Author: Ted Ballantine

Brazilian President Michel Temer details of his controversial pension overhaul plan earlier this week, and now further details are coming out about the expected savings the proposal would bring.

The overhaul would raise retirement ages and increase contribution required from workers — in effect, a significant cut in benefits for the country’s workers.

But the plan will bring billions in savings for the country over the next decade, to the tune of $200 billion.

From Reuters:

Brazil’s government expects to reduce expenditures by about 687 billion reais ($200 billion) between 2018 and 2027 with proposed changes to its costly pension system, the government’s pension secretary said on Tuesday.

The proposal to overhaul Brazil’s pension system, seen by investors as the most important of President Michel Temer’s agenda to shore up the country’s public finances, would automatically adjust up the minimum age of retirement as the population’s life expectancy grows, pension secretary Marcelo Caetano said.

Other changes would include removing tax exemptions on revenues from exports and demand rural workers to start contributing to the pensions system, Caetano told journalists.

The controversial pension reform plan at the heart of Temer’s austerity drive aims to shore up an economy mired in its worst recession on record by bringing under control a widening budget deficit. Temer unveiled the reform on Monday by saying it was necessary to avoid a collapse in the pension system.

 

A majority of 401k sponsors, big and small, are concerned about being sued, according to new research from Cerulli Associates.

Most of the lawsuits have so far targeted massive plans, but even small plans are feeling the heat. And it’s having an effect on investment strategy, as many plans consider a more passive approach amid scrutiny of fees.

From 401kSpecialist:

More than half of 401k plan sponsors express concern over potential lawsuits, new research from Cerulli Associates finds.

[…]

Survey data shows that smaller 401k plan sponsors are also taking notice of this increasingly litigious environment, as reflected by the nearly one-quarter of small plan sponsors (less than $100 million in 401k assets) who describe themselves as “very concerned” about potential litigation.

In particular, fee-related lawsuits have been a pervasive theme in the 401k plan market in 2016, further underscoring the 401k industry’s intense focus on reducing plan-related expenses. A significant consequence of this focus on fees is an increased interest in passive investing.

Plan sponsor survey results show that the top two reasons for which 401k plan sponsors choose to offer passive (indexed) options on the plan menu are because of “an advisor or consultant recommendation” or because they “believe cost is the most important factor.”

Several defined contribution investment only (DCIO) asset managers tell Cerulli that the demand for passive products is driven, primarily, by the desire to reduce overall plan costs.

“As advisors become increasingly fee conscious, some view passive options as a way to drive down overall plan expenses, which in turn demonstrates their value to the plan,” Jessica Sclafani, associate director at Cerulli, said in a statement.

Brazilian President Michel Temer on Monday will reveal details of his plan to overhaul the country’s retirement benefits system, according to Reuters.

The plan, which is likely to be controversial among citizens and lawmakers, calls for raising the retirement age, higher contributions from workers, and lower benefits.

From Reuters:

The pension reform, which had been promised by Temer since he became president in May, faces fierce opposition from powerful labor and civil servant unions that threaten to organize street demonstrations to block the changes.

Despite such threats, the government plans to send the reform plan on Tuesday to Congress where is expected to face a heated debate that could last several months.

“It will face a lot of resistance, but I believe Congress is well aware of the fiscal dilemma and social security is at the heart of the problem,” said deputy Reinhold Stephanes, a former pensions minister who may have the task of reporting to the lower house on the reform plan.

“We have to be in line with the pension standards of the rest of the world by having a minimum age of retirement of 65 years of age,” he told Reuters.

Expenditures from social security make up about 40 percent of the government’s primary spending, or spending before debt payments. It is considered the main threat to the country’s finances in the future.

 

Illinois Gov. Bruce Rauner on Thursday vetoed a bill that would have provided a funding package of $215 million to the pension system of Chicago Public Schools [CPS].

The Senate promptly overrode the veto; however, the overriding process will likely stall in the House.

Rauner said he vetoed the bill because Democrats didn’t hold up their end of the bargain: state-wide pension reform.

From Crain’s:

“The agreement was clear: Republicans supported Senate Bill 2822 only on condition that Democrats re-engage in serious, good faith negotiations,” the governor said in his veto message. “Despite my repeated requests for daily negotiations and hope to reach a comprehensive agreement by next week, we are no closer to ending the (budget) impasse or enacting pension reform.”

Rauner’s reference was to a now two-year standoff between him and House Speaker Mike Madigan on whether to enact a “clean” budget bill with a needed tax hike, or to also pass some of the union-weakening, political reform that Rauner wants in his “Turnaround Illinois” agenda.

Though it was widely reported at the time that the CPS pension deal was linked to statewide pension changes, Senate President John Cullerton today denied that.

Details of the bill:

The measure, which would refinance pension systems covering laborers and white-collar workers by requiring taxpayers to put in more and newly hired workers to pay more, today zipped through the House by a veto-proof 91-16 margin and seems to be headed for routine final approval by the Senate.

