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Ontario Teachers’ Fund Sets Sight On Airport As It Looks To Increase Infrastructure Holdings

The Ontario Teachers’ Pension Plan is looking to expand its infrastructure holdings by up to $6 billion, or 33 percent, and the fund’s first move will likely be to buy an airport. From Reuters:

Canada’s Ontario Teachers’ Pension Plan is seeking to buy the rest of Britain’s Bristol Airport in a deal worth up to 250 million pounds ($424.6 million), a source closely monitoring the situation said on Monday.

The pension fund, which already owns 49 percent of the regional airport, has the right of first offer for the 50 percent owned by Australian asset manager Macquarie Group.

Macquarie, the world’s largest infrastructure asset manager, was sounding out buyers for its holding, British newspaper The Sunday Times reported.

Ontario Teachers’ Pension Plan is eyeing the stake as it seeks to expand its infrastructure holdings from $12 billion to around $18 billion. The deal could take place this year, the source said.

“Given the right of first offer, Ontario Teachers is likely to purchase the stake, but this will of course be based on an appropriate valuation,” the source said, adding that discussions have not commenced but are expected to start “very soon”.

European airport deals typically attract a valuation of 15-17 times core earnings (EBITDA).

The Teachers’ Plan originally invested in the airport in 2002, and it increased its stake in to 49 percent in 2009.

Bristol Airport is the ninth-busiest airport in Britain.

North Carolina Nears Pension Spiking Ban For Top State Officials

The practice of pension spiking has garnered more media attention than ever over the past few years, and that is leading to the practice being examined in the halls of numerous state-level legislatures.

Pension spiking happens when public workers accumulate sick leave, vacation time, bonuses and other benefits until the year before they retire. In their final year on the job, they cash out all those benefits—inflating their final year salary.

Since final year salaries play a big role in calculating a worker’s pension benefits, spiking can increase a retiree’s annual pension by thousands of dollars per year. The practice is currently legal in most states.

Pension360 previously covered the outlawing of spiking in Phoenix, Arizona. Now, lawmakers in North Carolina are on the brink of prohibiting the practice in their state as well. From the Raleigh News and Observer:

The state Senate tentatively approved legislation Monday night that would prevent state agencies and local governments from using the state retirement system to boost the pensions of top officials when they finish their careers.

The bill, approved 44-4, requires the agencies, local governments or the top officials themselves to put the money into the retirement system to pay for the pension spiking. The legislation cleared the House last month with no votes in opposition, making it likely a second approval from the Senate would make it law.

The legislation followed a report in The News & Observer that four community colleges in recent years converted tens of thousands of dollars in perks such as car and housing allowances into salaries for their presidents as they neared retirement.

In November, the N&O’s Checks Without Balances series reported on four community college presidents whose boards allowed for as much as $92,000 in perks to be converted into salary. The colleges are Cape Fear, Central Piedmont, Sandhills and Wilkes.

Their boards used the removal of a state salary cap on the local share of community college presidents’ salaries to convert the perks to salary. As perks, the pay was not eligible for pension purposes, and no contributions had been made out of them to the state retirement system. But when the perks were converted into salary, they became pension-eligible compensation.

Taxpayers support the retirement system through contributions made by state and local governments on behalf of their employees. The employees are also required to contribute a small percentage of their pay.

Two of the four community college presidents – Eric McKeithan at Cape Fear and Gordon Burns at Wilkes – have since retired. Burns, whose $80,000 in perks converted to pay before he stepped down in June, could see his pension bumped up as much as $52,000 a year.

The other two presidents are Central Piedmont’s Tony Zeiss and Sandhill’s John Dempsey. Their boards each converted roughly $40,000 in perks to pay.

There are, however, some worker-friendly provisions in the bill to make it more palatable. From the Raleigh News and Observer:

• It would return the vesting period to become eligible for a pension to five years. Three years ago, lawmakers raised it to 10 years, thinking it would save the state money. But the treasurer’s office found it wasn’t saving much money and was making the state less competitive for job candidates.

