Category: Pension Newsroom

In June, CalPERS began collecting historical carried interest data from its general partners as part of a long-term project to develop a more robust reporting and monitoring system for its investments.

The vast majority of firms have now delivered the information to the pension fund, but not every general partner is cooperating.

Now, even as CalPERS readies to release it’s carried interest data to the public eye, several firms are holding out.

From the Wall Street Journal:

Among the firms that didn’t provide the information to Calpers in the requested form was Khosla Ventures , the eponymous firm of well-known venture capitalist Vinod Khosla . A spokeswoman for the firm said it “adheres to the disclosure requirements in the applicable legal agreements.”

Other firms that didn’t fully disclose fees included Pinnacle Ventures and Generation Partners, according to the FOIA request. Officials at the firms didn’t respond to requests for comment.

[…]

All of Calpers ‘s 10 largest private equity managers gave the full information it needed, according to an analysis of the public records by Dow Jones, highlighting its sway over those firms with which it invests the most.

[…]

Some managers that weren’t fully forthcoming were venture firms behind funds that are relics of the fast and furious dot-com era, a period not known for being investor-friendly. Several of these funds, while technically active, are now reaching the end of their lives and have struggled to deliver strong returns.

In part from concerns that it can’t get enough disclosure from venture-capital firms, Calpers has been cutting its exposure to these strategies down to a sliver, said people with knowledge of the matter.

CalPERS officials have said that moving forward, a manager’s willingness to disclose carried interest and other fee data will be a decisive factor in CalPERS’ desire to invest with that manager.

 

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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.

Would you bet millions of dollars on your ability to accurately predict how the IRS will interpret the tax code? That’s what a plan sponsor that adopts a plan that isn’t approved by the IRS does. Even though they are not legally required to obtain determination letters,  virtually all plan sponsors with their own plan documents apply regularly for favorable determination letters approving their plan language.

The Internal Revenue Service recently announced that it is not only discontinuing its requirement that individually-designed plans seeking approval be reviewed for new determination letters every five years, but it will no longer review these plans except on adoption and termination.  The excuse given is lack of manpower and resources, but the decision leaves adopters of individually-designed plans in a quandary.

How are they to make sure that their plans are in compliance, given the seemingly ever-changing statutory and regulatory requirements and the serious consequences, up to retroactive disqualification, for failure to do it right?  

Here are some suggestions for plan sponsors and the IRS to consider.

If you are a plan sponsor:

• Could you move to a pre-approved plan?  The IRS will continue to approve the language in prototype and volume submitter plans used by vendors such as Fidelity and Vanguard and some banks and law firms.  This would simplify life, but at the cost of sacrificing flexibility.  Most of these plans have limited ability to accommodate custom provisions, or provisions designed to protect plan fiduciaries, such as contractual statutes of limitations for participant lawsuits or plan governance delegations.
• Encourage your law firm to develop a volume submitter plan.  Plans are legal documents that are best drafted by lawyers, and these might accommodate more flexible legally-recommended options than vendor pre-approved documents. Large vendor documents often seem to be drafted to make life simpler for the vendors.  However, your law firm will need a minimum number of adopters to do this.
• If you keep your own document, consider getting legal qualification opinions from your employee benefits counsel on a regular basis.  These will be particularly helpful in audits and litigation, but may also be sought by buyers in acquisition transactions.
• If you keep your own document, consider adopting model and sample amendments issued by the IRS, which are “safe harbors” with language intended to automatically satisfy the legal requirements. Note, however, that these also will limit flexibility and may not work without modification if there are unusual or complicated plan designs.
• If you keep your own document, make sure to hire the most competent drafters.  The consequences of drafting mistakes will get much more serious and expensive.

The IRS should consider the following changes to preserve individually-designed plans:

• Modify its rule that a document defect found on audit goes automatically into the closing agreement program, and is not eligible for the less expensive voluntary correction program (VCP) penalties.
• Modify its long-criticized rule that interim and discretionary amendments must be adopted by the end of the year in which they are effective or the plan sponsor’s tax return deadline for that year.  There should be reasonable extended remedial amendment periods for adopting amendments to reflect changes in the law. (That would also limit the frequency with which qualification opinions might have to be obtained from counsel.)
• Approve major modifications to a plan, such as conversion to another type of plan as if a new plan had been adopted at the effective date of the change.
• Issue more model and sample language and add choices, similar to the way that adoption agreements can be used for different choices.