Despite some very public griping and high-profile exits from and about hedge funds and private equity, institutional investors are still looking to increase their allocations to both investment vehicles in 2017 and 2018, according to a survey.

The Fidelity Global Institutional Investor Survey polled 933 institutional investors across the globe. In all, 72 percent of them said they’d be increasing their allocations to PE and hedge funds over the next two years.

Their pooled responses also show their confidence in meeting return targets, even if they’re also wary about the market climate.

More details from Reuters:

The survey, which was conducted over the summer, found that despite their concerns, 96 percent of the institutions believed they could achieve an 8 percent investment return on average in coming years.

[…]

institutions were most concerned with a low-return investing environment over the next one to two years, with 28 percent of respondents citing it as such. Market volatility was the second-biggest worry, with 27 percent of respondents citing it as their top concern.

Private sector pensions were most concerned about a low-return environment, with 38 percent of them identifying it as their top worry, while sovereign wealth funds were most nervous about volatility, with 46 percent identifying it as their top concern.

“With the concern about the low-return environment as well as market volatility, as a result we’re seeing more of an interest in alternatives, where there’s a perception of higher return opportunities,” said Derek Young, vice chairman of Fidelity Institutional Asset Management and president of Fidelity Global Asset Allocation.

 

Some banks are being more careful about lending to businesses — but down under, one pension fund is looking to fill the void.

The Australian pension fund Host-Plus Pty Ltd. says it will expand into lending to companies as it looks for strong returns in places other than equities.

The pension fund manages $16 billion USD for about a million Australians in the hospitality industry.

More from Bloomberg:

The fund will search for companies that are “distressed not because they themselves were distressed, but because their bankers were,” he said in a telephone interview from Melbourne. “These are perfectly well-operating companies, so the question is how can other pools of capital outside the banking system help.”

[…]

Host-Plus, which primarily serves workers in Australia’s hospitality industry, dumped all of its sovereign bond investments six years ago when it opted to pump more money into illiquid assets such as infrastructure and private equity.

The pension manager’s “MySuper” strategy, its default retirement savings option for members, has returned 9.4 percent during the 12 months to August, ahead of an industry average of 7.1 percent. The firm has the second best performance in that category, according to Morningstar Inc. data.

Sicilia said he has no plans to re-enter the sovereign bond market any time soon as the majority of Host-Plus’s members are young Australians who don’t need to make frequent redemptions.

“Bonds provide downside protection from equity markets, but we get our downside protection from unlisted assets,” he said.

President-elect Trump has plans to roll back many of President Obama’s marquee orders and laws, most notably the healthcare law and various regulations.

But in 2015, Obama went on a spree of retirement policy-related executive actions. The moves, some more controversial than others, made that year one of the most productive ever in terms retirement policy.

Over at the Brookings Institute, William G. Gale and Joshua Gotbaum write about Obama’s legacy as it relates to retirement policy:

Taken as a whole, the Administration’s actions undertaken in 2015 are likelier to have a positive effect on retirement security than anything that any administration or the Congress has done in many years.

Payroll Savings are Key to Retirement Security. By far the greatest success in saving for retirement occurs when saving is done automatically by deducting funds from a paycheck and having them invested automatically in a professional retirement program. However, under Federal law, such programs are entirely voluntary and employers that provide them must meet the many legal fiduciary, disclosure, and eligibility requirements of the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code. As a result, most employers, especially small businesses with fewer employees, decline to provide these programs.

Auto-IRA: Gridlocked in Washington, Unlocked in the States. In 2008, both major presidential candidates endorsed a proposal [2] by J Mark Iwry (then of Brookings) and David John (then of the Heritage Foundation) to require those small businesses without a plan automatically to enroll their employees in an Individual Retirement Account.

California and other states stepped in and proposed “Secure Choice” programs: a requirement that employers without a plan automatically enroll their employees (who could opt out at any time) into a professionally-managed retirement program, probably an IRA, that would be established by a state board. Legislation establishing such state boards to study and/or implement programs was enacted by California, Illinois, and Oregon.

DOL Allows Businesses to Encourage Retirement Saving without Full Federal Regulation. In July [4], the President announced that DOL would issue regulations and guidance to advance state savings plans. In November, DOL did so, publishing a proposal [5] under which state-sponsored IRA programs would exempt employers from ERISA fiduciary and other requirements.

DOL is doing more than just “legalizing” the IRA model that Illinois has legislated and other states are considering. They have also published a bulletin [6] outlining the ways they are willing to modify traditional ERISA requirements in order to facilitate state-sponsored pension and 401k-type plans. This would significantly increase and improve the options available for states to consider.

Adoption by states of an auto-enrollment requirement would extend coverage to an estimated 50-70 million working Americans who currently have no private retirement savings. It would be the largest expansion of retirement savings in more than 50 years.

