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The Canada Pension Plan Investment Board is one of the world’s largest infrastructure investors, and CEO Mark Machin told Reuters his fund is paying close attention to U.S. President Donald Trump’s as-yet-unreleased infrastructure plan.
Though details are scarce, Trump has said he plans to roll out a $1 trillion U.S. infrastructure program. If and when he does, the CPPIB could be a prime candidate to invest.
The Canada Pension Plan Investment Board, one of the world’s biggest infrastructure investors, is awaiting details of U.S. President Donald Trump’s planned $1 trillion infrastructure program, its CEO said.
The CPPIB, which invests on behalf of 19 million Canadians, has said it sees potential opportunities emerging from policies pursued by the new U.S. administration, particularly in infrastructure.
Chief Executive Mark Machin said on Friday the fund was monitoring developments but it was too early to say what opportunities may materialize while the new administration works through its priorities.
“They’re going to get to infrastructure, I think it’s going to take a little more time but we’re hopeful and we’re long-term (investors). We’ll keep a close eye on that,” Machin said in an interview after the fund reported third-quarter results.
The Dallas Police and Fire Pension System is one of the most troubled pension funds in the country. It’s 45 percent funded, but has lost 15 percentage points from its funding status since 2009.
As other funds raked in solid investment returns post-recession, Dallas Police and Fire has struggled; the fund returned -12 percent in 2015.
Those struggles have been well-publicized, and it’s beginning to have an effect on the workforce as public safety workers wonder whether they should retire now to ensure money is left for their pension.
More than 200 workers have decided to retire or leave, about double the normal rate, said Mayor Pro Tem Erik Wilson, who sits on the Dallas Police and Fire Pension System’s board. That’s threatening to put further pressure on the fund as benefits come due, including lump-sum payouts to older employees who’ve been drawing a paycheck while earning a guaranteed 8 percent return on their pensions.
“I’ve had 40 to 50 officers in my office this week asking what they should do,” said James Parnell, 52, secretary-treasurer of the Dallas Police Association and 25-year veteran. “They’re very nervous about what is going to happen, they’re fearing a run on the money.”
The squeeze on Dallas’s fund is even more acute because of a decision to divert money from stocks and bonds into Hawaiian villas, Uruguayan timber and undeveloped land in Arizona, among other non-traditional investments. The strategy, put in place under prior managers, backfired. The fund lost 12.6 percent in 2015 and 0.7 percent over the past three years.
The public-safety system has just 45 percent of the assets it needs to cover benefits, down from 64 percent at the end of 2014 and half what it was a decade ago. The pension could be out of cash in 15 years at the current rate of projected expenditures, according to a Segal Consulting report in July.
The Illinois Teachers’ Retirement System on Friday voted to lower its assumed rate of return for the second time in three years.
The board voted to lower the rate from 7.5 percent to 7 percent, much to the dismay of various government officials who are wary of the extra cost it will bring to the state.
The news of the vote triggered more shade from the Rauner administration on Friday. From Reuters:
“Illinois taxpayers including our social service providers and small business owners were just handed a bill for nearly a half-billion dollars,” Rauner spokesman Lance Trover said in a statement.
He added that “questions remain about the legality of today’s action,” alluding to concerns raised by Rauner’s deputy general counsel that TRS’ revised meeting agenda containing the rate change as a voting measure did not comply with the state’s open meetings act’s 48-hour posting requirement.
TRS Executive Director Dick Ingram disputed there was any violation. He said the board has a fiduciary obligation to do “what is best for the financial sustainability” of the fund and that its action to lower the rate can be overridden by the Illinois Legislature.
Illinois’ total fiscal 2017 pension payment to its five retirement systems was pegged at $7.9 billion, up from $7.617 billion in fiscal 2016 and $6.9 billion in fiscal 2015, according to a March bipartisan legislative commission report.
Buenrostro, 66, is serving a 60-day jail sentence after being arrested twice on misdemeanor battery charges. Because the battery charge constituted a violation of his bail terms in the bribery case, federal officials issued an arrest warrant this week. That means Buenrostro probably will remain in custody in Sacramento and then be transported by federal marshals for sentencing in San Francisco.
Fred Buenrostro was scheduled to be sentenced May 18 in U.S. District Court in San Francisco after pleading guilty to accepting bribes from a Lake Tahoe investment banker. But with Buenrostro expected to be in Sacramento County’s main jail until May 22, prosecutors and defense attorneys have agreed to postpone the federal sentencing to May 24. The proposed delay awaits a judge’s approval.
He pleaded guilty in 2014 to accepting more than $250,000 in bribes from investment banker Alfred Villalobos in a scheme to steer pension money to Villalobos’ clients in the private equity industry. Villalobos, who pleaded not guilty in the case, committed suicide last year in Reno.
