Author: Megan Leo

A study discovered that CalPERS pays slightly below other similar companies in fees. However, the study does not take into account data on private equity. CalPERS was highly criticized last year for its lack of private equity performance fees.

Pensions & Investments discusses the study further:

A CalPERS-commissioned study from CEM Benchmarking shows the $293.6 billion pension fund paid $1.18 billion in fees or 41.1 basis points in calendar year 2014, slightly below its peer group median of 43.2 basis points.

However, the study does not include performance fees for private equity, real estate, infrastructure and natural resource investments. An executive summary of the study was included in the agenda materials for the retirement system’s investment committee meeting scheduled for May 16.

CalPERS’ lack of data on private equity performance fees became a major controversy last year. In June 2015, pension fund officials disclosed it could not account for how much it paid in performance fees for the asset class even though it was CalPERS’ largest external management cost.

In late November, after implementing a new reporting system, the California Public Employees’ Retirement System, Sacramento, reported it paid $700 million in performance fees or carried interest to private equity firms in the 12-month fiscal year ended June 30, 2015.

CEM said in the study that CalPERS was able to achieve overall a slightly lower cost than its peers in 2014 from its equity, fixed income and now-eliminated hedge fund portfolio because of less use of funds of funds and external active management and fewer portfolio overlays. CEM said CalPERS also paid less than its peers in terms of external management and custody fees, and internal management costs. The study did take into account base fees for alternative investments.

CEM says it compared CalPERS to a peer group of 14 global asset owners with assets ranging from $117 billion to $844 billion. The median size of the plans in the peer group was $184 billion.

CalPERS board members are pushing for an amendment to the California Assembly Bill that would require California pension funds to release information on fees charged by annual investment managers. For more on the bill, read the full article here.

 

A recent legislation passed by New Jersey’s Senate bans pension companies from investing with any business currently boycotting Israel. The bill passed with nearly complete support from the Senate. NJ officials hope the ban will send a message of support to Israel.

NJ.com discusses the topic further:

The state Senate threw nearly full support Monday behind a bill requiring New Jersey’s public worker pension fund to divest from companies that boycott Israeli goods and businesses.

The bill (S1923) pushing back against businesses participating in the Palestinian-led “Boycott, Divestment and Sanctions” movement against Israel was approved 39-0. The Assembly still needs to take action on the bill.

State Sen. Jim Beach (D-Camden), a sponsor, said on the Senate floor Monday that “I think this bill sends a very clear message to our friends in Israel that New Jersey has your back.”

Under that bill, the state Division of Investments would be barred from investing public workers’ $68.6 billion pension fund in these companies and dump any of these existing holdings within 18 months.

It makes exceptions for companies that provide “humanitarian aid to the Palestinian people through either a governmental or nongovernmental organization unless it is also engaging in prohibited boycotts.”

[…]

“New Jersey cannot support such biased practices as those of the BDS against our sister state,” state Senate Majority Leader Loretta Weinberg (D-Bergen) said in a statement. “Israel has long been a vibrant trading partner, ally and friend with our state, and making sure that we are not investing in any company that seeks to hurt the interests of Israel or its people through boycotts, divestments and sanctions will send a clear message that we stand against this kind of veiled discrimination.”

The bill joins existing New Jersey motions that prohibit pension funds from investing in business that are connected to Sudan, Northern Ireland, or Iran.

 

The 6^th District Court of Appeal prevented San Jose Mayor Sam Liccardo from repealing Measure B. Although previous rulings allowed for Liccardo to repeal the measure, the appeal stops all proceedings and requires that the case be reconsidered.

Mercury News discusses the topic further:

In a victory for former Councilman Pete Constant and a blow to his one-time ally, Mayor Sam Liccardo, an appellate court on Wednesday put the brakes on the city from repealing Measure B — the pension reform initiative voters overwhelmingly approved in 2012.

“I’m happy the court agreed that the council cannot move forward in such a rushed manner — trying to push things through before the court process was completed,” Constant said Wednesday.

Constant, along with the Silicon Valley Taxpayers Association and businessman Charles Munger Jr., have issued legal challenges to the city’s quest to nullify Measure B through a court proceeding.

Constant, who championed Measure B along with Liccardo, said any changes to the initiative must go back out to voters. The city last year reached settlements during closed-door meetings with employee unions who filed numerous lawsuits against the measure, saying it was an assault on their rights.

Liccardo and the current City Council pushed to replace Measure B with the settlement language — but without full consent from voters who approved it.