Reducing Conflicts in the Marketing of Retirement Plans. After a false start in 2010, this year DOL proposed new regulations intended to limit the “conflict of interest” effects of commissions in biasing the advising and marketing of retirement products. DOL and others had shown that the presence of product commissions led financial advisors to favor the higher-commission retirement options. One survey by the Council of Economic Advisors estimated that biased compensation arrangements might result in extra fees on the order of $17 billion annually. [7]

DOL proposed that all advisors either forego product commissions in favor of asset-based or per-session compensation or that they enter into a legally-enforceable “Best Interests Contract” that both disclosed all fee arrangements and committed the advisor to placing client interests first. Although DOL’s proposal did not go as far as actions taken in the UK and elsewhere – which banned product commissions entirely—it has nonetheless generated substantial controversy. Many financial service firms and advisors argued that the DOL action is unnecessary, that it would reduce the supply of retirement advice, and/or that potential conflicts can be handled through existing industry self-regulation and by the Securities and Exchange Commission. (The SEC had been directed by Congress to provide guidance in 2010, but five years later had failed to reach any agreement.) Various Brookings scholars have studied these issues. Martin Baily and Sarah Holmes, reviewing the academic literature, concluded that conflicted advice is significant and that the approach proposed by DOL could, on net, benefit the country if it incorporated modifications to preserve investor education efforts and to reduce the likelihood that investors would avoid getting any advice at all. [8]

Offering a Federal Private Retirement Savings Option. Frustrated by Congressional unwillingness to legislate the Auto-IRA, the President announced in 2014 that Treasury would set up a voluntary retirement savings plan, My Retirement Account (“MyRA”) allowing voluntary payroll deductions to purchase a special Federal bond “to help millions of Americans save for retirement” [9]. Since the Administration had no authority to require employers to auto-enroll their employees in MyRA and there has not been significant willingness of employers to do so voluntarily, this year the Treasury announced that individuals would be permitted to join MyRA and make automatic contributions directly from their bank accounts. Nonetheless, there’s little evidence that this will lead to significant additional savings.

Limiting Employers’ Ability to Cash Out their Pension Obligations via Lump Sum Payments. ERISA’s intention was to preserve traditional defined benefit (DB) pension plans and ensure that pension commitments, when made, were honored. Ironically, the response by most employers has been instead to limit their DB obligations; DB plans now cover only a small minority of private sector workers and many current DB plan sponsors are “de-risking” either by freezing their plans and purchasing annuities to replace them, or by offering to cash out individual pension obligations via lump sum payment. Unfortunately, the passage of the Pension Protection Act of 2006 accelerated “de-risking” activity.

Read the entire article here.

New Jersey state lawmakers are again pushing a bill that would require the state to make its pension payments on a quarterly basis, instead of once annually.

The bill flew through the state Senate and Assembly unanimously, by votes of 72-0 and 35-0.

Quarterly payments would let the pension funds invest the money sooner, with more time for return on investment.

Gov. Chris Christie has vetoed similar legislation in the past, but this version of the bill might be more palatable.

From NJ.com:

It would require governor to make pension payments on a quarterly basis by Sept. 30, Dec. 31, March 31 and June 30 of each year, instead of at the end of the fiscal year in June. In exchange, the pension fund would reimburse state treasury for any losses incurred if the state has to borrow money to make a payment.

[…]

In his 2014 veto of the bill, Christie called it “an improper and unwarranted intrusion upon the longstanding executive prerogative to determine the appropriate timing of payments” so those expenditures line up with tax collection cycles.

But the change in the bill which would have the pension fund pick up the cost of borrowing if needed may address the governor’s previous concerns.

Asked whether the GOP governor would support the measure, the Senate Republican leader, Sen. Tom Kean Jr. (R-Union), said he believes he will.

The response from unions was lukewarm; they support quarterly payments, but they also support full payments — and they are skeptical that lawmakers can consistently deliver.

The Illinois State Board of Investment, the entity that manages investments for the pension funds covering the state’s non-school employees and judges, said this week it will yank $2.4 billion from active managers.

It will place that money in passive index funds in a bid to reduce the cost and complexity of its portfolio.

In the last year, the Board has rapidly reduced its allocation to active managers.

From the Wall Street Journal:

The move by the Illinois State Board of Investment, or ISBI, means an agency that oversees $16 billion for state employees, judges and lawmakers will have 35% of its holdings with actively managed investment funds, down from 70% in September 2015.

Limiting the number of active managers will reduce what the board pays in fees and simplify management of the portfolio, said Board Chairman Marc Levine.

[…]

The switch to more passively managed investments in Illinois is being led by Mr. Levine, who became chairman of ISBI in September 2015. Prior to Tuesday’s vote, the board had already terminated a total of nine active money managers over the past 14 months. In March it voted to pull $1 billion from hedge funds.

Two months ago, the board also terminated almost all of the active managers in a separate 401(k)-style plan it manages.