Home | Pension360

San Francisco Pension Backs Off Hedge Funds After Conflicts of Interest Surface

San Francisco Employees’ Retirement System (SFERS) was set to vote yesterday on whether the fund should allocate up to 15 percent of assets, or $3 billion, to hedge funds.

But the vote never happened, in part because of the objections of union members and retirees who showed up to the meeting. Recent reports of conflicts of interest surrounding the hedge fund investments probably didn’t help, either.

From the International Business Times:

San Francisco officials on Wednesday tabled a proposal to move up to 15 percent of the city’s $20 billion pension portfolio into hedge funds. The move came a day after International Business Times reported that the consultants advising the city on whether to invest in hedge funds currently operate a hedge fund based in the Cayman Islands.

The hedge fund proposal, spearheaded by the chief investment officer of the San Francisco Employees’ Retirement System, or SFERS, had been scheduled for action this week. If ultimately enacted, it could move up to $3 billion of retiree money from traditional stocks and bonds into hedge funds, potentially costing taxpayers $100 million a year in additional fees.

Pension beneficiaries who oppose the proposal spoke at Wednesday’s meeting of the SFERS board. They cited financial risks and the appearance of possible conflicts of interest in objecting to the hedge fund investments.

Prior to the meeting, the Service Employees International Union, which represents roughly 12,000 members who are eligible for SFERS benefits, asked city officials to have the hedge fund proposal evaluated by a consultant who has worked with boards that have opted against hedge funds.

David Sirota reported on the possible conflicts of interest earlier this week:

[SFERS is] drawing on the counsel of a company called Angeles Investment Advisors, one of a crop of consulting firms that has emerged across the country in recent years to aid municipalities in navigating the murky waters of managing money.

For two decades, Angeles has been employed by the San Francisco pension system to champion the best interests of city taxpayers and employees — the cops, firefighters and other municipal workers who depend on pension payments after their retirement. But the firm is concurrently playing another role that complicates its image as a disinterested guide: An International Business Times review of U.S. Securities and Exchange Commission documents has found that since 2010, Angeles has run a hedge fund based in the Cayman Islands that invests in other hedge funds.

In other words, the consultants that are supposed to be providing unbiased advice about whether San Francisco would be wise to entrust its money to the hedge fund industry are themselves hedge fund players.

SFERS says that, although the vote is tabled for now, it could be brought back at a later time.

This isn’t the first time the pension fund has delayed voting on hedge fund investments. In fact, it’s the third time: the board first delayed the vote in June. Then it delayed the vote again in August.

State Pension Funding Improves For First Time in Six Years

State pension plans have improved their collective funding ratios for the first time since 2007, according to 2013 data.

From Bloomberg:

The median state system last year had 69.3 percent of the assets needed to meet promised benefits, up from 68.7 percent in 2012, according to data compiled by Bloomberg. It was the first increase since the start of the 18-month recession that ravaged retirement assets and led some officials to skip payments as tax revenue sank. Illinois and New Jersey, with the weakest state credit ratings, saw funding levels set new lows for the period.

Buoyed as the Standard & Poor’s 500 index set record highs, the nation’s 100 largest public pensions earned about $448 billion in 2013, the most in at least five years, Census data show. At the same time, governments added a record $95 billion to their plans as they socked away rebounding tax revenue toward obligations to retirees.

“States are playing catch-up — you see more discipline and more public acknowledgment that plans have got to make the required payment every year,” said Eileen Norcross, senior research fellow at George Mason University’s Mercatus Center in Arlington, Virginia.

[…]

The Bloomberg data for 2013, the latest available, underscore the findings in a June report from S&P that said funding levels “have likely bottomed out” and are poised to improve along with climbing stocks.

The S&P 500 index (SPX) rose almost 30 percent last year, the most since 1997, propping up the pensions as the Federal Reserve’s policy of keeping its benchmark interest rate close to zero suppresses debt yields.

But not all states got healthier. The funding statuses of pensions in Illinois and New Jersey have deteriorated further.

Illinois’ funding status dropped from 40.4 percent in 2012 to 39.3 percent in 2013.

New Jersey’s ratio fell from 67.5 percent in 2012 to 64.5 percent in 2013, according to Bloomberg data.

Photo by www.SeniorLiving.Org

Fact Check: Has Tom Corbett Been Shorting The Pension System?

