Category: Pension Newsroom

Earlier this month, Detroit was surprised to learn that an upcoming lump-sum pension contribution could be much larger than expected.

Under its bankruptcy plan, Detroit pays nothing into its pension system for most of the next decade. But in 2024, the city will make one big payment.

That payment is projected to be $80 million – or 71 percent – larger than the city initially anticipated. Now, Detroit is hiring an expert to weigh its options.

From the Detroit News:

The city of Detroit plans to hire a consultant to examine massive legacy costs that come due when its recovery plan winds down, a report to Gov. Rick Snyder says.

In the Nov. 24 biannual report publicly released Monday, Detroit’s Financial Review Commission writes that the city is implementing programs in accordance with its bankruptcy plan and anticipates a larger than expected surplus for the 2015 fiscal year.

The amount projected in fiscal year 2024 was contemplated at $113.9 million. But this month, the actuarial firm for Detroit’s retirement systems issued a report that suggests the city’s general fund contribution in 2024 would increase to about $196 million, says Detroit’s Finance Director John Naglick.

Among the factors cited in the study by Southfield-based Gabriel Roeder Smith & Company is mortality data used in the city’s bankruptcy plan projections. Initially, the assumptions had been based on 2000 mortality tables. Gabriel Roeder performed a mortality study for each pension system for years 2008 to 2013, which concluded in early 2015. The pension systems changed mortality tables from year 2000 to fully generational 2014 mortality tables, wrote Ronald L. Rose, executive director of the Financial Review Commission.

[Finance Director John] Naglick said findings from the pension fund actuaries have prompted the city to seek an expert to examine how the plans could potentially be funded sooner or what other options Detroit might have. The city hopes to have the consultant on board early next year.

“Now that you look at these early numbers, they are higher than what the plan assumed,” he said. “It’s suggests that the retiree cuts could have been substantially more if these numbers would have been fully known.”

Before its bankruptcy, Detroit’s pension obligations totaled $3.5 billion.

 

Photo credit: “DavidStottsitsamongDetroittowers” by Mikerussell – Own work. Licensed under Creative Commons Attribution-Share Alike 3.0 via Wikimedia Commons

Market conditions in Canada have spurred the country’s institutions, corporations and pension funds to add record levels of foreign investment assets to their books in 2015.

The growth in foreign assets has been led by the Canada Pension Plan Investment Board.

From Bloomberg:

Facing a commodities crash and anemic growth at home, Canadian companies and funds have added C$83.4 billion ($63 billion) of investment assets outside the country in the first nine months of the year, according to data from Statistics Canada. That’s more than double year-ago levels and on pace for a record year. The nine-month figures, released Monday, include a record C$48.7 billion in foreign mergers and acquisitions.

Easy credit, strong balance sheets, and lack of investing opportunities at home are the main factors driving Canadian money managers and companies on a shopping spree that has included Royal Bank of Canada’s $5 billion takeover of Los Angeles-based City National Corp. and Canada Pension Plan’s $12 billion acquisition of GE Antares Capital Corp.

[…]

Canada’s pension funds are also big players. Canada Pension Plan Investment Board has been the biggest buyer of purchases abroad, scooping up about $67 billion of assets in the year through yesterday, according to data compiled by Bloomberg. Ontario Teachers’ Pension Plan Board and Caisse de depot et placement du Quebec have also been active this year.

“It’s a diversification play,” said Mark Chandler, head of fixed-income research at RBC Capital Markets in Toronto. “If anything, the events over the last year have struck home that the Canadian equity-market play is concentrated, and if you wanted to diversify by industry and certainly geography, you have to go abroad.”

Overall, Canadian entities have invested over $83 billion CAD in foreign assets in 2015.

 

Photo by  Horia Varlan via Flickr CC License

Japan’s Government Pension Investment Fund, the largest pension fund in the world, overhauled its portfolio last year to double down on equities and distance itself from bonds.

The initial results were strong: the pension fund’s new equity exposure helped propel it toward a record annual return of 12.3 percent in fiscal year 2014-15.

