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Thousands of Early Retirements Coming In Indiana As New Law Takes Effect

A new law has pushed forward the retirement plans of thousands of Indiana workers, who may retire early to try and avoid lower interest rates on their monthly retirement benefits.

One state system, the Indiana Public Retirement System, said it expects 2,000 more retirements than last year, which amounts to a 25 percent increase. From the Lafayette Journal and Courier:

A law, passed by the General Assembly this spring, lowers the interest rate retirees will be paid if they choose to annuitize some of their retirement benefits, taking monthly payments for the rest of their lives rather than a lump sum.

For employees whose last day of work is before the end of August, the rate is 7.5 percent. It’ll drop to 5.75 percent thereafter and keep dropping until it’s tied to the market rate.

The change is supposed to prevent a changing world from bankrupting the system, according to INPRS documents. Concerns stem from longer life expectancies and the system’s return on investment, which is lower than the current interest rate.

While system administrators say the lower rates are necessary, the change has inspired government workers who were nearing retirement to move up their plans.

Of course, nobody knows for sure how many of those extra retirements were spurred specifically by the new law. From JC Online:

Local officials says it’s hard to judge the exact impact the new law has on retirees.

In the Lafayette School Corp. for example, 37 teachers retired this year, more than the typically 20 to 25 teachers, said assistant superintendent John Layton. But without asking each one point blank why they’re retiring, the reasons prompting that retirement aren’t always clear.

[…]

West Lafayette city human resources director Diane Foster said the change has had minimal impact on the city. The only retiree to cite that as a reason is soon-to-retire parks and recreation superintendent Joe Payne.

“Other than that I’m not aware of any other employees who have made that decision based on this,” Foster said. “It could be that if an employee is already considering retirement this may be just one more factor that could help them go ahead (and do it).”

It’s unclear how the change is impacting Lafayette. Human resources director Kim Meyer said retirement data wasn’t immediately available.

Rhondalyn Cornett, president of the Indianapolis Education Association, told the Lafayette Journal Courier that a retiree could see significantly less benefits under the new law—to the tune of $5,000 a year.

With that number in mind, it’d be surprising if the new law wasn’t at least a factor in most of these early retirements.

Photo by www.aag.com via Flickr CC License

Infrastructure Investments Becoming Big Part of Canadian Pensions

Infrastructure investments are becoming increasingly common endeavors for public pension funds. That’s true around the world, but nowhere is the trend more pronounced than in Canada, where the average pension fund has doubled its allocation to infrastructure since 2009. As reported by Benefits Canada:

Historically, Australian and Canadian investors—primarily pension funds—have dominated investment in infrastructure assets, accounting for 40% of historical allocations despite representing only 7% of total potential available capital.

Canadian pension assets totaled US$1.6 trillion in 2013, while infrastructure allocations by Canadian plans totaled US$47.2 billion. This contrasts with U.S. pension assets, which were in excess of US$18 trillion also in 2013, and whose allocations to infrastructure were only US$25.4 billion, less than those made by Canadian pension plans.

On average, Canadian pension funds have allocated 4% of their pension fund assets to infrastructure, up from 2% in 2009.

More recently, there have been some noticeable trends in infrastructure investing, both in terms of investor location and type. To date, pension funds have accounted for 72% of allocations made to infrastructure assets. Based on prospective allocations, sovereign wealth funds are expected to increase their “market share” from 13% of the total allocations to 40%, with a corresponding decrease in the percentage attributed to pension funds (45% versus the present 72%).

Funds in the United States might not be in on the game yet, but insiders say they expect state-level pension funds to significantly boost their allocations to infrastructure investments. More from Benefits Canada:

American state pension funds, as well as Asian investors[…]have started to take an active interest in infrastructure investing. These two groups currently account for 20% of allocations, but based on surveys by Preqin, are expected to increase these to 48% of total infrastructure allocations. Most notably, the Government Pension Investment Fund of Japan has committed 0.2% to infrastructure, though this translates into US$2.7 billion in investments over the next five years.