Tom Corbett has used the campaign trail to paint himself as a pension reformer – Corbett, the incumbent governor of Pennsylvania, says the pension system needs to be overhauled and supports a plan to shift public workers into a 401(k)-style plan.

His opponent, Tom Wolf, disagrees. Wolf says the problem isn’t the current system—it’s the current governor. He says the system’s current funding problem stems from Corbett’s failure to make required payments into the system.

The issue was brought up during a debate Wednesday night. WESA reports:

Wolf argued that the pension system itself is not flawed, but that the state needs to put more money into fully funding its pension obligations.

“Governors have not adequately paid into that fund,” Wolf said. “We need to figure out a way to do that, pay that debt, because that balance keeps coming up. I plan to do something about that. I will not keep delaying payment, I will do something.”

Corbett took issue with Wolf’s assertion that his and previous administrations have not adequately paid into the system, and instead said it’s the system itself that needs to be overhauled.

“We do have to, though, bite the bullet and start reforming how we’re paying into that system, rather than continuing to say we’re just going to continue to pay at $610 million new dollars each year for the next, I think it’s 25 years,” Corbett said.

Corbett seemed to dodge the issue of failing to pay the state’s actuarially required contributions (ARC). But Wolf has a point.

Since 2008, Pennsylvania has consistently shorted its largest pension funds.

The state has gone above and beyond when it comes to making payments to the Municipal Retirement System (MRS); but that system is also much smaller than the others.

Both candidates have points here. Wolf is right that Corbett has shorted the pension system. But while making full payments would be a step in the right direction, it wouldn’t solve the system’s funding crisis on its own.

Lessons In Infrastructure Investing From Canada’s Pensions

Canada’s pension plans were among the first in the world to invest in infrastructure, and they remain the most prominent investors in the asset class.

Are there any lessons to be learned from Canada when it comes to infrastructure investing? Georg Inderst, Principal of Inderst Advisory, thinks so.

In a recent paper in the Rotman International Journal of Pension Management, Inderst dives deep into Canada’s infrastructure investing and emerges with some lessons to be considered by pension funds around the world.

The paper, titled Pension Fund Investment in Infrastructure: Lessons from Australia and Canada, starts with a short history of Canadian infrastructure investing:

Some Canadian pension plans, notably the Ontario Teachers’ Pension Plan (OTPP) and the Ontario Municipal Employees Retirement System (OMERS), were early investors in infrastructure in the late 1990s and early 2000s, second only to Australian superannuation funds. Other funds followed, and the average allocation has been growing steadily since, reaching C$57B by the end of 2012 (5% of total assets). Here, too, there is a heavy “size effect” across pension funds: bigger pension plans have made substantial inroads into infrastructure assets in recent years (see Table 2), while small and medium-sized pension funds have little or no private infrastructure allocation.

The main driver for infrastructure investing appears to be the wish to diversify pension funds’ assets beyond the traditional asset classes. While Canadian pension funds have been de- risking at the expense of listed equities, regulators have not forced them into bonds, as was the case in some European countries. Real estate and infrastructure assets are also used in liability-driven investing (LDI) to cover long-term liabilities.

Canada frequently makes direct investments in infrastructure, an approach that is now being tested by pension funds around the world. From the paper:

According to Preqin (2011), 51% of Canadian infrastructure investors make direct investments, the highest figure in the world. This approach (known as the “Canadian Model”) has attracted considerable attention around the world, for several reasons:

• lower cost than external infrastructure funds

• agency issues with fund managers

• direct control over assets (including entry and exit decisions)

• long-term investment horizon to optimize value and liability matching

This direct approach to infrastructure investment must be seen in the context of a more general approach to pension plan governance and investment. Notable characteristics of the “Maple Revolutionaries” include

• Governance: Strong governance models, based on independent and professional boards.

• Internal management: Sophisticated internal investment teams built up over years; the top 10 Canadian pension plans outsource only about 20% of their assets (BCG 2013).

• Scale: Sizable funds, particularly important for large-scale infrastructure projects.

Potential challenges for the direct investing approach include insufficient internal resources, reputational and legal issues when things go wrong, and the need to offer staff market-based compensation in high-compensation labor pools.

Despite these challenges, however, the direct internal investment approach of large Canadian pension funds is now being tried in other countries. Other lessons from the Canadian experience include the existence of a well-functioning PPP model, a robust project bond market, and long-term involvement of the insurance sector.