“All we’ve asked for is that residents be given the right to vote on the settlement between the city and the unions,” Constant said. “We believe that right rests solely with the residents.”

Santa Clara County Superior Court Judge Beth McGowen didn’t agree. She issued two separate rulings, denying Constant’s plea and siding with the city in its attempt to wipe Measure B off the books.

Union leaders applauded the move, saying it allows them to begin rebuilding a workforce that was depleted from hundreds of employees resigning after pension reform.

Constant and his group appealed and the 6th District Court of Appeal on Wednesday granted a temporary stay in the case — stopping all proceedings to reconsider the case.

City and union leaders have until May 23 to submit their comments on the case.

Current estimates suggest that companies are taking money away from hedge funds at the highest rate since the recession. Many blame the industry’s high fees for their decision, but those within the industry say that the bad reputation that surrounds hedge funds may be the driving factor. Despite this trend, public pensions are staying firmly rooted in hedge funds.

Reuters elaborates on the issue:

Recent moves by a few large institutional investors were seen as the beginning of a mass exodus. In 2014, the $300 billion California Public Employees’ Retirement System said it was getting out of most hedge funds. Then, this February, the $15 billion Illinois State Board of Investment said it would reduce its target allocation from 10 percent to just 3 percent. In April, the $51 billion New York City Employees Retirement System (NYCERS) decided to exit hedge funds entirely.

Henry Garrido, a worker union leader and NYCERS trustee, cited the industry’s high fees and poor performance in scoring a near-unanimous vote in favor of his proposal to axe about $1.4 billion from hedge funds including Brevan Howard and D.E. Shaw Group, about 3 percent of its portfolio.

“I think it’s insane,” Garrido said in a pension trustee meeting this year, “that we keep pouring money into hedge funds.”

Data, however, suggest that U.S. public pensions are staying put. The number of public pensions that use hedge funds has steadily increased to 282 in 2016 from 234 in 2010, data from research firm Preqin show. The average percentage of pension portfolios in hedge funds has also rose to nearly 10 percent.

Steve Yoakum, executive director of the Public School & Education Employee Retirement Systems of Missouri, said his pensions are sticking with hedge funds despite concerns about high fees and low returns.

“We are parking our money there because we don’t like the alternatives,” Yoakum told Reuters, adding “They are doing what they were hired to do.”

[…]

Mark McCombe, global head of BlackRock’s institutional client business, said pensions will continue to look to hedge funds to help them achieve their financial goals.

“These are very individual decisions,” McCombe said of the CalPERS and NYCERS pull outs. “This is not a systemic move away from hedge funds.”

Many of the companies that are pulling out of hedge funds maybe expecting a stock-like turn around on investment, and may be disappointed when that doesn’t happen. For more on the issue, read the full article here.

U.S. Treasury Secretary Jack Lew indicated the possibility for pension cuts to help diminish Puerto Rico’s debt crisis during a visit to the island earlier this month. Puerto Rico has defaulted hundreds of millions in bonds in recent months due to the financial crisis, and officials agree that a solution must be found to stop the increasing debt. The possibility of pension cuts as a solution is currently hotly debated.

USA Today writes more on the topic:

“That doesn’t mean that all debt is equal. We’ve never said that pensions should be made senior to all debt,” [Lew] said. “But there does have to be a balancing — and at the end of the day you’re going to need to have a functioning economy.”

Puerto Rico — a U.S. territory with 3.5 million residents who are born as American citizens — has accumulated more than $70 billion in bond debt and more than $40 billion in unfunded pension liabilities, according to Treasury’s recent estimate.

[…]

A fiscal oversight board should be formed and given “the discretion to make the trade-off decisions,” Lew said.

But, he added, “the efforts to try to protect any of the interests to the exclusion of all of the others are problematic.”

[…]

Some Republicans have pushed for pension adjustments as part of a restructuring package being considered by Congress, but many Democrats have largely opposed the concept, pushing instead for protections for union interests.

But Lew did not rule out reductions.

“There’s going to have to be a balancing of the interest of creditors and those who get retirement benefits and other bills that the commonwealth has to pay,” Lew said. “If the test is, creditors get paid 100% before anyone else gets paid anything, there’s not going to be a functioning Puerto Rico.”

Puerto Rico Governor Alejandro Garcia Padilla recently declined the concept of pension cuts for the sake of combating debt. He stated that the option would be unconstitutional.