Category: Funding status

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.

From Reuters:

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.

From Bloomberg:

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.

Fred Buenrostro, former CEO of CalPERS, pled guilty last year to accepting bribes during his tenure.

But his sentencing for the bribery charges has now been delayed, as Buenrostro will be in jail on a different set of charges: battery.

From the Sacramento Bee:

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.

From Investments & Pensions Europe:

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.

The report can be viewed here.

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.

Credit: Bloomberg

Japan’s Government Pension Investment Fund (GPIF) will not be altering its asset allocation in the near future, according to the fund’s new chief.

The pension fund is two years into implementing a major allocation shift that saw it dramatically increase its equity holdings.

More from Reuters:

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.

A new State Street survey finds that a third of pension professionals think their fund should increase risk-taking to boost returns.

But less than half of those professionals thought their boards had sophisticated knowledge of investment risk.

From ai-cio.com:

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.