Now, the GPIF has set a less impressive record: the fund returned -5.6 percent in the third quarter of 2015, a $64 billion loss marking its worst quarter since 2008.

From Bloomberg:

Japan’s giant pension manager is unrepentant after a push into equities saw the fund post its worst quarterly result since at least 2008.

There’s no reason to doubt the Government Pension Investment Fund’s investment strategy, officials said on Monday in Tokyo as they unveiled a 7.9 trillion yen loss for the three months through September. The slump was GPIF’s first negative return after revamping allocations last October, when it doubled holdings of Japanese and foreign shares.

“They will see some criticism for this. But that’s more of an issue of financial literacy,” said Ayako Sera, a market strategist at Sumitomo Mitsui Trust in Tokyo. “The liabilities of public pensions have an extremely long duration, so it’s best not to carve it up into three-month periods. However, from a long-term perspective, it’s necessary to continue monitoring whether the timing of last year’s allocation was good or not.”

GPIF lost 5.6 percent last quarter as China’s yuan devaluation and concern about the potential impact if the Federal Reserve raises interest rates roiled global equity markets. That’s the biggest drop in comparable data starting from April 2008. The pension manager’s Japan equity investments slid 13 percent, the same retreat posted by the Topix index, and foreign stock holdings fell 11 percent. The fund lost 241 billion yen on overseas debt, while Japanese bonds handed it a 302 billion yen gain.

The GPIF manages $1.1 trillion in assets.

 

Photo by Ville Miettinen via Flickr CC License

Reporter Ed Mendel covered the California Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.

Using a new data system, CalPERS last week issued its first report on fees paid private equity firms, a type of investment that created a new class of billionaires and is criticized for debt-laden company takeovers resulting in job losses and bankruptcies.

Private equity has yielded the highest CalPERS investment returns, needed to reach a goal of earning an average of 7.5 percent a year, while providing some protection against stock market plunges.

Private equity also has given CalPERS its biggest scandal. A former board member, Alfred Villalobos, collected about $50 million in “placement” fees from firms seeking CalPERS investments.

Villalobos died last January, an apparent suicide about a month before his trial. A former board member who became the CalPERS chief executive, Fred Buenrostro, pleaded guilty to bribery-related charges for aiding Villalobos and awaits sentencing.

After the pay-to-play scandal surfaced in 2009, the California Public Employees Retirement System and the Legislature made a number of reforms. Several large private equity firms agreed to lower their CalPERS management fees.

In 2011 CalPERS began work on a data collection system, the Private Equity Accounting and Reporting Solution. A staff remark last April that CalPERS could not track big incentive payments and other fees drew criticism in the national media.

Last week the first report from the new system showed that since CalPERS private equity investments began in 1990, the private equity firms received $3.4 billion and the pension fund had net gains of $24.2 billion, an annual net return of 11.1 percent.

A CalPERS news release did not say how this compares to what is often said to be a typical “2 and 20” private equity fee structure — 2 percent for management and 20 percent of the profits after a basic amount, an incentive known as “carried interest.”

A New York Times report last week said the CalPERS disclosure of carried interest “could help to pave the way to more transparency in the private equity industry, historically one of the most secretive corners of the financial world.”

CalPERS has several kinds of private equity investments. The largest and most controversial is the “leveraged buyout.” Often a company is purchased, mainly with loans based on the takeover target’s own cash flow or assets, and then restructured and sold.

“Some see them as tools to streamline corporate structures, to rationalize meaninglessly diversified companies, and to reward neglected stockholders,” Inc. magazine said of the leveraged buyout. “Others see the LBO as a destructive force destroying economic and social values, the activity motivated by greed-driven predation.”

A list of “the 18 richest people in private equity” was published last March by Business Insider, based on a Forbes list of the world’s billionaires. Private equity also gets what critics say are major tax breaks.

Managers pay taxes on the 20 percent carried interest share at a lower capital gains rate, not at the higher ordinary wage rate. Some also get the capital gains rate on the 2 percent payment by waiving the fee and taking a larger profit share.