Finally, the paper points to some lessons that can be learned from Canada:

Lessons learned include the following:

• Substantial infrastructure investments are possible in very different pension systems, with different histories and even different motivations.

• Infrastructure investment vehicles can evolve and adjust according to investors’ needs. In Australia, listed infrastructure funds were most popular initially, but that is longer the case.

• Pension plan size matters when investing in less liquid assets. Private infrastructure investing is driven primarily by large- scale funds, while smaller funds mostly invest little to nothing in infrastructure. In Australia, two-thirds of pension funds do not invest in unlisted infrastructure at all.

• Asset owners need adequate resources when investing in new and difficult asset classes. Some Canadian plans admit that their own estimates of time and other inputs were too optimistic at the outset.

• New investor platforms, clubs, syndicates, or alliances are being developed that should also attract smaller pension funds, such as the Pension Infrastructure Platform (PIP) in the United Kingdom or OMERS’ Global Strategic Investment Alliance (GSIA). However, industry experts stress the difficulties of such alliances with larger numbers of players, often with little experience and few resources. Decision time is also a critical factor.

The full paper offers much more insight into Canada’s approach as well as Australia’s. The entire paper can be read here.

Chicago Fund Looks To Fill New Deputy Executive Director Position

The Chicago Public School Teachers’ Pension & Retirement Fund has created a new “deputy executive director” position and is looking for someone to fill it.

The job listing reads:

DEPUTY EXECUTIVE DIRECTOR RESPONSIBILITIES

The Deputy Executive Director will report to the Executive Director and provide support in leadership of functional departments that support Fund operations. The Deputy Executive Director will be actively involved in strategic planning activities. The Deputy Executive Director will advise the Executive Director, Trustees, and other management personnel regarding operational and planning matters.

Key areas of responsibility will include, but will not be limited to: assuring confidentiality, integrity and availability of information and information systems throughout CTPF; ensuring, along with the CFO, fiscal integrity and proper reporting, including the CAFR and budget preparation; planning/coordinating departmental goals and objectives; workforce planning, hiring, evaluating and developing staff; and monitoring Fund operations for compliance with regulations, internal controls and industry best practices.

[…]

REQUIREMENTS

Viable candidates will have significant leadership experience within a public pension system, financial services organization, or other customer service-oriented organization; solid staff management experience; solid fiscal management, budgeting and planning skills; strong project management skills, specifically related to IT initiatives; experience managing external relationships, including legislative ones; working knowledge of institutional investment concepts; and, an understanding of actuarial concepts. An advanced degree is strongly preferred.

FOR MORE INFORMATION / TO APPLY

For more information, or to apply, contact:

Lorraine Gallick

Research Associate

EFL ASSOCIATES

lgallick@eflassociates.com

According to Pensions & Investments, the fund is looking to fill the position by January 1.

The job listing can be found here.

CalPERS Chooses Firm to Manage $200 Million Private Equity Commitment

CalPERS announced Wednesday that it had chosen a firm to run its new $200 million private equity emerging manager commitment. The firm: GCM Grosvenor.

From Reuters:

Calpers said the new program would launch by the end of the year via a fund-of-funds vehicle. The pension fund would also invest $100 million in AGI Resmark Housing Fund, LLC, a San Francisco Bay Area-focused multi-family residential apartment development fund.

Calpers considers itself a leader in developing and implementing newly formed firms or firms raising first- or second-time funds, called emerging manager programs. Since 2010, the pension fund has committed $900 million to these types of funds.

Grosvenor, a large independent alternative asset management firm, manages approximately $47 billion in assets and multiple emerging manager programs for large institutional investors, including public pension plans and corporate plans.

San Francisco-based AGI Capital is an emerging manager-led real estate investment company that focuses on enhancing communities while delivering strong market returns for investors and partners.

CalPERS has invested $12 billion with emerging managers since 1991.

Dan Primack: All Alternatives Are Not Created Equal

Pension funds have been receiving flak from all sides lately regarding alternative investments.

The criticisms have been varied: the high fees, opacity, underperformance and illiquidity.

But, outside of official statements from pension staff defending their investments, it’s not often we get to here from the people on the other side of the argument.

Dan Primack argues in a column this week that not all alternatives are created equal—and the fight against the asset class has been “oversimplified”.