The basic decision made by the IRS seems to be set in stone.  However, it will be a blow to the private pension system if these changes make individually-designed plans too risky to maintain.

Defined benefit plans, in particular, are already being discouraged by overly complex regulation and ever increasing PBGC premiums.  Since individually-designed plans have long been a way to  customize provisions to meet an employer’s own business needs, the IRS should make special efforts such as those suggested above to keep them alive.

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PFZW, the pension fund that covers the Netherlands’ healthcare workers, announced on Tuesday its plans to divest from coal and fossil fuel holdings over the coming years.

It is one of the largest institutional investors yet to voluntarily begin dropping its investments linked to fossil fuels.

From Reuters:

Citing the need to invest in a way that protects the environment, the fund said it would divest completely from coal-related companies by 2020, while investments in fossil fuel companies will be reduced by 30 percent.

“This will take place in four annual steps and result in investments being withdrawn from approximately 250 companies” focused in the energy, utilities and materials sectors, the fund said in a statement.

Maurice Wilbrink, a spokesperson for PGGM, which manages assets for PFZW, said the divestments represent about 5 percent of PFZW’s equity portfolio, or 1.7 billion euros.

“That will be taken from companies in those sectors that score poorly” on measures of efficient resource use, and be reinvested in companies that score well, Wilbrink said.

He said PGGM and PFZW believe the investment change will be “neutral to slightly positive” for medium-term investment returns.

That comes despite the risk that the decision to divest may be poorly timed, given the fall in oil prices over the past year. The fund did not provide data but said in its third-quarter report that commodity-linked investments had “delivered the worst returns” in its investment portfolio, which had a loss of 3.2 percent from the same quarter a year earlier.

PFZW manages a $172 billion (USD) portfolio.

 

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

California State University employees pay less for their pensions and health care than other state workers, including members of a faculty union scheduled to demonstrate for higher pay at a CSU trustees meeting in Long Beach today.

The California Faculty Association, backed by a member strike authorization, has launched a “Drive for Five” campaign for a pay raise of 5 percent, rather than the 2 percent pay raise offered by the university administration.

As it happens, the gap between the faculty goal and the administration offer, 3 percent of pay, equals the gap between what CSU employees and other state workers pay for the same pension.

CSU employees contribute 5 percent of pay. The employees of other state agencies contribute 8 percent of pay. Both groups are in the “2 at 55” CalPERS plan, which provides a pension of 2 percent of final pay for each year served at age 55.

It’s an obvious inequity, if not a subsidy, because the contribution rate for the employers in both groups is the same: 25.1 percent of pay this fiscal year, projected to grow to 30.1 percent in five years.

(Under a cost-cutting reform Gov. Brown pushed through the Legislature, state workers hired since Jan. 1, 2013, are in new plans requiring longer service or an older age to earn a similar pension.)

The lower employee pension payment may not feel like a free ride for the California State University faculty union representing 26,000 employees, the largest of the 13 bargaining units on the 23 campuses.

“Faculty salaries lag behind the UC and California community college faculty salaries both in absolute terms and in relation to inflation over the last 10 years,” said the faculty union’s “Race to the Bottom” analysis.

“While the average faculty salary at the University of California rose from 2004 to 2013, adjusted for inflation, purchasing power for CSU faculty fell during the time period,“ said the analysis. “This disparity is most dramatic in San Francisco, where UC San Francisco average salaries rose $16,138, while faculty at San Francisco State lost $9,748.”

Is the CSU employee pension contribution an issue in the current labor negotiations? Spokeswomen for the CSU chancellor’s office and the California Faculty Association did not reply.

The powerful California Public Employees Retirement System does not control employee contributions. But it does set the annual contribution rates that must be paid by state employers.

Four years ago, the Brown administration requested separate rates for CSU employers because CSU employees, unlike other state workers, had not agreed to increase their pension contributions.