The pros and cons of private equity, or “benefit” and “challenge,” were outlined at the opening of a CalPERS board workshop held this month to provide a better understanding of the fees. (See chart below.)

Private equity, once a cottage industry, is said to now represent a “multi-trillion dollar” global industry, expanding investment options for pension funds, institutions and other large investors.

Private equity returns are usually higher than publicly traded stocks, but performance can vary widely among managers. Private equity investors are “limited partners” with little control over the “general partner” managers in private equity firms.

“The funds are blind pools,” Ted Eliopoulos, CalPERS chief investment officer, told the workshop. “When you go into them, you don’t know the investments that will be made subsequently by your external managers in these areas. So it’s hard to predict the characteristic and nature of the return streams that you will be receiving.”

In contrast to their lack of control over private equity firms, both CalPERS and the California State Teachers Retirement system have corporate governance units that use shareholder clout to push for change and reform in publicly traded companies.

On corporate boards, for example, pension funds and other institutional investors advocate diversity, majority vote, allowing shareholders to put candidates on corporate ballots, splitting chairman and chief executive roles, and controlling executive pay.

In 1985 the Council of Institutional Investors was formed mainly by pension funds. “Members use their proxy votes, shareowner resolutions on regulators, discussions with companies, and litigation where necessary to effect change,” says its website.

The late state Treasurer Jesse Unruh and others are said to have organized the council in response to “greenmail.” Corporate raiders would buy enough shares to threaten a takeover, causing the company to buy back the shares at a premium.

In the wave of leveraged buyouts that came later, private equity firms go beyond threats and actually take over a company, hostile or friendly, by getting enough investors and big loans to buy all of the stock and take the company private.

A private equity group, the Institutional Limited Partners Association, was formed in 2002. It’s an education, research and networking group, with little means to “effect change” beyond issuing guidelines and principles.

For better or worse, California public pension funds, once limited to bonds before voters lifted the lid in 1966 and 1984, are now arms of government that help shape the private-sector economy through large ownership stakes, active or passive.

Private equity is about 10 percent of the CalPERS investment portfolio. At the workshop, Eric Baggesen, a CalPERS investment official, said academics have suggested that private equity could be replaced by “levering up” a stock portfolio.

Baggesen gave several examples of how that switch would cause the “volatility” or risk of a major loss to soar and diversification to drop. “There are no obvious simple answers to finding alternative ways to express the private equity exposure,” he said.

Photo by TaxRebate.org.uk

Arizona lawmakers are nearing a deal to bring changes to the state’s Public Safety Personnel Retirement System.

Cities have become unhappy with rising pension costs; the average Arizona city contributes 42 percent of its police and firefighters’ salary to the Public Safety pension system.

Among the changes currently being discussed: capping COLAs, increasing the pension eligibility age, and increasing employee contribution rates.

From the Houston Chronicle:

State Sen. Debbie Lesko, R-Peoria, has been spearheading talks with police and fire unions on an overhaul.

[…]

Lesko said last week that she believes a plan can be ready for the upcoming legislative session.

“The good news is I’m very confident, although I can’t say 100 percent, I’m really thinking we’re going to get something done,” she said at the Arizona Tax Research Association’s outlook conference.

The plan includes a firefighter’s proposal to change yearly benefit increases that are sapping the trust fund. The change would require voter approval. The way the plan is now structured, excess earnings from the pension trust are put into a fund that doles out automatic increases in most years. The problem is that when the fund sees losses, as it did during the Great Recession, excess cash in flush years can’t make up the difference because it is sent to the cost-of-living-adjustment fund. The firefighter’s proposal would end that practice.

Other changes include proposals to increase the pension eligibility age, equalize employer-employee contribution rates and a cap on earnings that are used to calculate pensions. That would address problems with so-called “pension spiking” where employees cash in vacation time, sick days and other accrued time to increase earnings in the final years of service and boost their pensions forever.

The Arizona Public Safety Personnel Retirement System is about 50 percent funded.