It’s a very interesting trend, and one that likely won’t reverse course in the near future. The exception may be smaller funds, who will have more trouble navigating direct investments in infrastructure. They’ll have to hire third-party managers, and that may not be appetizing to some funds who are becoming increasingly allergic to fees and investment expenses.

Photo by Kyle May via Flickr CC License

Fitch Weighs In On New CalPERS Compensation Rules

This week, CalPERS approved 99 types of additional income that workers can include in their pension calculations.

The change will increase the pensions of many workers in the CalPERS system, and the fund has already drawn flak from California Governor Jerry Brown.

Now, the credit rating agency Fitch is in on the game, too. Fitch says the changes will increase pension liabilities and present additional costs to the state. From Fitch:

The expanded definition of pensionable compensation exposes public employers to higher pension liabilities and contribution expenses, and appears to be a step backward from recent reforms. The Public Employees’ Pension Reform Act of 2013 (PEPRA) narrowed the definition of pensionable compensation for public employees in an effort to address “pension spiking,” the inflation of base pay for purposes of pension benefit calculations. This decision expands the definition of pensionable compensation, in apparent conflict with PEPRA, and will increase pension costs for public employers if implemented.

The magnitude of impact from this decision is not yet clear, but it raises more questions about the sustainability of California’s pension reform efforts, which continue to face legal and institutional challenges. Particularly worrisome to Fitch is the absence of detailed information on the analysis of its projected costs. The decision has been sharply criticized by Gov. Jerry Brown, who cited its conflicts with recent state legislation intended to reduce pension costs. City-led pension reform efforts in San Diego and San Jose remain mired in litigation while this CalPERS decision appears to open up a new front for challenging reform efforts.

Gov. Brown was actually open to most of the 99 “special pay items”. But he adamantly opposed the measures that contradicted the reform law Brown passed in 2012.

“Today Calpers got it wrong,” Brown said in a statement on Wednesday. “This vote undermines the pension reforms enacted just two years ago. I’ve asked my staff to determine what actions can be taken to protect the integrity of the Public Employees’ Pension Reform Act.”

CalPERS Board Member Facing Stiffer Penalty After Latest Failure To File Campaign Documents

What do the years 2002, 2007, 2008, 2010, 2012 and 2013 all have in common?

Those are the years that Priya Mathur, Vice President of the CalPERS board, failed to submit campaign finance documents or conflict of interest statements in a timely manner.

She was fined three times by the Fair Political Practices Commission over that period for those violations. Now, another fine is coming for her latest transgressions. From the LA Times:

At issue in the recent enforcement action was the failure to file four semiannual campaign financial statements for 2012 and 2013 in a timely manner.

In a recent email, she described the missed reports as an oversight. “I had inadvertently failed to file the proper forms in 2012 to close my campaign committee,” she said.

The proposed fine of $1,000 was announced Aug. 11 after she and FPPC attorneys reached an agreement to settle the charges. In turn, Mathur and her board reelection committee pledged not to contest the punishment.

But the panel reversed course on the $1000 dollar fine and decided they should quadruple it—raising it to $4000. The Sacramento Bee reports:

Mathur, the pension fund’s vice president, had agreed to a $1,000 fine with the staff of the state Fair Political Practices Commission. But the commissioners refused to accept the fine Thursday, arguing that Mathur should get a higher penalty because she had been fined several times before by the FPPC.

Gary Winuk, the agency’s chief of enforcement, said commissioners sent the case back to the FPPC’s staff and suggested the fine be increased to $4,000.

“Given her history … they felt it warranted a higher penalty,” he said. He said the matter could be brought back to the commission next month.

At this point, Mathur and the ethics panel probably know each other on a first name bases. But repeated disciplinary actions haven’t changed Mathur’s behavior. From the Sac Bee:

The FPPC has already fined Mathur a total of $13,000 for earlier transgressions, including late filing of campaign documents and her conflict-of-interest statements. The most recent fine came in 2010, prompting the CalPERS board to punish her by removing her as chair of the health benefits committee and suspending her from traveling on pension fund business.

