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Pension Pulse: The Long-Term Imperative?

Leo Kolivakis is a blogger, trader and independent senior pension and investment analyst. This post was originally published at Pension Pulse.

In an era of growing complexity and uncertainty, how can business leaders make decisions for the long-term? At Davos 2016, a panel discussion which included Mark Wiseman, CEO of CPPIB, discussed “The Long Term Imperative.”The discussion was moderated by Victor Halberstadt, Professor of Economics, Leiden University, Netherlands and the speakers include:

Dominic Barton, Global Managing Director, McKinsey & Company, USA
Laurence Fink, Chairman and Chief Executive Officer, BlackRock, USA
Andrew N. Liveris, Chairman and Chief Executive Officer, The Dow Chemical Company, USA
Güler Sabanci, Chairman and Managing Director, Haci Ömer Sabanci
Holding, Turkey
Tidjane Thiam, Chief Executive Officer, Credit Suisse, Switzerland
Mark Wiseman, President and Chief Executive Officer, Canada Pension Plan Investment Board, Canada

Take the time to listen to this discussion (above). It’s not a sexy topic, especially in a world where the electronically lobotomized masses suffering from chronic ADHD focus on Instagram, Facebook, Twitter, iGadgets, Apps, and daily swings in the stock market, but the panel tackles some very important and complex issues which are critical to the future of capitalism.

These are all very smart and accomplished people but the person that impresses me the most is Andrew Liveris, Dow Chemical’s CEO (and I’m not biased because of his Greek roots). Liveris is very experienced, extremely sharp and he raises a lot of great points in this discussion which every corporate CEO is struggling with.

But all the panelists raise great points. There were a few zingers in this discussion. At one point, Larry Fink took on pensions: “Some of the loudest pension funds who talk about long term, without naming them, are actually the largest investors in activist hedge funds.”

At the end of the discussion, Mark Wiseman raised a great point that “activists are not the cause of the issue, they are the symptom. And the symptom is where are the other 97% of the owners? …When activists that have 3% or 4% — and sometimes no economic interest because they’ve hedged out the other side — are able to force change, to me the problem is that the other 97% are not acting like owners.”

I agree with Mark but Larry Fink is right, “the velocity of money has been increasing primarily for three reasons: hedge funds, sovereign wealth funds and central banks. And who invests in hedge funds?…Who are the investors behind these hedge funds? They’re pension funds.” Fink foresees more and more money going into hedge funds which will increase the velocity of money.

All these pension funds “with a very long investment horizon” increasingly allocating billions to activist and other hedge funds to make their return target are part of the problem, funding hedge funds which take a minority stake and are then able to force corporate leaders to drop their long term view and focus on short term actions to “unlock shareholder value” (a euphemism for show me the money now!)

I know this is a widely contested issue and I’m not implying that activist hedge funds are all evil, clearly they’re not. But there is a problem as the truth is large public pension funds investing billions in hedge funds and private equity funds are fueling rising inequality which is deflationary and very disruptive on a short term and long term basis.

I’ll let you watch the panel discussion above and mull over their comments and my comments above. If you have anything to add, feel free to reach me at LKolivakis@gmail.com.

[Do you enjoy Leo’s comments on Pension Pulse? Consider donating to his blog.]

Photo by Santiago Medem via Flickr CC

In Panicked Market, Canada Pension Head Says: “Buy”

Mark Wiseman, the chief executive officer of Canada Pension Plan Investment Board, spoke about long-term investing at the World Economic Forum this week.

Wiseman said he sees the current market as a “buying opportunity”. More from Bloomberg:

The sell-off roiling stock markets from Shanghai to New York offers an opportunity to buy assets as long-term prospects for economic growth remain favorable, the head of Canada’s largest pension fund said.

“Absolutely it’s a buying opportunity, when the world is panicking and you have a quintessentially long-term view,” Mark Wiseman, the chief executive officer of Canada Pension Plan Investment Board, said in an interview at the World Economic Forum. “Whatever negative market sentiment there is, I don’t believe is supported by the facts that are coming out.”

[…]

Rather than change its strategy, CPPIB is buying equities to maintain the balance of its portfolio between stocks, bonds and other assets. The Toronto-based fund manages about C$273 billion ($188.6 billion) on behalf of 18 million Canadian savers.

Separately, CPPIB on Thursday joined five other large institutional investors, including the New Zealand Superannuation Fund and Ontario Teachers’ Pension Plan, to announce the creation of a stock index focused on long-term performance. The Standard & Poor’s Long Term Value Creation Index is designed to track companies that meet criteria on corporate governance and environmental sustainability, among other measures.

CPPIB manages $188 billion in assets.