From Fortune:

Hedge funds are considered to be “alternative investments.” So is private equity. And venture capital. And sometimes so is real estate, timber and certain types of commodities.

A number of public pension systems have increased their exposure to “alternatives” in recent years, at the same time that they either have curtailed (or threatened to curtail) payouts to pensioners. The official line is that the former is to prevent more of the latter, but many critics believe Wall Street is getting rich at the expense of modest retirees.

The complaint, however, generally boils down to this: Alternatives have underperformed the S&P 500 in recent years, even though many alternative funds charge higher fees than would a public equities index fund manager. In other words, state pensions are overpaying for underperformance.

Great bumper sticker. Lousy understanding of investment strategies.

The simple reality is that not all alternatives are created equal. Some, like private equity, are more tightly correlated to public equities than are others. Some are designed to chase public equities in bull markets without collapsing alongside them (that’s where the name “hedge” name from). Real estate is largely its own animal. Same goes for certain oil and gas partnerships.

Lumping all of them together because of fee strategies makes as much sense as arguing that a quarterback should be paid the same as an offensive lineman. After all, they both play football, right?

Primack uses New Jersey as an example:

For those who want to criticize public pensions for investing in alternatives, be specific. New Jersey, for example, reported alternative investment performance of 14.21% for the year ending June 30, 2014. That trailed the S&P 500 for the same period, which came in at 21.38% (or the S&P 1500, which came in at 16.99%). But that alternatives number is a composite of private equity (23.7%), hedge funds (10.2%), real estate (12.74%) and real assets/commodities (6.12%). The sub-asset class most tightly correlated to public equities actually outperformed the S&P 500 (net of fees).

Would New Jersey pensioners have been better off without private equity? Clearly not for that time period. Having avoided real estate or hedge funds, however, would be a different argument. But even that case is tough to prove until New Jersey’s relatively immature alternatives program experiences a bear market. For example, both hedge funds and the S&P 500 went red last month, but the S&P 500’s loss was actually a bit worse. And macro hedge fund managers actually had positive returns. Does that make up for years of the S&P 500 outperforming hedge? Likewise, should real estate performance receive an indirect bump from recent rises in venture capital performance, just because they are both “alternatives?”

Again, that’s a judgment call that should be based on voluminous data, rather than on knee-jerk anger that alternative money managers are getting paid while retiree benefits are getting cut. If alternative managers are helping to stem the severity of those cuts, then everyone wins. If not, then the state pension needs a change in policy. But, in either case, the specific alternative sub-asset classes should be analyzed on their own merits, rather than as one homogeneous bucket. Otherwise, critics may throw out the baby with the bathwater.

Read the entire column here.

Photo by 401kcalculator.org

CalPERS Board Member Faces Quadrupled Fine After Repeatedly Failing To Disclose Campaign Finances

CalPERS board member Priya Mathur failed to turn in campaign finance and conflict of interest statements in 2002, 2007, 2008, 2010, 2012 and 2013.

She’s been fined numerous times, but her next one is going to be bigger the biggest yet: the panel that levies the fines has agreed to quadruple Mathur’s latest fine, from $1000 to $4000. From the Sacramento Bee:

The Fair Political Practices Commission plans to impose a $4,000 fine at its Oct. 16 meeting. Mathur has agreed to the fine, according to FPPC documents.

The agency’s staff had proposed a $1,000 fine for Mathur’s most recent violation, in which she failed to file campaign finance statements on time. But the commissioners decided at their August meeting that Mathur’s repeat offenses warranted a penalty of $4,000. The fine comes to $1,000 for each of the four campaign finance statements that she was late in filing.

In a Sacramento Bee interview earlier this summer, she blamed the latest problems on a paperwork snafu. But FPPC staff said it took “numerous requests” from investigators to get Mathur to finally submit the documents.

Mathur last week was declared the winner, based on preliminary results, in her bid for re-election. An official with the Bay Area Rapid Transit district, Mathur will serve another four-year term starting in January.

Mathur has been fined $13,000 by the Comission during her time on the CalPERS board.

Florida Pension Cuts PIMCO

In the latest vote of non-confidence in a post-Bill Gross PIMCO, the Florida State Board of Administration (SBA), the entity that manages investments for the Florida Retirement Systems, has announced it will drastically cut its investments with PIMCO.