In the latest case, Mathur was late filing four campaign finance statements in connection with her re-election bid. Mathur told The Sacramento Bee last week that the late filing was the result of a paperwork mix-up.

The FPPC staff, in its report to the commissioners, said it took “numerous requests” from investigators to get Mathur to finally file the documents. That conduct played a role in the commissioners’ desire for a stronger penalty, Winuk said.

The board’s election takes place next week. The election is conducted by mail.

Photo by Blake O’Brien via Flickr CC License

Russia Diverts Pension Contributions To Plug Other Budget Holes

pensii_941 — CREDIT: Natalia Mikhaylenko, RBTH

For the second straight year, Russia has decided to freeze its contributions to its pension funds and instead use the money to plug budget holes elsewhere.

Russia says the money will be used for more pressing needs elsewhere in the budget. But critics claim the action could be a costly one. Russia Beyond The Headlines reports:

For the second year in a row, the Russian government has decided to freeze the portion of pension contributions allocated for investment.

Contributions for 2013, amounting to some 550 billion rubles ($15.2 billion), have already been frozen, with the government intending to do the same with a further 700 billion rubles’ worth of pension savings for 2014.

The move, which the Ministry of Labor and Social Protection says is necessary in order to finance current pension payments, will leave major Russian companies without investment and will force banks to raise interest rates.

The negative effects are already being felt by ordinary Russians: At the end of last year, minimal interest rates for individuals started at 8 percent, whereas in 2014 loans have become 2 percent more expensive, with interest rates starting at 10 percent.

This year’s situation will be further exacerbated by the departure of foreign investors, Baranov adds.

“This will result in the cost of loans and debt refinancing growing in 2015 for banks and corporations, for the federal and regional finance ministries. It is hard to estimate the exact figure that they will have to pay extra, but it will be comparable with the amount of frozen funds, i.e. the very same 700 billion rubles or maybe even more,” Baranov says, predicting the potential consequences.

Russia’s pension funding is experiencing turbulence due to a demographic shift that has more people retiring and less people contributing to the system. From RBTH:

Sergei Khestanov, an economist for the ALOR Group, explains that the deficit in the Pension Fund has occurred because of the country’s demographic decline. The population is aging, and while 20-30 years ago there were 6 workers to one pensioner, now there are fewer than two, and their contributions do not cover current needs.

That demographic shift won’t be reversing itself anytime soon. So while the pension freeze helps plug current shortfalls, it only exacerbates future problems.

Reuters reported earlier this month that there was “deep disagreement” among Russian officials regarding the contribution freeze.

Union Coalition Wants Illinois Court To Act Faster In Case Against Reform Law

A coalition of some of the largest labor groups in Illinois filed a motion today calling on the court to speed up its ruling regarding the constitutionality of Illinois’ pension reform law.

The coalition, We Are One Illinois, says the Supreme Court’s July decision—where the court ruled retirees’ health benefits are protected under the state’s constitution—confirms that Illinois’ pension reform law is illegal.

From CapitolFax:

Yesterday, the We Are One Illinois coalition, along with other plaintiffs, filed a motion in Sangamon County urging the Circuit Court to enter judgment in the plaintiffs’ favor on the State’s affirmative defense in light of the recent Supreme Court decision in the case of Kanerva v. Weems. The We Are One Illinois coalition and other plaintiffs assert that the Kanerva decision confirms that the Pension Protection Clause in the Illinois Constitution is absolute and without exception, even with respect to the fiscal circumstances alleged by the State in its defense.

Illinois says its dire fiscal situation gives it the authority to cut to pension benefits, even if they are constitutionally protected. From Reuters:

The state has contended that its sovereign powers allow it to act in a fiscal emergency. Illinois has a $100 billion unfunded pension liability and the country’s worst funded state retirement system. Illinois’s credit ratings are also the lowest among U.S. states.

But the court’s July decision doesn’t bode well for the state’s case. At the time, the court wrote:

“[I]t is clear that if something qualifies as a benefit of the enforceable contractual relationship resulting from membership in one of the State’s pension or retirement systems, it cannot be diminished or impaired … Giving the language of article XIII, section 5, its plain and ordinary meaning, all of these benefits, including subsidized health care, must be considered to be benefits of membership in a pension or retirement system of the State and, therefore, within that provision’s protections.”