Photo by Andreas Poike via Flickr CC License

NJ Pension Case Has Implications for Credit Rating, Says Moody’s

In the near future, the New Jersey Supreme Court will rule on a pension case that Moody’s says has big implications for the state’s credit rating.

The lawsuit in question challenges the constitutionality of a 2011 pension reform law that froze cost-of-living-adjustments on retirees’ pensions.

An appellate court ruled in favor of retirees; if the Supreme Court does the same, the state will owe retirees backpay to 2011.

Here’s what Moody’s says about the case, from NJ.com:

Moody’s Investors Service again sent up a warning flare that a possible New Jersey Supreme Court ruling striking down cuts to public retirees’ pension benefits would soak the struggling retirement system with new pension liabilities.

But in its latest report released Wednesday on the “extraordinary decisions and challenges” the Garden State faces, the Wall Street ratings agency estimated the public pension system’s $55 billion unfunded liability ($113 billion if measured under different accounting standards) would increase by a third if state and local governments are forced to restore retirees’ cost-of-living increases.

The state portion of the unfunded liability would increase from $40 billion to about $53 billion and the system would fall from 51 percent funded to 44 percent if the court strikes the freeze down.

“The heightened burden, combined with an increase in benefit costs, would hurt New Jersey’s pension fund cash flows and funded status and the state’s ability to reach structural budget balance,” Moody’s said.

Retirees are angry because, as part of the 2011 reform law, they made a deal: they’d accept the freezing of their COLAs, and in exchange the state promised to make its full actuarially-required contributions to the pension system.

It took the state two years to renege on its side of the bargain.

Photo by Joe Gratz via Flickr CC License

Research: Younger Teachers Shoulder High Burden For Retired Peers

Ten percent of the average teacher’s earnings go toward paying down pension liabilities accrued by their older counterparts, according to a recent paper from the Center for Analysis of Longitudinal Data in Education Research.

More on the research, from U.S. News & World Report:

In a recent paper for the Center for Analysis of Longitudinal Data in Education Research, a team of economists calculated that 10 percent of the earnings for an average public school teacher goes toward paying for pension liabilities accrued on the behalf of prior cohorts of teachers. That’s money they could be taking home in salary.

The contribution made by younger teachers is so high in part because their more experienced counterparts shoulder very little of the burden. States have increased vesting periods and employee contribution amounts for new teachers while leaving the plans for current retirees constant. A recent report by Bellwether Education Partners showed that these and other changes disproportionately affect younger and future teachers compared to those who have already worked for several years.

Reductions in compensation for young teachers are only making a longstanding problem worse. Teacher pension systems already transferred money from younger to more experienced teachers before these systems became underfunded.

Read the full paper here.

Photo by cybrarian77 via Flickr CC License

British Pension Fund Sues Volkswagen Over Emissions Scandal

A British pension fund – identity currently unknown – is suing Volkswagen over its emissions scandal, which caused the car company’s shares to plunge.

A German law firm, representing the pension fund, broke the news on Wednesday.

From Yahoo:

Law firm Nieding + Barth said in a statement that together with another fim, Mueller Seidel Vos, it had filed a suit on behalf of the pension fund at the regional court in Brunswick.

“The basis for our claim is (VW’s) violation of its capital market information obligations,” said law firm chief Klaus Nieding.

“Because VW concealed its manipulation of the software in diesel vehicles for many years, shareholders have suffered substantial losses on their investment. And VW must be held responsible for that,” said Daniel Vos of Mueller Seidel Vos.

[…]

The scandal has hit VW hard. It lost nearly 40 percent in market capitalisation since September, when the scandal broke, even if its shares have come back off their lows since then.

The German law firms accused VW chief executive Matthias Mueller of deliberately playing down the affair on his recent visit to the United States.

“That testifies to a lack of will (within VW) to clear up the matter,” Nieding said.

The car manufacturer could soon face lawsuits from more institutional investors, car owners, and penalties from governments.

Photo by Long Road Photography (formerly Aff) via Flickr CC License

Video: New Mexico Pension CIO Talks About Long-Term Thinking in Tumbling Markets

Jonathan Grabel is the Chief Investment Officer at New Mexico PERA.

In this clip, above, he talks about why his fund isn’t pulling money out of the markets, and how to keep a long-term view even as stocks are falling.

New Mexico PERA manages $14 billion in assets.

Credit: CNBC

Photo by www.SeniorLiving.Org

EU Official: Greece Must Improve Pension Reforms to Move Ahead With Bailout

A week after a Greek official said further pension cuts were a “non-starter” in negotiations with creditors, it appears the country may have to cross that “red line” if it wants to move forward with its bailout.

Greece released a reform plan this month that delivers savings of about 1 percent of the country’s GDP.