Globally, pension funds have increased allocations to alternative investment vehicles and green bonds, according to a recent survey from the Organisation for Economic Co‑operation and Development (OECD).
Additionally, pensions funds have a growing interest in infrastructure – but levels of investment remain low.
Large pension funds’ allocation to alternatives, which includes infrastructure, increased on average from 14.3% of total assets in 2010 to 15.3% in 2014, according to the survey report.
“The trend in alternatives is even stronger among PPRFs,” it said.
On average, at the 19 funds that submitted data over the past four years, average allocations to alternatives increased from 11.2% in 2011 to 13.5% in 2014.
Infrastructure, meanwhile, is drawing growing interest from pension fund managers, but the survey results show a low level of investment on average, according to the OECD.
For the 77 funds that returned questionnaires, infrastructure investment in the form of unlisted equity and debt was $85.6bn in 2014, representing 1.1% of the total assets under management.
The pace of the increase in infrastructure allocation has slowed over the past few years at 23 funds that reported their allocation over the 2010-14 period, according to the survey report, “indicating that funds have not been able to grow their infrastructure allocations”.
Direct investment remains the most common method for funds to gain exposure to infrastructure, according to the report.
Another noteworthy trend, according to the OECD, is that, among the funds that reported green investments, there was “a general increase” in the amount of pension funds that invest in green bonds, as well as in the relative size of their allocations.
When municipalities and cities go bankrupt, who takes priority: bondholders or pensioners?
The chart above, put together by Bloomberg this week, shows the recovery rates of bondholders vs. pensioners in six instances of municipal bankruptcy.
There’s a reason the chart looks the way it does: pensions are typically protected by law in more than one way. Investors, on the other hand, are guaranteed nothing; and investing in a cash-strapped municipality comes with risks.
Pensioners typically come out unscathed, although not always: they took a big hit when Central Falls ran out of cash.
Bondholders, on the other hand, usually bear the brunt of the pain. When San Bernardino went bankrupt in 2014, bondholders recovered a mere 20 percent of their money on average. Some recovered nothing.
The country’s trillion-dollar public pension fund targets keeping 35 percent of its total assets in JGBs and 25 percent each in domestic and foreign stocks.
The GPIF needs to hedge against foreign currency moves to protect its assets from volatile market movements, Norihiro Takahashi told Reuters in an interview on Tuesday.
“The Bank of Japan introduced the negative interest rate policy in order to boost the economy and prices. Interest rates will rise if the policy works, which is why we do not see the need to change our basic asset allocation,” Takahashi said.
GPIF, which is already prepared to hedge against the risk of fluctuations in the dollar and euro, plans to broaden its approach for hedging, Takahashi said.
It will hedge against drastic moves of not just dollar and euros but other currencies, he said, adding the fund will also hedge against both a strengthening and weakening yen.
“We need to show Japanese people that we take measures to minimize currency risks,” said Takahashi. “It is an ideal that we can hedge not only just the dollar and yen but currencies for the third countries against the risk of fluctuations”
GPIF oversees the management of a $1.1 trillion portfolio.
More than a third (36%) of 400 pension professionals from around the world surveyed by the investor services giant said their funds had funding issues requiring greater risk-taking. However, of those people, less than half (43%) said their boards had a “high level of understanding of risks” to their funds. Just 29% of those whose funds were seeking to lower risk said their boards had sophisticated expertise.
“We examined pension funds’ capabilities across four distinct types of risk: investment, liquidity, longevity, and operational risk,” State Street wrote. “For each of these areas, only one-fifth of funds at most consider their risk management to be very effective.”
Large funds were generally better at risk management than small funds, the survey found, while public funds were better than their private sector counterparts.
A significant proportion of respondents said their employers planned to change the process for recruiting new board members in order to improve their expertise. More than half (53%) of those funds seeking to increase portfolio risk said this was the case.
One of California’s largest city pension funds is not only paying a “big” sum for its huge, high-end office space—it’s also locked into a long lease.
An investigation by a ABC10 found that the San Diego City Employees’ Retirement System is locked into a 10 year lease for the office space it rents, and the System will pay over $10 million in rent over that period. From ABC10:
The San Diego City Employees’ Retirement System manages a $7 billion fund. A review of office leases by Team 10 found SDCERS will spend $10.1 million renting office space at 401 West A Street in downtown San Diego. The lease is for 26,000 square feet over 10 years, and an SDCERS spokeswoman said 58 employees use the space — which breaks down to roughly 450 square feet per employee.
“I have to wonder why more than 20,000 square feet. Forget whether you own or lease it. Why that big a space?” real estate appraiser and San Diego State University lecturer Dana Kahn asked after reviewing the SDCERS lease.
Those numbers fall roughly in line with what SDCERS has reported publicly for years; according to its latest financial report, the System spent $998,000 on rent in 2013.
The investigation also looked into office space rented by the California Public Employees Retirement System.