We Are One Illinois issued the following statement after filing the motion:

“The Kanerva decision confirms what we have always argued, that the state’s constitutional language guards against any diminishment or impairment of pension benefits that Senate Bill 1 imposes. We believe, then, that the State’s defense is without merit and so have asked the Court in this motion to rule in our favor on the State’s defense that seeks to justify Senate Bill 1. We maintain that the constitution protects the hard-earned and promised retirement savings of our members and remain ready to work with any legislator willing to develop a fair and legal solution to our state’s challenges.”

Photo credit: “Gfp-illinois-springfield-capitol-and-sky” by Yinan Chen, Via Wikimedia Commons

Which Pension Fund Is Best At Investing In Private Equity? The Results Are In

Reuters PE Hub recently surveyed 160 public pension funds across the country in an attempt to pinpoint the fund with the highest-performing private equity portfolio.

The results of the survey were released this month, and the fund with the best performance from private equity was the San Diego City Employees Retirement System (SDCERS). From KUSI News:

SDCERS’ private equity portfolio consists of 45 different funds, with commitments of $580 million. The survey noted 47 percent of SDCERS’ funds performed in the top 25 percent of all funds surveyed. The private equity program invests in all types of assets and strategies globally, including buyouts, special situations and venture capital funds.

“The success of SDCERS’ private equity program can be attributed to the thoughtful way in which the program was constructed, and the quality of the dialogue between staff and consultants,” SDCERS CEO Mark Hovey said. “I am proud of our investments team and the Board of Administration, who work tirelessly to secure a retirement future for more than 200,000 members through an effective investment strategy focused on delivering long-term results.”

SDCERS shouldn’t be confused with the San Diego County Employees Retirement Association, which gained notoriety this week when the Wall Street Journal reported on the fund’s heavy reliance on alternative investments.

SDCERS was 68.6 percent funded as of 2013.

Would You Sell Your Future Pension For a Lump Sum of Cash? These Businesses Are Banking On It

You’ve heard of payday advances. But pension advances?

Believe it or not, businesses are popping up that allow retirees to do just that: “sell” a portion (or all) of their future retirement income in exchange for a lump sum of cash today.

The owners of these businesses admit that their service isn’t for everyone. But if you need to pay bills now, they say, then why not sell a portion of your pension for cash? More from Today:

Their pitch, aimed at military and government retirees with generous pension benefits and those with bad credit, is mighty appealing: cash now to pay today’s bills.

Of course, to get tomorrow’s money today, you have to sign over your future pension payments for a specified number of years.

Mark Corbett runs the website Buy Your Pension, which helps facilitate pension sales. He told TODAY that a pension advance is not for everyone, but he believes it can be beneficial for some people.

“You should not sell your pension unless it saves you money,” he said. “For example, you are using it to pay off bills.”

Four years ago, Corbett got an advance on his private pension — selling a $237,000 nest egg for $89,000 — to pay off his mounting bills. He called it “a godsend” that reduced his stress and probably added years to his life.

But critics say pension advance services are dangerous and financially unwise. The Federal Trade Commission, Financial Industry Regulatory Authority and other consumer protection agencies are already cautioning people to be know the implications of selling your pension. Today writes:

“There are serious financial consequences down the road for taking the money in a lump sum now,” said Gerri Walsh, FINRA’s senior vice president of investor education. “You are getting less money than if you waited and got those monthly pension payments.”

Unlike a traditional loan, you can’t get out of the deal early. If you signed up for a six-year payout, the company gets your pension for a full six years.

“A pension advance is unlike any other type of financing, because you’re required to sign over part of your future income stream,” said Leah Frazier, an attorney for the FTC.

“You could find yourself in a situation down the road where you need money for your basic expenses, but you don’t have it because you took it as an advance.”

And remember: Getting a lump sum pension payment is likely to have some serious tax implications.