But an EU official on Wednesday said the plan needs to be “fleshed out” and improved if Greece wants to move ahead with its bailout.

Greece Willing to Discuss Pension Reforms With IMF; Unions Plan Strike

A Greek official made it clear last week that further pension cuts would be a non-starter in negotiations with creditors.

But the country’s finance minister this week said he is willing to discuss pension reforms with the IMF – if it means their bailout review will be quick.

From Reuters:

Greece’s international lenders – the IMF and the European Union – are widely expected to launch a review this week of the reforms Athens has adopted as part of a bailout package it clinched last year to avert bankruptcy. Technical teams are already in Athens.

“We are even ready to discuss the pension reform, as long as the IMF wants to conclude this discussion in a timely manner,” Euclid Tsakalotos told a news conference.

[…]

The review, if concluded sucessfully, could pave the way for discussions on debt relief that Greece has long sought, coax back investments and help its crippled economy return to growth.

Meanwhile, several unions are planning a strike to protest the planned reforms. From ABC:

Union discontent is growing in Greece against planned pension reforms, with civil servants joining in a strike by private sector workers next month in what will be the first general strike of the year in the financially struggling country.

The ADEDY umbrella civil service union said Monday it will participate in the Feb. 4 strike, and accused the radical left-led government of aiming to “plunder” pensions through drastic new cuts.

Unions representing lawyers, doctors and engineers have also strongly protested the draft reforms, which would significantly increase their social security contributions.

One condition of the IMF bailout is that Greece trim nearly $2 billion in pension costs.

Photo credit: “Flag-map of Greece” by en.wiki: Aivazovskycommons: Aivazovskybased on a map by User:Morwen – Own work. Licensed under Public Domain via Wikimedia Commons

The Blindsided Fiduciary: Ignorance is Not Bliss

Carol Buckmann is an attorney who has practiced in the employee benefits field for over 30 years. This post was originally published at Pensions & Benefits Law.

Alliance Bernstein recently released the shocking result of a survey it had taken of plan sponsors: a whopping 37% of those fiduciaries surveyed didn’t know that they were fiduciaries.Obviously, it is unlikely that these individuals are fulfilling their fiduciary responsibilities if they are unaware of their status. And we wonder what will happen if the plans of these oblivious fiduciaries are selected for a Department of Labor audit, though we are sure that it won’t be a pretty picture.It is possible to be an ERISA fiduciary and not know it, because no acknowledgement of fiduciary status is required. ERISA has a functional definition of fiduciary, which means that you become a fiduciary based on what you do. Administration, investment control and giving investment advice for a fee are the activities that trigger fiduciary status. ERISA also provides that there must always be at least one named fiduciary to manage a plan, and this will be the Company and its directors if no other designation is made.

Another form of ignorance can complicate this problem, because it is also possible to believe that your plan service providers are fiduciaries when they are not. Small plan fiduciaries are not the only ones under these misconceptions. Misplaced reliance on what these non-fiduciary vendors are doing can result in avoidable compliance failures and litigation exposure. Here is a short checklist for people who have relationships with employee benefit plans:

If you are a director, you have some fiduciary responsibilities even if the board has delegated authority to other fiduciaries.
If you are a plan trustee, you are a fiduciary.
If you are on a plan committee, including an investment or administrative committee, you are a fiduciary.
If you have adopted a prototype or other pre-approved plan, your vendor is not a fiduciary unless it has agreed to make decisions and become an administrator as defined in Section 3(16) of ERISA or manages investments.
If you have appointed an investment manager with the authority to make investment decisions, the investment manager is a fiduciary.
If you are receiving investment advice from a broker or registered investment adviser, you may not be receiving advice from an ERISA fiduciary as the law stands now. It all depends on factors such as whether the advice is one-time or on a regular basis, or is given with the understanding that it will be a primary basis for plan investment decisions. The Department of Labor, with the support of the Obama administration, has been working on a controversial new proposal to extend ERISA fiduciary responsibilities to brokers and others who provide investment advice to plans, but so far, is being close-mouthed about what it says.

Since fiduciaries may be personally liable for losses caused by fiduciary breaches, knowing whether you and your vendors are fiduciaries is essential self-defense against being blind-sided in the pocketbook by a court award, audit penalty or settlement.

Photo by Martin Raab via Flickr CC License

California’s Controversial Pension-Curbing Ballot Measure Delayed

A proposed California ballot measure, which seeks to curb the state’s pension benefits and rein in costs, will not make it on the 2016 ballot.

The initiative’s two backers – former San Jose Mayor Chuck Reed and former San Diego Councilman Carl DeMaio – said they are now shooting for the November 2018 ballot.

The measure would have shifted new state employees into a 401(k) system and capped how much employers could contribute to new hires’ pensions.