 

Photo credit: “Entering Arizona on I-10 Westbound” by Wing-Chi Poon – Own work. Licensed under CC BY-SA 2.5 via Wikimedia Commons

Bloomberg on Wednesday whipped up this interesting chart, seen above, detailing the five funds to which CalPERS has paid the most carried interest since 1990.

One interesting wrinkle: if Apollo Investment Fund VII sounds familiar, it’s because it was one of the funds on the periphery of the CalPERS bribery scandal. The fund itself committed no wrongdoing, but was the subject of a fraudulent transaction between the scandal’s two schemers: disgraced CalPERS chief executive Fred Buenrostro and placement agent Alfred J. Villalobos.

At the time, Buenrostro signed a fake disclosure letter for Apollo Investment Fund VII, and Villalobos subsequently collected millions in placement agent fees, according to the SEC.

Click here for carried interest broken out by every manager in CalPERS’ portfolio.

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

Geoffrey Morgan of the National Post reports, TransAlta Renewables gets $200M investment from Alberta fund manager AIMCo:

Alberta’s provincially owned investment management company bought a $200-million stake in a local renewable power provider Monday, the day after the province announced it would phase out coal-fired electricity generation.

Alberta Investment Management Corp., which manages more than $75-billion worth of investments from the province’s government pension funds, bought $200 million worth of TransAlta Renewables Inc. shares Monday from the green-electricity provider’s parent company, TransAlta Corp.

TransAlta Corp. will continue to be the largest investor in the renewables company, and plans to use the proceeds from the sale to pay down its debt.

The deal would make AIMCo the second-largest investor in TransAlta Renewables, with eight per cent of its shares, after parent company TransAlta, which also owns coal-fired power plants throughout Alberta.

AIMCo CEO Kevin Uebelein said in a release that “TransAlta has set forth a bold transition plan that will see it become one of North America’s preeminent clean power companies.”

AIMCo operates at arm’s length from the provincial government, which on Sunday announced a series of new climate change policies that included a 2030 deadline for coal-fired power producers to cut their emissions to zero.

Alberta currently generates 55 per cent of its electricity from coal power, but the province wants to replace two-thirds of that power capacity with renewables by 2030.

Many industry analysts expect utility companies to shut down their coal-fired power plants by that time as a result of the new provincial policies.

Unlike many of its coal-power peers, TransAlta’s shares surged on Monday morning following the government’s announcement. The company’s share price rose nine per cent to close at $5.96.

Trading in the company’s shares was halted leading up to the announcement that AIMCo had acquired a large stake.

RBC Capital Markets analyst Robert Kwan upgraded the company to “sector perform” and said “TransAlta has the potential to benefit from replacement generation.”

TransAlta had been planning to phase out most of its coal generation by 2030 under existing federal regulations, while Edmonton-based competitor Capital Power Corp.’s coal fleet was still expected to operate beyond then.

Kwan said Capital Power is “possibly the biggest ‘loser’ in all of this, but the impact is really far into the future.”

Jeffrey Jones and Jeffrey Lewis of the Globe and Mail also report, TransAlta Renewables acquires wind and hydro assets, sells stake to AIMCo:

TransAlta Renewables Inc. is buying Ontario and Quebec wind and hydro power assets from its parent company, TransAlta Corp., for $540-million and taking on a new big investor: Alberta’s public-sector pension manager.

It’s selling an 8-per-cent stake in the company to Alberta Investment Management Corp., or AIMCo, for $200-million.

TransAlta Renewables, which is currently 76-per-cent owned by TransAlta Corp., is also offering $150-million of shares in a bought deal.

The series of transactions comes a day after TransAlta Corp., Canada’s largest coal-fired power generator, learned that the Alberta government will phase out that form of energy by 2030 under its sweeping plan to fight climate change. The company and a government-appointed negotiator will try to reach an agreement on how to deal with stranded asset value.

It is selling its majority-owned affiliate the Sarnia Cogeneration Plant, Le Nordais wind farm and Ragged Chute hydro facility, adding a total of 611 megawatts of generating capacity. As part of the deal, TransAlta Renewables will issue $175-million in shares to the parent as well as $215-million in unsecured debentures.