“We expect that having separate rates will result in state employers having to contribute $50 million less for the remainder of the fiscal year and CSU employers having to pay $50 million more,” CalPERS actuaries said in a staff report.

The CalPERS board rejected the proposal on a rare tie vote, 5-to-5 with three absentees. The vote was evenly split between members elected by active and retired employees and Brown appointees and representatives of the state treasurer and controller.

Now the governor’s state budgets have begun gradually shifting more of the CSU employer pension cost to the university system.

The state continues to pay the full CSU employer rate. But the amount the state gives CSU for mid-year adjustments to the rate, based on payroll and other factors, has been tied to the fiscal 2013-14 level.

As the payroll increases over the years, the state will pay a shrinking amount of the mid-year rate adjustment, requiring CSU to pay the remainder.

“This process is intended to increase budget transparency and helps hold CSU accountable for payroll decisions that are within CSU’s control,” said H.D. Palmer, the Brown finance department spokesman.

At the same time, he said, CSU is held harmless for employer rates that are outside of CSU’s control, such as CalPERS investment returns and changes in actuarial assumptions.

Another difference: CSU employees are in a “100/90” health care plan that pays 100 percent of the average cost of several plans and 90 percent of the cost for dependents. After retiring, they remain in the plan until eligible for Medicare supplement.

Other state workers are in a health care plan that pays 80 to 85 percent of the average health plan cost for retirees, depending on bargaining, and 80 percent of the cost for dependents. They receive the more generous “100/90” plan after retiring.

“My plan also will change the anomaly of retirees paying less for health care premiums than current employees,” Brown said in a 12-point pension reform issued four years ago.

The debt or “unfunded liability” for retiree health care promised state workers over the next 30 years ($72 billion) was greater last year than the unfunded liability for state worker pensions ($50 billion).

A Brown reform proposed last January would, through labor bargaining, switch state worker retiree health care from “pay as you go” to a pension-like “prefunding” with investments to help pay future costs.

Employee contributions to the retiree health care fund would be matched by the state. Some small state worker bargaining units, including the Highway Patrol, had already begun making payments for their retiree health care.

Brown also proposed adding five years to the retiree health care vesting period that begins with 50 percent coverage after 10 years of service and reaches 100 percent after 20 years. Yet another difference: CSU employees currently vest after five years.

State workers would be barred from receiving a higher health care subsidy in retirement than on the job. The governor’s proposal for an optional low-cost health plan with high deductibles, strongly opposed by unions, stalled in the Legislature.

Last month, state engineers agreed to a contract that phases in payments for retiree health care, extends the vesting period, and has a smaller retiree health care subsidy, the Sacramento Bee reported. Most state worker unions will negotiate contracts next year.

 

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Detroit’s future pension contributions could be significantly larger than projected under the city’s bankruptcy plan, according to a report from the Detroit Free Press.

Under the 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.

The problem for the city is that the 2024 payment could be far larger than projected.

From the Detroit Free Press:

According to new actuarial estimates in documents reviewed by the Detroit Free Press, the city’s balloon payment due in 2024 for its two pension funds has risen to $195 million, or about 71% above the original $114 million projected under the city’s bankruptcy exit plan approved by a federal judge last year. No one has a recently updated forecast yet of what the city’s pension bills look like in the decades after that.

[…]

The actuaries for the city’s two pensions funds say the lower estimate used in the bankruptcy plan was based on outdated information, including projections that didn’t allow for the longer life expectancy of retirees or that the city would be hiring new employees after filing for bankruptcy who would need to become part of the pension system.

The old calculation also was based on pension cuts taking effect in June 2014, instead of nine months later in March, which underestimated the liability for the pension system, officials from the Gabriel Roeder Smith & Co. actuarial firm told its Detroit pension fund clients in recent weeks.

How much of this increase should have been anticipated? Experts warned early on that the ability of Detroit to know its true pension obligations was always unsteady even as the city was set to emerge from bankruptcy.

Martha Kopacz, who analyzed the plan for U.S. Bankruptcy Judge Steven Rhodes and found the city’s plan feasible, cautioned in her report last year that the city must be “continually mindful that a root cause of the financial troubles it now experiences is the failure to properly address future pension obligations.”