• It allows all state and local employees who leave their jobs within five years to recoup their pension contributions plus accumulated interest, which currently is set at 4 percent. Currently, only fired employees can receive the interest. The treasurer’s office says North Carolina is the only state retirement system in the country that does not pay interest in returning the pension contributions to all employees who leave before five years of service.

If officially passed, the law wouldn’t take effect until January 1, 2015. It wouldn’t affect employees who make less than $100,000 a year.

Big Payout, Benefits for Arizona Fund Boss Fired for Misconduct

Pension360 has been closely following the story of Jim Hacking, the recently fired Director of the Public Safety Personnel Retirement System. He’s been embroiled in trouble of late, as his fund is in the midst of an FBI criminal investigation—centered on claims that the staff inflated real estate investment values to trigger bonuses—as well as a workplace investigation spawned from sexual harassment allegations.

When he gave illegal raises to five employees on his investment staff earlier this year, it was the last straw. He was placed on administrative leave and fired shortly after.

But he won’t be leaving without some handsome benefits. Those include a severance package, a pension, and the promise that the Retirement System will pay all Hacking’s legal bills and travel expenses.

From the Arizona Republic:

Jim Hacking, a former Arizona public-safety pension administrator who authorized illegal staff pay raises, will receive a severance of roughly $107,250, an annual pension of $86,704, and a commitment to cover all his bills should he be named in “any legal proceeding.”

Other records the newspaper obtained detail the lifetime annual pension Hacking is projected to receive for his roughly nine years of employment, as well as a $16,406 payout for unused vacation time.

More specifics on the settlement, of which the Arizona Republic obtained a copy:

The settlement calls for:

• Hacking to be paid through Dec. 31.

• Hacking and the retirement system to agree to not sue each other.

• The retirement system to pay all “reasonable” travel expenses should Hacking, who has a home in St. Paul, Minn., be required to attend a meeting, deposition or hearing in Arizona.

• The retirement system to cover all of Hacking’s potential legal costs.

“Should Mr. Hacking be personally named as a defendant in any legal proceeding arising out of or relating to actions taken in the course and scope of his employment, the system agrees to fully defend and indemnify Mr. Hacking against such claim(s), including court costs and attorneys’ fees,” the settlement reads.

Some additional background and context on this case from the Republic, in case you need a refresher:

Hacking’s departure comes after a year in which four high-level staff members quit amid allegations that the trust used inflated real-estate values in annual reports to improve its financial performance and trigger bonuses. Hacking denies the allegations.

The PSPRS board in December unanimously voted to extend Hacking’s contract by one year, even though the four staff members had resigned between June and September because of the real-estate controversy.

Tobin executed Hacking’s extension on March 11. That was four days after the board hired a criminal defense attorney to deal with a federal grand-jury subpoena in relation to an FBI investigation.

Hacking in November sought raises for five employees. He told the board the hikes were to replace a controversial bonus program the board had suspended. And, Hacking noted, his staff was doing more work with the exodus of the other employees.

A divided board approved the raises, but it also needed approval from the state Department of Administration under a 2012 personnel reform law Brewer pushed through the Legislature.

The Department of Administration had held off approving those raises because of the numerous controversies. In early July, The Republic asked PSPRS the status of those raises and was told the ADOA had approved them.

Department officials told the newspaper that the ADOA never approved the raises, then began an investigation. Although Hacking had actively negotiated with the ADOA this year on the raises and led state personnel officials to believe they had not gone into effect, Hacking ordered his human-resources director to implement the raises in December, according to trust records.

Hacking, 68, will receive a five-figure pension because, as PSPRS administrator, he oversaw the Elected Officials’ Retirement Plan and was entitled by law to receive a pension from that system, even though he never was voted into public office.

Rhode Island Denies Newspaper Access to Records of Hedge Fund Investments by Pension System

When the Providence Journal initially asked to see records relating to hedge fund investments by Rhode Island’s pension system, they were surprised that their request was promptly granted.

But they soon found out why: the documents were heavily redacted, and much of the information journalists were looking for—manager compensation, as well as risk and investment strategies of the funds—was blacked out.