From the New York Times:

The investment body overseeing the state of Florida’s retirement system said Tuesday that it would be sharply curtailing the funds that it has allocated to the shaken bond giant.

In a statement, Dennis Mackee, a spokesman for the $147 billion pension fund, said that $1.9 billion in assets managed by PIMCO as a separate investment account for Florida would be “significantly reduced.”

Mackee also said that Florida’s investment plan would be terminating PIMCO’s Total Return Fund and its Inflation Response Multi-Asset Strategy Fund. Together, the funds managed just over $1 billion for Florida retirees.

Adding insult to injury, Mackee said that this money would be steered toward two funds belonging to PIMCO’s archrival, BlackRock.

Mackee said that Blackrock would also be one of several other money managers receiving the separate account money withdrawn from PIMCO.

As with many state retirement funds, Florida had put PIMCO on its watch list after reports that its two leaders, Bill Gross and Mohamed El-Erian, were feuding.

The Florida Retirement System is one of the largest public pension funds in the United States. It manages $147 billion.

Would An Elected Comptroller Ease New Jersey’s Pension Pain?

Fixing New Jersey’s pension system has been the talk of the state lately, and as far as ideas go, all the usual suspects have been proposed: cutting benefits, making full actuarial contributions, transferring new hires into a 401(k)-style plan, etc.

One idea that is rarely discussed is the creation of a model similar to New York: the appointment of a comptroller to oversee and have authority over the pension system.

Under this model, the comptroller would take significant authority out of the governor’s hands regarding pension matters.

This hypothetical comptroller, if he wished, could have overridden Chris Christie’s decision to cut the state’s pension payments. More analysis from NJ Spotlight:

While New Jersey governors and legislatures have been cutting, skipping, or underfunding pension payments for the past 20 years, New York does not have a similar pension crisis because its elected state comptroller has the power not only to set the actuarially required pension payment each year, but also to require Albany’s governor and Legislature to fully fund it, according to a senior Moody’s Investors Service analyst.

New York State Comptroller Thomas DiNapoli is required to calculate the state’s pension payment by October 15 to give the governor’s office and legislative branch sufficient time to include his calculation in the budget for the fiscal year that begins the following June 30. That amount is then required to be paid into the state’s pension systems on or before March 1 — three months before the end of the fiscal year.

“In New York, the state comptroller is responsible for the entire pension system,” Robert Kurtter, Moody’s Managing Director for U.S. Public Finance, explained at a forum on pension funding at Kean University last week. “The comptroller’s power to require full pension funding has been litigated and upheld by New York’s highest Court of Appeals.

“The New York Legislature tried to underfund the actuarially required contribution, but couldn’t,” Kurtter said. “It’s a two-edged sword for New York. Their unfunded liability is low, but they don’t have a choice, even when revenues are down.”

The soundness of New York’s pension system is one of the principal reasons that the state enjoys a AA1 bond rating from Moody’s — one of 30 states in the top two rating categories — while Illinois and New Jersey are the nation’s fiscal basket cases, the only two states with lower-tier single-A bond ratings. While New York was upgraded this year, New Jersey’s bond rating has been downgraded a record eight times under Gov. Chris Christie.

But creating a comptroller position and giving it authority is a politically tricky process – because it involves not only amending the constitution, but also taking away significant power from the state’s governor. From NJ Spotlight:

New Jersey’s governor has more power over state spending than any other governor. New Jersey’s governor has unilateral authority to determine the revenue projections that determine the size of the budget — which Christie has consistently overestimated, as previous governors have when it met their political needs.

New Jersey’s governor also has the ability to make midyear budget cuts without seeking legislative approval — as Christie did when he retroactively changed the pension formula in March and cut $900 million in Fiscal Year 2014 pension payments in May.

Adding an elected state comptroller or state treasurer or establishing an ironclad requirement that the state make its actuarially required contributions to the pension system annually would require a constitutional amendment. The Democratic-controlled Legislature would need the governor’s signature to pass a new law, but not to put a constitutional amendment on the ballot — a strategy it used to bypass Christie on the minimum wage last year and on guaranteed funding for open space this fall.

Last spring, Christie cut $2.4 billion in payments to the pension system and diverted it to help balance the state’s general budget.

Deprecated: Function get_magic_quotes_gpc() is deprecated in /home/mhuddelson/public_html/pension360.org/wp-includes/formatting.php on line 3712