“It could push you into a higher tax bracket,” said Lisa Greene-Lewis, lead CPA at TurboTax. “I could see people doing this and getting shocked by the additional taxes they now have to pay.”

The Government Accountability Office (GOA) recently did some secret shopping at nearly 40 pension advance businesses. Based on their experiences, they released a report indicating that they’d found numerous “questionable business practices”.

Last month, Missouri banned pension advances for public employees. They are the only state thus far to do so.

Photo by: www.SeniorLiving.Org

New Jersey Bill Would Make Corrupt Politicians Pay For Court Costs—From Their Pensions

In 2013, New York paid $600,000 in pension benefits to politicians who were occupying jail cells instead of offices.

That’s because New York’s constitution makes it nearly impossible to take away a person’s pension benefits—even if that person is a corrupt politician who was booted from office and sent to jail.

The same is true around the country, as at least six states protect pension benefits under their constitutions. It’s a well-meaning provision, but in the case of corrupt politicians it often has unintended consequences.

New Jersey has been paying attention to New York’s conundrum, and it wants no part of that game.

Three state legislatures (Sen. Christopher J. Connors, Assemblyman Brian E. Rumpf and Assemblywoman DiAnne C. Gove) recently proposed two initiatives that would shield taxpayers from the expenses that come with corrupt politicians—and force those politicians to pay for their court costs, among other things, by garnishing their pensions. From The Sand Paper:

The delegation’s first reform measure would make public officers or employees convicted of crimes affecting their office or found at fault in certain civil actions liable for the cost of prosecution and legal representation if received through the expense of public funds. Under the legislation, convicted persons would be subject to pension garnishment to satisfy the liability.

The second measure would allow a public employer to levy a judgment for restitution of illegally obtained funds against a convicted public employee’s retirement allowance. Provisions of the legislation would apply to any official’s or employee’s pension contribution to principal state-administered retirement systems.

One interesting segment from the lawmakers’ joint statement on the initiatives:

“When holding public office, you are answerable to the people whose tax dollars fund the operations of government,” the statement said. “Therefore, it would be appropriate to garnish the public pension of convicted politicians as a means of recovering the cost of their prosecution and legal defense as well as funds illegally obtained through the use of their government position. To do so would mitigate the cost of corruption on taxpayers, whose interests should be put first as the victims of such crimes.”

Illinois, Kentucky Pension Funds Benefit From $17 Billion Bank of America Settlement

A handful of pension funds will be receiving large chunks of change after Bank of America agreed today to pay $17 billion to end a Justice Department probe into the bank’s sale of toxic mortgage securities.

The Justice Department alleged that Bank of America violated federal law when it marketed and sold investment vehicles tied to shoddy home loans and misled investors about the quality of the investments.

Many pension funds were major investors in such investment vehicles and sustained major losses on those investments during the financial crisis.

But some funds will be getting a chunk of that money back, including numerous Illinois funds and the Kentucky Retirement System. From Red Eye Chicago:

For Illinois, the $16.65 billion national settlement means a cash payment of $200 million for the state’s pension system, making it whole for losses sustained as a result of the risky investments.

…

The Illinois pension entities that will receive the payments under Thursday’s deal are the Illinois Teachers Retirement System, the State Universities Retirement System and the Illinois State Board of Investment, which oversees pension plans for state employees, the General Assembly and judges.

Kentucky’s payout is substantially smaller than that of Illinois, but the KRS will still see some relief. From the Lexington Herald-Leader:

Kentucky Retirement Systems will get $23 million from Bank of America’s $16.65 billion national settlement with the federal government over accusations that the bank improperly dumped “toxic” mortgage-backed securities on the market, helping fuel the economic recession of 2008.

This isn’t the first major settlement stemming from toxic investments that have benefited pension funds. Earlier this year, CalPERS and CalSTRS received over $100 million combined when CitiGroup agreed to a $7 billion settlement.

Illinois was a beneficiary of the CitiGroup settlement as well, as three Illinois funds received a combined $45 million as reparations for their investment losses.

Photo by Mike Mozart via Flickr CC License

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