So the newspaper filed a complaint against the Attorney General’s office in hopes of receiving access to the full, uncensored documents. The request was denied Thursday. From the Providence Journal:

Attorney General Peter Kilmartin’s office has ruled against The Providence Journal in a long-running dispute over records related to the state pension system’s investment in hedge funds.

The Journal initially sought the records from General Treasurer Gina Raimondo’s office. After that office provided heavily redacted documents, the newspaper appealed to Kilmartin’s office.

Assistant Attorney Gen. Michael Field, in a decision released last week, rejected The Journal’s appeal, which focused on a section of the state’s Access to Public Records law that says records presented and discussed at a public meeting are always public.

Field hung his decision, in large part, on an interpretation of “the plain language and meaning of the word ‘submitted.’”

The ruling stems from a complaint The Journal filed after Raimondo’s office refused to make public, in full, the “due diligence reports” that the state’s investment adviser, Cliffwater LLC, prepared prior to the state’s investment in three hedge funds: Third Point Partners, Elliott Associates and Mason Capital.

The Providence Journal claims that the documents should legally be available under the state’s Access to Public Records Act. That law states that records presented and discussed at public meetings are available to the public upon request. The Journal claims that the documents were discussed at an open meeting of the State Investment Commission. More from the Providence Journal:

The complaint stemmed from an April 14, 2013, request by then-Journal reporter Michael Stanton to the treasurer’s office for investment and due-diligence reports that Cliffwater prepared and presented to the State Investment Commission, chaired by Raimondo, on 19 hedge funds.

He also requested a copy of the PowerPoint presentation that the Point Judith Venture Fund II, created by a firm cofounded by Raimondo before she took office, presented to the investment commission in the lead-up to a $5-million state investment.

The Journal argued that: “All of the documents Stanton requested were presented in full at public meetings of the [State Investment Commission] and are referenced in meeting minutes and tape recordings.”

Raimondo’s office provided heavily redacted copies of the records, asserting that the redacted portions of the records contained information deemed confidential, [proprietary] and/or trade secrets.”

The Journal released a statement that said the media, as well as citizens, have “a vital interest in knowing how the pension fund investments made by the [State Investment Commission] are performing and what those investments cost. Without access to specific information about the performance and fees of hedge funds, which make up nearly 15 percent of the portfolio, neither The Journal nor the public can evaluate those investments.”

Photo by JohnnyMrNinja via Flickr CC License

Challengers to Illinois Reform Law Seek Expedited Supreme Court Ruling

Illinois’ pension reform law, passed and signed in December, remains in a legal limbo that has parties on every side of the issue uncomfortable. As a result, the attorneys behind several of the lawsuits challenging the reform law plan to submit motions that they hope will land the case in front of the Supreme Court sooner than later. From the State Journal-Register:

Lawyers challenging last year’s pension reform law said they will make another attempt to get an expedited ruling in the case in the wake of the Illinois Supreme Court’s decision in the retiree health insurance case.

[Attorney Don] Craven said this new motion could enable the pension reform case to get to the Supreme Court earlier than is now considered likely. Before the health insurance ruling, [Judge] Belz set out a lengthy schedule for lawyers on both sides to conduct preliminary work on the cases. Lawyers for the state indicated they want to use six expert witnesses to buttress their case. Aaron Maduff, another attorney challenging the law, said it involved “tremendous, tremendous” preliminary work.

“It’s a huge amount of material,” he said.

At this point, however, the schedule is still in place and a ruling at the circuit court level isn’t expected until next year.

The next hearing in the pension reform lawsuit is scheduled for Sept. 4.

The Illinois Supreme Court ruled earlier this month that it was unconstitutional to charge seniors a premium for their state-subsidized health insurance. The ruling was of particular relevance to the state’s pension reform law because the legal reasoning behind the judgment was that the state is not permitted to diminish retirement benefits protected by the state Constitution.