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

Three of Canada’s largest pension plans over the weekend bought the rights to operate the Chicago Skyway until the year 2104.

The consortium of pension funds paid $2.8 billion for the lease rights; the Skyway was originally leased by the city to Spain’s Cintra Infraestructuras and Australia’s Macquarie Group in 2005. The cost of that deal was $1.83 billion.

More from the Chicago Sun-Times:

The buyers are a consortium made up by the Canadian Pension Plan Investment Board, the Ontario Municipal Employees Retirement System and the Ontario Teachers’ Pension Plan, according to a joint statement from the three entities. Each will have a 33.33 percent stake in the Chicago deal.

“Skyway represents a rare opportunity for us to invest in a mature and significant toll road of this size in the U.S.,” said Cressida Hogg, managing director and head of infrastructure for the Canada Pension Plan Investment Board.

The Council must approve the sale of the Skyway rights. A spokeswoman for Mayor Rahm Emanuel’s administration declined comment.

The Skyway company reported collecting nearly $80.7 million in revenue from tolls last year, a slight increase from 2013.

[…]

Motorists who use the 7.8-mile-long toll road on the South Side are unlikely to notice any changes as a result of the sale because the schedule of toll increases was laid out in the long-term lease agreement approved by the City Council 10 years ago.

Barring another sale, the pension funds will operate the Skyway for the next 99 years.

 

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A judge ruled against Providence, Rhode Island this weekend in a case brought by the city against its pension consultant.

The city claims that Buck Consultants miscalculated the savings that would result from a 2012 pension reform measure that suspended COLAs for the city’s retirees.

More from WPRI:

A U.S. District Court judge ruled Friday that Providence officials failed to prove how the city would have saved millions of dollars if its longtime actuary didn’t make errors in analyzing the city’s 2012 pension reform ordinance.

U.S. District Court Chief Judge William E. Smith granted a motion for summary judgment filed by Buck Consultants, the firm the city accused of negligently overestimating savings it would generate from suspending retiree cost-of-living adjustments (COLAs) by at least $10 million.

Lawyers for the city argued that Providence relied on Buck’s opinion that the COLA suspension would save the city $180 million when it negotiated a pension settlement with its public safety unions and retirees, but the estimate should have been $170 million. If Buck gave an accurate assessment, lawyers argued, the city would have sought an additional $10 million in savings from the settlement or moved forward with the original pension reform ordinance.

In his decision, Smith called the city’s damage theories “inherently speculative,” arguing that officials did not “present any evidence showing that it actually could have succeeded in getting any further concessions from the unions, let alone in what amount.”

Providence was seeking $10 million in damages.

 

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The writing has been on the wall: since early Summer, Pension360 has covered CalPERS’ efforts to scale back its real estate exposure in a big way.

On Thursday, the country’s largest pension fund sold $3 billion worth of real estate to the Blackstone Group – an sale which amounts to 10 percent of CalPERS’ real estate holdings.

More from the Sacramento Bee:

The California Public Employees’ Retirement System has been working for years to remove speculative undeveloped holdings from its real estate portfolio and focus more on commercial buildings and other properties that are already developed and producing income.

“This sale allows CalPERS to focus on our strategic plan and on investing in assets and managers that better align with our real estate goals,” said Paul Mouchakkaa, the pension fund’s managing investment director for real assets, in a prepared statement.

CalPERS put the assets up for sale in June.

[…]

Selling to Blackstone also helps with another strategic goal: reducing the number of outside investment managers with which CalPERS does business. CalPERS hopes to save money by having relationships with fewer managers; the pension fund spent $1.6 billion on fees to outside managers in 2014.

The sale comes as the $293.7 billion fund wrestles with a broader effort to reduce investment risks. The pension fund is considering a plan to lower its “discount rate,” which is a target for annual investment profits. A lower rate translates into fewer risks, although lower investment gains would likely lead to higher pension contributions from state and local governments and public employees.

As the Bee notes in its final paragraph, CalPERS is indeed beginning a years-long shift to a more conservative investing strategy.

 

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