The acquisition of long-term contracted generation capacity will support a 5-per-cent increase in dividends, TransAlta Renewables president Brett Gellner said in a statement.

In its budget last month, the Alberta NDP government gave AIMCo, along with other public agencies, a mandate to search out investments in companies that will help the province diversify the economy away from oil and gas.

Kevin Uebelein, AIMCo’s chief executive officer, said the investment is not related to the timing of Alberta’s economic diversification strategy or its climate plan. Still, AimCo is actively scouting for more deals in renewable energy as policies around carbon emissions firm up.

“The short answer is yes,” Mr. Uebelein said in an interview. “As governments move to change the shape of the playing field with regard to carbon taxing and other measures, then these other forms of power generation, the payback calculation will adjust in response to those government actions.”

The AIMCo investment is expected to close on Thursday. As part of the deal, the fund manager gets the right to acquire shares in future financings.

Under the bought-deal financing, TransAlta Renewables will issue 15.4 million subscription receipts at $9.75 each to underwriters led by Canadian Imperial Bank of Commerce and Toronto-Dominion Bank. They will be converted into common shares when the acquisition closes in January, the company said.

Those of you who want to read the details of TransAlta Corporation’s (TSX: TA) $540 million investment by TransAlta Renewables (TSX: RNW) in three of its Canadian assets can click here. Also, AIMCo put out a press release which you can read here.

What do I think of this deal? It’s definitely advantageous to TransAlta Corp. which is suffering from high debt and welcomes the cash infusion. If you ever want to see why you should avoid investing based solely on high dividends, just have a look at TransAlta’s stock over the last five years (click on image):

In fact, 2015 has been a particularly brutal year for TransAlta’s shareholders. Even after Monday’s pop following the Alberta government’s announcement to phase-out of coal generation and accelerate wind and solar power construction, the stock is down more than half this year (but the high dividend yield helped cushion some of that decline). The same goes for TransAlta Renewables Inc. (RNW.TO).

It’s no secret among Canadian portfolio managers that TransAlta Corp. has been poorly managed and that’s why the stock keeps sliding lower. Having said this, if you’re an investor looking for dividend income, I like it better at these levels than where it was a year ago and maybe the company is finally on the right path to a brighter future (that remains to be seen).

As far as AIMCo, the timing of the deal makes it look suspicious but the fund operates at arms-length from the Alberta government and this deal was in the pipeline for months. I think AIMCo is getting in at the right time and investing in renewable energy is a smart long-term play as long as the terms of the deal make sense.

Does this mean we should force green politics on pension funds? Absolutely not! AIMCo didn’t buy a stake in TransAlta Renewables based on green politics, it expects to make money on this deal over the long-run, just like the Caisse expects to make money with its big investment in Bombardier.

On Monday, I had a chance to meet up with Kevin Uebelein, AIMCo’s chief executive officer, here in Montreal where he was on a business trip. The deal was announced after we met but during our lunch, he told me he was waiting for an important email with a big announcement and apologized for checking his phone.

I enjoyed meeting Kevin Uebelein, he’s a very smart and nice guy and he has an interesting background. For those of you who have never met him, here is a picture of him (click on image):

Kevin worked many years at Prudential before moving on to Fidelity Canada and then AIMCo. His experience with a huge insurer prepared him well for managing a major Canadian pension fund as insurance companies are also in the business of managing assets with liabilities.

We talked about many things, most of which will remain off the record, but I’ll share with you a story I liked. He told me about the time Japanese life insurers got whacked hard when the real estate market cratered in Japan in the early nineties. He told me that investment banks and hedge funds came in to buy properties 10 cents on the dollar and they made off like bandits.

He was able to structure a deal to sell properties of Japanese life insurers Prudential was acquiring at 30 cents on the dollar and he told me it was the first time he realized who was at the other end of the insurance policy and why what he was negotiating mattered a lot. He added: “I want everybody at AIMCo to realize who is at the other end of the pension fund and why what we do matters.”