CalPERS—the nation’s largest public fund—has eight offices around the state, although its staff is much larger than that of SDCERS.
CalPERS is a bit more secretive about its rental costs, as its financial reports don’t specifically disclose the cost of rent for its offices.
Its latest financial report does disclose that the System pays $3,789,000 for “facilities operations”, which may include rent as well as utility costs associated with its office spaces.
ABC10 managed to get a hold of SDCERS’ spokesperson over email, and she answered a few questions.
1. Why did SDCERS choose to rent office space?
SDCERS has been renting office space for many years. We’ve been in the current locating for the past seven, and then rented space in other downtown office building locations for many years before that.
2. Did SDCERS considering buying space?
No. The only investments in real estate done by SDCERS are as part of the fund’s real estate holdings in our investments portfolio.
3. How many employees work in the office?
There are 58 budgeted staff positions at SDCERS.
4. How much of SDCERS portfolio consists of real estate?
Real estate holdings in our investments portfolio account for 9.1 percent of the fund, or approximately $630 million.
5. Who negotiated the lease?
The original lease for SDCERS’ space at 401 West A Street was signed in April 2007. Signing for SDCERS were its then CEO and Board President. SDCERS was assisted in finding space by broker Irving Hughes. The first amendment to the current lease was signed in October 2013, again by its current CEO and Board President. SDCERS was assisted in negotiating the amendment by broker Hughes Marino.
Pennsylvania Gov. Tom Corbett has spent the first week of August touring the state as part of his re-election campaign, and he’s using the opportunity to hammer home Pennsylvania’s need to lower the costs of its retirement system, and tout his policy ideas on the subject.
One idea that Corbett has frequently proposed is shifting some state workers from their defined-benefit plans into 401(k)-style plans. Nearly every state burdened with pension obligations has considered this policy option. Many have even implemented it. From PennLive:
Only Alaska and Michigan have shifted new hires into 401(k)-style programs, but nearly a dozen states have crafted hybrid programs featuring smaller lifetime pension plans along with a 401(k)-style plan, and some states, such as Florida, are giving new employees the option of going entirely into a 401(k)-style plan, our pal Deb Erdley at The Tribune-Review reports.
Corbett’s repeated harping on the pension issue has gotten him, to some extent, what he wanted back in June: a debate. Even if state lawmakers remain on vacation, many experts have been weighing in on the issue.
Richard Johnson, director of the Washington-based Urban Institute’s Program on Retirement Policy, makes this note on the switch from DB to DC:
“These defined-benefit plans work very well if you’re going to stay for 30-35 years, but they require a pretty large employee contribution, and they don’t work very well for the shorter-term worker,” Johnson tells the newspaper.
Stephen Herzenberg of the Keystone Research Center points to the experiences of other states as an argument against switching to a 401(k)-style plan:
In fact, when Florida created this choice, its traditional pension was overfunded. In a decade-plus since, the investment returns of Florida’s traditional pension have been 10 percent higher than the return on individual accounts. Over the 30 years that typical retirement contributions grow, this difference would become a one-third gap in savings available for retirement.
Alaska and Michigan did shift all new hires into 401(k)-style plans but the switch did not, in fact, work. Pension debt in both states grew.
Rhode Island did save some money but only because of deep cuts in traditional pensions, including for current retirees. The state then wasted some savings on a “hybrid plan” for new employees that included 401(k)-type accounts with low returns and high fees.
Guaranteed pensions need sound management and can get in trouble if politicians fail to make required contributions. But long term, there’s no beating the high returns of professional managers and the low costs of pooled pension assets. That’s why Pennsylvania’s current pension design is the best deal, long term, for taxpayers and retirees.
Herzenberg claims that reforms moving state workers to a 401(k)-style retirement plan in other states have “failed” because their traditional, non-401(k) pension funds lost value during the most recent recession. Huh?
Every state¹s pension fund lost value when the stock market fell, including Pennsylvania’s, which went from being fully funded to today having more than $50 billion (and growing) in unfunded liabilities. That’s about $10,000 per household in the state.
Now here’s the rub. States like Michigan and Alaska would have lost more from their pension funds had they not started to convert new employees into a 401(k). In fact, without reform, Michigan’s unfunded liability would be upwards of $4.3 billion more.
Thankfully, because lawmakers in the Wolverine state acted early, they saved taxpayers those additional costs. Pennsylvania would have also had substantial savings had we followed Michigan’s lead.
Corbett has tried desperately to make pension reform a campaign issue. It has worked. He’s gotten the media, thought leaders and everyday citizens talking about Pennsylvania’s retirement system and the policy options to address the issues Corbett foresees.
That’s healthy for the state—but make no mistake, it’s probably just as healthy for Corbett’s election chances.
He’s been gaining ground on challenger Tom Wolf in recent weeks.