Some parties believe last month’s ruling was the nail in the coffin for this iteration of state pension reform. But others say the eventual ruling on the reform law won’t be influenced by the previous judgment. From the State Journal-Register:

“The Supreme Court could hardly have been clearer in destroying the police powers argument in the Kanerva case,” said attorney John Myers, who brought another of the pension reform lawsuits. “What the Supreme Court is saying is you have to fund this, now figure it out. That destroys the whole sovereign powers defense, which is, ‘We don’t have to figure it out, we can impair pensions.’ ”

Attorney General Lisa Madigan has said the ruling in the health insurance case does not affect the pension reform case because they involve different legal issues.

Pension benefits are protected in Illinois by the state Constitution. The reform law seeks to end cost-of-living-adjustment increases and raise the retirement age.

Australia Looks to Cut Down Investment Fees After Scathing Report

Pension funds are becoming increasingly allergic to fees eating into their returns, as CalPERS demonstrated this week when it announced a decision to cut hedge fund investments by 40 percent. But the United States isn’t the only country where this concern is taking hold. From the Financial Times:

Australia’s highly regarded private pension system faces sweeping reform following a sharply critical report into the fees charged by superannuation funds, which manage $1.8tn ($1.7tn) of assets.

Although Australia has the fourth largest private pensions savings pool in the world, the operating costs of the country’s superannuation funds are among the highest in the OECD, leaving scope for significant improvements in retirement incomes.

Fees should be cut by an average of 40 per cent (or 38 basis points) across the entire superannuation sector, according to an interim report released last week by the Murray inquiry, chaired by David Murray, a former chief executive of the Commonwealth Bank of Australia. This would deliver savings of about $7bn ($6.6bn) a year from annual running costs of $20bn ($18.8bn), boosting the average retirement payout by $40,000 ($37,574).

“There is an opportunity for innovation to deliver better outcomes for retirees and to better meet the needs of an ageing population,” said Mr Murray.

The report called for a “fundamental change” in the way the country manages its assets. It urged Australia to look at other parts of the world for ideas. From FT:

The report suggested Australia’s government should consider following the example of Chile and auction the right to manage default funds for all new pension accounts to the lowest cost provider. Fees charged by successful bidders in Chile have fallen 65 per cent since this approach was introduced in 2008.

The report also urged the government to consider introducing some form of compulsory deferred annuitisation that would pay out after the age of 85 – just as the UK is abandoning near-compulsory annuitisation.

The report said Australia was “unusual” in not encouraging citizens to convert their retirement savings into an income stream with longevity protection.

A “fundamental change” in the approach to asset management is required by Australia’s pension system, which focuses on maximising wealth on retirement rather than ensuring a sustainable income flow for life, said Mr Murray.

The panel that produced the report, called the Murray Inquiry, will send its official policy recommendations to the Australian government in November.

S&P Threatens Illinois With Another Credit Downgrade In Wake of Pension Reform Uncertainty

In what has become an annual tradition, ratings agency S&P has threatened to further downgrade Illinois’ credit rating, whose bonds already carry among the lowest ratings in the country.

The main factor, according to S&P, was the status of the state’s pension reform law, which sits in legal limbo until a court decides its constitutionality.

From Reuters:

Standard & Poor’s Ratings Services on Wednesday warned that Illinois’ already low credit rating could sink further if the state is unable to implement reforms to curb its big unfunded pension liability and balance its budget.

The credit rating agency revised the outlook on Illinois’ A-minus credit rating to negative from developing, citing a recent state supreme court ruling that could derail a new pension reform law and the state’s structurally imbalanced state budget.

“If the pension reform is declared unconstitutional or invalid, or implementation is delayed and there is a continued lack of consensus and action among policymakers on the structural budget gaps and payables outstanding, we believe there could be a profound and negative effect on Illinois’ budgetary performance and liquidity over the next two years and that this could lead to a downgrade,” S&P said in a statement.

It added that Illinois could achieve a stable outlook if the pension reform law Illinois enacted in December withstands constitutional challenges and the state takes “credible action” to balance its budget.

When a state’s credit rating is under review, ratings agencies assign it to one of three categories: positive, negative or developing. Positive indicates that the rating agency holds a positive outlook for the state’s credit rating and will likely upgrade it in due time.