Kevin also told me he wants to attract more people to Edmonton (no easy feat) as well as hire the cream of the crop from Alberta’s universities. I gave him an idea to create an intern program where students and even new hires with little experience are exposed to operations across public and private markets so they understand the two cultures and how it all fits into the bigger picture of a pension fund.

What else can I share with you? He told me he doesn’t believe that a CEO of a major pension fund can carry the CIO hat as well, “especially when you have different clients like we do at AIMCo.” I completely agree and told Gordon Fyfe a long time ago to drop his CIO duties (which he never did because that was the fun part of his otherwise hectic and stressful job) and focus solely on his CEO duties.

At AIMCo, Kevin appointed Dale MacMaster as the chief investment officer. And unlike Roland Lescure at the Caisse who oversees public markets, MacMaster oversees the entirety of AIMCo’s $80 billion portfolio, which is a huge job since he was previously executive vice president for public market investments, a role he held since 2012.

Every CEO of a major pension fund should take note (including Gordon Fyfe who held on to both hats at bcIMC). If you’re in charge of billions, make sure you hire a qualified CIO who can oversee and allocate risk across public and private markets. If this pisses off some of your senior people, tough luck, let them deal with it.

Is it easy finding a very qualified CIO who can fulfill these duties? Of course not. People like Neil Petroff and Bob Bertram who held this position at Ontario Teachers aren’t exactly a dime a dozen. But in my mind, it’s crazy and highly irresponsible to have all the investment people report to the CEO and not to a dedicated CIO whose sole job is to oversee all investments.

What else? On real estate, Kevin told me AIMCo’s Alberta properties are going to get marked down but he expects nice deals to open up in that market over the next few years and they still have class A properties with solid tenants providing them steady income.

All in all, I came away with a very positive view of Kevin Uebelein. He’s a very nice man who thinks through his decisions and always stresses process over performance. He isn’t averse to taking smart risks but he wants to understand the risks AIMCo’s staff are taking across public and private markets.

That was that, I enjoyed our lunch, told him I’d love to keep in touch and he went off to meet more important people. Still, I thought it was very nice of him to take some time to meet me. I also told him to say hello to Gordon Fyfe the next time they meet and he told me he saw him at conference last month where he looked “extremely relaxed” (Victoria suits Gordon a lot more than Montreal where running PSP had huge payouts but a lot more stress).

 

Photo credit: “Canada blank map” by Lokal_Profil image cut to remove USA by Paul Robinson – Vector map BlankMap-USA-states-Canada-provinces.svg.Modified by Lokal_Profil. Licensed under CC BY-SA 2.5 via Wikimedia Commons

A Supreme Court ruling on the legality of Chicago’s 2014 pension reform law is coming soon.

But in the interim, at least one group is decidedly pessimistic about the city’s chances of winning: municipal bond investors, who are already “emotionally prepared” for Chicago to come out on the losing side.

More from the Chicago Tribune:

Investors are already marking the fight down as a loss that will strain city coffers and boost pension costs by billions.

Conning, which oversees $11 billion of municipal bonds including Chicago debt, has encouraged investors to reduce their holdings for more than a year, and said the projected negative ruling affirms that view. Wells Fargo Asset Management, which holds $475 million of Chicago general obligations, said the market is “emotionally prepared” for the loss, and hasn’t materially changed position.

[…]

“As an investor, you have to assume that the city is going to lose,” according to Matt Fabian, a partner at Concord, Massachusetts-based Municipal Market Analytics, who said the city is still a good purchase for investors seeking tax-exempt income. “The city doesn’t have many triggers left to pull.”

Market analysts including Fabian, Paul Mansour of Conning and Dan Heckman of U.S. Bank Wealth Management don’t expect much of a market reaction, unless the justices reverse the lower court’s decision in a surprise move.

“If the city wins, you could see some positive price action just because it’s been void of victories from a financial standpoint,” Gabe Diederich of Wells said. After the win on higher property taxes rallied Chicago bonds, a positive court ruling on the pension overhaul “just shows they’re taking steps, and they’re taking steps that are being either recognized, or upheld that can get put through.”

There is currently no timeline on the Court’s decision.

 

Photo by Pete Souza via Flickr CC License