $450 billion from US non-financial corporate pensions’ total unfunded liabilities.

“One indirect policy effect [of ultra-low rates] was increasing pension benefit obligations because of lower discount rates,” Moody’s Senior Accounting Analyst Wesley Smyth wrote in a research note. “Since 2008, our rated issuers’ obligations have risen by $703 billion to around $2.1 trillion. We estimate that $342 billion of this increase was driven by lower discount rates.”

Brad Smith, a partner in NEPC’s corporate pension practice, said the decision to raise rates is a welcome one for pension plans for this reason. As for the asset side, Smith said pensions were unlikely to make drastic allocation changes in the wake of the announcement, having already prepared for interest rates to go up.

“Our clients, for a long time, for the past six to nine months, have been waiting for the Fed to take action,” he said. “A lot of the managers have positioned their portfolios for a rate increase.”

View the Moody’s report here [subscribers only].

 

Photo by Sarath Kuchi via Flickr CC License

Canadian investors put a record-setting $34 billion into Australia-related investments in 2015, and Canadian pension funds led the way.

Caisse de dépot et placement du Quebec, for its part, has 20 percent of its infrastructure portfolio invested in Australian projects.

More details from the Globe and Mail:

Canadian purchases in Australia jumped more than eightfold in 2015, data compiled by Bloomberg show. Caisse de dépot et placement du Quebec bought into an electricity grid in New South Wales state and opened a Sydney office with six executives this year. Canada Pension Plan Investment Board and Canada’s Brookfield Asset Management Inc. are part of rival groups competing for Australian port and rail company Asciano Ltd.

“We’re there to invest in infrastructure, and they are the model,” Ron Mock, chief executive officer of the Ontario Teachers’ Pension Plan, which manages about $155 billion, said in a Bloomberg TV Canada interview. “They’ve figured out how to attract capital from all over the world.”

[…]

The creativity in the Australian system should serve as a global model, bridging the gap between investors that favour mature assets and the need for riskier new infrastructure projects, says Mark Machin, international head for Canada Pension, the country’s largest pension plan.

“It’s excellent policy,” he said. “They’re getting tremendous interest and tremendous value from international capital and domestic capital.”

Australia, in a push to ramp up infrastructure investing, recently offered incentives to regions who sell state assets and use the proceeds to fund infrastructure.

Andre Bourbonnais, Chief Executive of Canada’s Public Sector Pension Investment Board, said on Tuesday that the current oil slump is piquing the Board’s interest in the energy sector.

A few of Canada’s other large pension funds appear to think the same.

PSP is Canada’s fourth largest pension fund.

More details from Reuters:

The Public Sector Pension Investment Board, one of Canada’s 10 largest pension fund managers, is considering entering the oil and gas sector, as weak crude prices create opportunities for long-term investors, said Chief Executive Andre Bourbonnais.

“It’s one asset class we’re looking into,” Bourbonnais told media in Montreal on Tuesday. “We do not currently have the internal expertise really, so we’re trying to look at how we’re going to build it first.”

Last week, the head of Healthcare of Ontario Pension Plan (HOOPP) expressed a similar sentiment, stating the prolonged weakness in energy prices is making valuations in the oil and gas attractive and revealed HOOPP is considering upping its investments in Canadian equities in response.

The interest mirrors that of larger Canadian pension funds such as Canada Pension Plan Investment Board (CPPIB) and Ontario Teachers’ Pension Plan Board.

[…]

Bourbonnais, who joined PSP earlier this year from CPPIB, said he does not think oil prices have come close to hitting bottom.

“I think these markets have a ways to go,” said Bourbonnais, who was previously global head of private investments at CPPIB, one of Canada’s most-active dealmakers with over C$272 billion ($198 billion) in assets under management.

PSP manages $81.6 billion in assets.

 

Photo by ezioman via Flickr CC License

New York City Comptroller Scott Stringer, who also serves as custodian and investment adviser on the boards of the city’s five pension funds, brought on some big changes this week in the way the city’s pension boards do business.

Stringer has consolidated the investment committees of the city’s five pension funds to create one big “umbrella” board; instead of each board meeting separately, there is now a mass meeting held four times per year.

Stringer hopes the change will lead to better investment decisions and boost returns.

From Crain’s New York:

Stringer hopes his changes, including the consolidation of meetings among the funds’ five boards, will boost city returns. New, mass trustee meetings will free up time for his chief investment officer, Scott Evans, to closely manage the funds, he said at a breakfast hosted by the Citizens Budget Commission.

With the new structure, “Scott Evans doesn’t spend every waking moment doing the same meeting over and over again,” Stringer said. “That means he can now sit down with our asset managers and … look at good investments, because it’s all about that one-twentieth of a percent. It’s all about hitting that investment at the right time.”

Improving returns by such a small amount would be better than nothing, experts said, but it is the market that ultimately determines whether the funds achieve their target 7% annual return.

“If the S&P is up 3.5% for a few years, we’re not going to make 7%,” former Merrill Lynch risk manager John Breit said. “And we can work on fees, we can work on investment meetings, and it’s not going to make a profound difference.”

Collectively, the city’s five pension systems manage about $160 billion in assets.

 

Photo by Thomas Hawk via Flickr CC License

Japan’s Government Pension Investment Fund has increased its infrastructure investment by ten-fold as it builds out its alternative investment department, according to a Bloomberg report.

The GPIF, the world’s largest pension fund, ramped up its infrastructure commitments significantly between March and September of this year.

More from Bloomberg:

The fund’s investments in infrastructure rose to about 70 billion yen at the end of September, based on figures supplied by GPIF, up from 5.5 billion yen at the end of March. The decision to invest in infrastructure is drawing interest abroad, with India’s railway minister urging the nation to invest in rail projects there.

“Infrastructure investments can provide stable long-term revenue and so we anticipate it will help steady pension finances,” Mori said in an e-mailed response to questions Dec. 4. “We haven’t set a number on how many people we will add to the department. If there are good people we will hire them.”

[…]

GPIF teamed up in February 2014 with the Ontario Municipal Employees Retirement System and the Development Bank of Japan to jointly invest in infrastructure such as power generation, electricity transmission, gas pipelines and railways in developed countries. It may expand infrastructure investments to as much as 280 billion yen over the next five years as part of the agreement, it said in a statement at the time.

The alternative investment department also can invest in private equity and real estate, although it hasn’t yet, Mori said.

This year’s infrastructure investments were made through the unit trust structure announced for the joint OMERS projects. The investment decisions are made by Nissay Asset Management Corp. according to the mandate decided by the GPIF. The GPIF team makes sure the details are in line with the investment mandate it outlined for the trust, Mori said.

GPIF manages $1.1 trillion in assets.

 

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