Illinois’ outlook was previously developing. Now, it is negative, meaning S&P will likely downgrade the rating sooner than later.

S&P added, however, that Illinois could avoid a downgrade if the state’s pension reform law passed legal muster.

Judge Throws Out Pension Funds’ Lawsuit Against JP Morgan

A lawsuit alleging that JP Morgan knew more than it let on about Bernie Madoff’s massive Ponzi scheme was dismissed yesterday by a judge, who said there wasn’t enough evidence that the bank’s board members breached their duty to shareholders by ignoring alleged “red flags” around Madoff’s fraudulent activities.

The suit was filed by two pension funds – the Steamfitters Local 449 Pension Fund in Pittsburgh and Central Laborers’ Pension Fund in Jacksonville, Illinois – that are both shareholders of JP Morgan.

CalSTRS Fighting For Changes At PepsiCo After Underwhelming Performance

The California State Teacher’s Retirement System (CalSTRS) owns a $250 million dollar stake in PepsiCo. That makes the fund one of the corporation’s 60 largest shareholders, and it means that the fund’s opinions hold a certain power with PepsiCo—a power that they are now attempting to use after becoming dissatisfied with PepsiCo’s performance of late.

From the Financial Times:

One of the US’s largest pension funds has asked Pepsi to give activist investor Nelson Peltz a seat on the board, after becoming disillusioned with the soft drinks maker’s performance.

Although Mr Peltz’s investment firm, Trian Partners, has made little headway in its year-long battle to persuade Pepsi to split off its snacks business, his meetings with scores of shareholders have persuaded some that his voice should at least be heard in the boardroom.

Calstrs is not backing the break-up call, but wrote in a letter dated June 30 that Trian could help Pepsi address its operational performance and open management to new ideas.

“Trian has a long history of doing very well at these food and beverage companies,” said Aiesha Mastagni, investment officer at Calstrs, who wrote the letter, citing its previous activist positions at Heinz, Snapple and Kraft.

CalSTRS isn’t the only major shareholder looking for change. A few other major players have come forward in favor of change, albeit anonymously. From FT:

[CalSTRS’] concerns were echoed by top 10 shareholders who did not want to be identified.

One said: “They are good shareholders and they have ideas worth looking at, so we are hoping everybody comes together.”

Another top 10 investor explicitly backed the idea of a board seat for Trian, saying Pepsi could learn from the investor’s industry experience while Mr Peltz could learn more about the business before continuing his campaign to split it in two.

“The bigger issue is leadership,” this shareholder said. “The CEO does not have the respect of the investor community. If Trian were on the board, maybe she would listen. I would like to think she is still flexible enough to adapt.”

CalPERS is also a major PepsiCo shareholder. But the fund has stayed on the sidelines during this ordeal and has no plans to join CalSTRS’ corner.

CalPERS To Pull Back 40% of Hedge Fund Investments

There is a growing desire by funds around the country to avoid large investment fees, and that trend has led many funds to reduce their investments in hedge funds. Now, CalPERS has hopped on that train. From MarketWatch:

[CalPERS’] hedge-fund investment is expected to drop this year by 40%, to $3 billion, amid a review of that part of the portfolio, said a person familiar with the changes. A spokesman declined to comment on the size of the reduction but said the fund is taking more of a “back-to-basics approach” with its holdings.

CalPERS’ decision comes on the heels of a similar move by the Los Angeles Fire and Police Pensions fund. The difference is, the LA fund separated itself from hedge funds altogether. From MarketWatch:

The officials overseeing pensions for Los Angeles’s fire and police employees decided last year to get out of hedge funds altogether after an investment of $500 million produced a return of less than 2% over seven years, according to Los Angeles Fire and Police Pensions General Manager Ray Ciranna. The hedge-fund investment was just 4% of the pension’s total portfolio and yet $15 million a year in fees went to hedge-fund managers, 17% of all fees paid by the fund.

The HFRI Fund Weighted Composite Index, which measured hedge fund performance, indicated hedge funds returned 3.2 percent in the first six months of 2013, compared to a 7.1 return for the S&P 500 index.

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