Category: Funding status

Argentina Default Devastates Pensions of Brazilian Mailmen

640px-Argentina_Logo

Argentina’s failure to pay interest on its debt—resulting in the country’s second default in 13 years—was always going to have an economic ripple effect.

But Brazilian mailmen probably didn’t realize they’d be near the top the list of negatively affected parties. In light of Argentina’s default, they’ve seen their pensions zapped.

That’s because Postalis, the pension manager to which about 130,000 active and retired Brazilian postal workers belong, is feeling the pain of the default.

Postalis was invested in the fund Brasil Sovereign II Fundo de Investimento de Divida Externa, a Brazil-based investment fund of Bank of New York Mellon, that this week wrote down its assets by 51 percent, according to Bloomberg:

Bank of New York Mellon Corp. said one of its Brazil-based investment funds wrote down more than half the value of its assets after recording losses on investments linked to Argentine government debt.

The Brasil Sovereign II Fundo de Investimento de Divida Externa FIDEX took a loss of 197.9 million reais ($87.2 million) on Aug. 1 after booking a provision on credit-linked notes tied to Argentine bonds, according to a regulatory filing yesterday by BNY Mellon DTVM, the bank’s Brazilian fund manager. The fund has just one investor and the identity is not public information, according to securities regulators.

Argentina last week failed to make a $539 million interest payment on its bonds, prompting Standard & Poor’s and Fitch Ratings to declare the country in default for the second time since 2001. The country has about $29 billion of overseas foreign-currency notes outstanding, and the International Swaps & Derivatives Association ruled last week that the failure to pay interest will trigger $1 billion of credit-default swaps.

“Due to the suspension of payment on foreign debt notes issued by Argentina backing the referred notes, and to the necessity to change its evaluation methodology of some credit-linked notes, provisions for losses have been made in its portfolio,” BNY Mellon DTVM said.

The fund that held the notes had 384.4 million reais worth of assets as of July 31, according to data available at the website of the Brazilian securities regulator. The value dropped about 52 percent to 185.5 million reais as of Aug. 1.

You’ll notice in the excerpt above that the fund has only one investor, the identity of which isn’t public information. But it’s widely believed that investor is Postalis. From Businessweek:

While the statement didn’t identify the entity that is the fund’s sole investor, all signs point to Postalis, the pension manager serving about 130,000 current and former postal workers in Brazil.

Postalis, which had 8 billion reais ($3.5 billion) in assets according to the latest data available, said in statements as early as 2011 and as recently as May that it had invested in the fund. Postalis’s press office declined to comment.

Postalis is Brazil’s 14th-biggest pension group by investments under management, according to June 2013 data available from the Brazilian pension association Abrapp.

Brazil’s pension regulator was asked by multiple media outlets to comment on the situation, but has so far declined all requests.

 

Photo: “Argentina Logo” by Guillermo Brea. Licensed under Creative Commons

Taking Stock of Where Rhode Island’s Candidates for Governor Stand On the Release of Pension Hedge Fund Records

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Last month, current Rhode Island Treasurer Gina Raimondo (Democrat) denied the Providence Journal access to records relating to the state pension fund’s hedge fund investments.

The newspaper appealed, but that appeal was denied as well.

In a letter written by Raimondo at the time of the denial, she justified her actions with the following logic (the entire letter can be read at the bottom of this post):

For democracy to work, the public, often through the press, needs oversight over how government is acting on its behalf. At the same time, the government, to fulfill its obligations to the public, needs to be able to function effectively, which often requires a measure of confidentiality, particularly when contracting with private sector entities. Over the years, the law has determined how to balance these two requirements, and the actions of Treasury were consistent with that balance.

With elections only a few months away, and Raimondo in the midst of a bid for governorship of the state, Raimondo’s opponents have seized the opportunity to pounce on her decision to deny access to the hedge fund records.

Providence Mayor Angel Taveras (Democrat), who is now running for governor of the state, had this to say:

“Apparently, the treasurer is more concerned about hedge funds being able to keep their talent than taxpayers knowing how their money is being spent,” Taveras’ spokeswoman Dawn Bergantino said. “The treasurer should be looking out for our interests, not Wall Street and hedge fund billionaires.”

Allan Fung (Republican) is currently the mayor of Cranston, Rhode Island. But he’s in the running for governor of the state as well, so he put his thoughts on the table:

“There is a dramatic difference between what is required legally and what is necessary to do the right thing,” Fung said. “Current and retired state employees depend on the strength of the pension fund for their retirement security, and all Rhode Islanders face the risk of higher taxpayer contributions if these investments come up short. We all face tremendous risk and we deserve to know the basis for these investments.”

According to the latest polls, Taveras is currently up on Raimondo, garnering 33.4 percent of the vote to Raimondo’s 29 percent. Clay Pell remains a distant third with 11.5 percent of the vote.

Credit: Wikipedia

Raimondo’s position has notably diminished since she chose to withhold the hedge fund records. Although she is drawing in the same percentage of votes, the issue may have swayed undecided voters to side with Taveras.

On the Republican side, the latest poll has Ken Block maintaining a healthy lead over rival Allan Fung.

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Credit: Wikipedia

And, as promised, here is the letter that Raimondo wrote when she denied the Providence Journal access to the state pension fund’s hedge fund records.

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Photo by: By Jim Jones (Own work) via Wikimedia Commons

Alaska mulls using savings to cover pension-funding shortfall

emergency savings

Alaska is a state far removed geographically from the rest of the country it belongs to. But financially, it may as well be a part of the lower 48—because, unfortunately for Alaska, the United States’ public pension problems know no borders.

The state’s lawmakers have been trying to address the state’s pension funding shortfall—the fund was only 59.2% funded as of 2011, 9th worst in the country—with concrete proposals for months.

Alaska governor Sean Parnell proposed in December that the state move $3 billion from its rainy day fund into its retirement system in an effort to start paying down its $12 billion pension obligation.

The plan went to the state House of Representatives, where it passed with near unanimity, and now the bill has passed the Senate as well—albeit with some changes. In essence, the plan is to use the state’s savings account to infuse its retirement system with $3 billion in additional contributions over the next 25 years.

The Republic has more details:

The Senate Finance Committee’s rewrite of HB385 calls for a contribution rate determined by what’s known as a level percent of pay method for 25 years. While the bill itself does not include dollar amounts, information provided by the Legislative Finance Division and Buck Consultants indicates combined annual payments for the two systems starting at about $345 million in 2016 and slowly building to about $514 million in 2038. It calls for a final payment of about $490 million the following year.

The information shows the Senate Finance approach extending payments by three years beyond Parnell’s plan, which called for annual payments of $500 million between the systems after the infusion, and costing slightly more — about $13 billion total for Parnell’s plan compared with about $13.3 billion under the committee approach.

These are projections, not predictions, Buck and Legislative Finance Division Director David Teal have pointed out.

Though the bill now differs slightly from Gov. Parnell’s original plan, he was happy with the result.

“With this legislation, we are strengthening the state’s AAA bond rating and ensuring future generations are not saddled with this debt,” he said in a press release.

 

Photo Credit: SalFalko via Flickr Creative Commons License

The Political Economy of Unfunded Public Pension Liabilities

This paper applies a public choice approach to the problem of unfunded pension liabilities and adopts the methodology of Congleton and Shughart (1990) to model underfunding of state-level public pension plans using the median voter theorem, along with the theory of “capture” by special interest groups, and a combined model of the two.


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