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San Bernardino Judge Wants Look at Pension Costs

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.

Pension cost cuts seemed unlikely after bankrupt San Bernardino agreed to repay CalPERS for skipped payments and adopted a recovery plan that only cuts bond and retiree health care debt, as in the previous Vallejo and Stockton bankruptcies.

Then this month U.S. Bankruptcy Judge Meredith Jury asked for more information showing that if she approves the San Bernardino recovery plan, rising payments to CalPERS will not push the city into a second bankruptcy.

“I don’t really think it’s in anybody’s objection, but the public perception — the media perception — of the two cities with confirmed (bankruptcy exit) plans, that being Vallejo and Stockton, is that they’re already in trouble because they didn’t impair CalPERS,” Jury said at a hearing on Oct. 8, as reported in the San Bernardino Sun.

“ . . . I don’t think there is adequate discussion of how much those raises are going to be. I have heard other things, I think in this court, that it is an exponentially increasing number that will have to be paid in order to keep retirement plans intact. There comes a point where no matter what I confirm it will fail.”

Actuaries hired by the city project that payments to the California Public Employees Retirement System will more than double from the current level by fiscal 2023-24, reaching $29 million a year, the Sun reported.

In the latest CalPERS report for the San Bernardino plans (June 30, 2013), the police and firefighters rate is forecast to rise from 38.8 percent of pay this fiscal year to 49.3 percent in fiscal 2020-21, the miscellaneous rate from 24.2 to 32 percent of pay.

Last week an editorial in the Riverside Press-Enterprise, noting the judge’s remarks on Oct. 8, urged Jury to “put pensions on the table” and “insist that San Bernardino renegotiate its unsustainable contract with CalPERS.”

Pension cuts have not been proposed by the bankrupt cities. Vallejo said CalPERS threatened a costly legal battle. Stockton said pensions are needed to compete in the job market. San Bernardino mentioned a “fresh start” to stretch out CalPERS payments.

But in a landmark ruling in the Stockton bankruptcy last year, Judge Christopher Klein said California pensions can be cut in federal bankruptcy court, despite CalPERS-sponsored state laws to the contrary.

San Bernardino may have a deeper problem than the two cities that have already exited bankruptcy, putting more focus on pension savings. The city filed an emergency bankruptcy in August 2012, saying it was in danger of not being able to meet its payroll.

During the rest of the fiscal year, San Bernardino did not make any of the required payments to CalPERS totaling $13.5 million. After a legal battle and mediation, the city agreed last year to repay CalPERS with interest and penalties, a total of $18 million.

The recovery plan issued last May said San Bernardino “evolved from a city that was the epitome of middle-class living into one of the poorest communities in the United States” with a median household income of $38,000.

Political and financial turmoil continues. Two former city officials made allegations of falsified budgets and possible illegal wrongdoing after the bankruptcy filing. In a recall in November 2013, voters ousted a city attorney and a councilwoman.

An unusual San Bernardino city charter linking pay to the average in 10 similar cities has given police two $1 million pay raises during the bankruptcy. A proposal to end the pay link was rejected by 55 percent of voters last November.

Mayor Carey Davis unsuccessfully asked City Manager Alan Parker to resign last December, blaming him for slow bankruptcy progress. Last month Davis vetoed renewal of a contract for the son of a former mayor, a consultant supported by Parker and others.

At a stormy city council meeting this month, there were public protests and heated exchanges between council members over the failure to complete audits of city finances during the first two years of the bankruptcy.

Davis said in hindsight he should have used his gavel to end the council argument. “I have a gavel, but I don’t want to wear it out,” the mayor told the Sun. “Bring in the FBI/Complete the audits!” said a sign carried by one resident.

The San Bernardino recovery plan does not ask voters to approve a sales tax increase, unlike the 1-cent tax approved in Vallejo and ¾-cent tax approved in Stockton. The plan does expect some indirect savings in pension costs.

Payment for a $50 million bond issued to pay pension costs would be cut to $500,000, a deep debt reduction contested in court by bondholders. Contracting with the county for firefighter services is expected to save $2.7 million a year in pension costs.

Actuaries have told the city that shifting firefighters from CalPERS to the San Bernardino County Employees Retirement System would immediately reduce annual pension costs because the county has more quickly paid down pension debt.

Few details of the $2.7 million reduction were given to the council at a meeting in August. A Calpensions Public Records Act request for the actuarial report was denied by the city attorney‘s office, which cited several exemption laws and rulings.

Last week Vallejo and Stockton officials sharply disagreed with the view that the failure to cut their biggest debt, CalPERS pensions, is pushing them toward a second bankruptcy. But they said service levels have not been restored.

“We are not at risk of a second bankruptcy,” said Daniel Keen, the Vallejo city manager. “We would emphatically deny there is a possibility of a second bankruptcy.”

In a budget message last June, Keen said his “cautious optimism” is tempered by large long-term cost increases for CalPERS pensions, workers compensation, and health benefits.

“These fiscal challenges will continue to severely constrain our ability to rebuild services and infrastructure and deliver the service levels that our residents deserve,” Keen said in the budget message.

In the latest CalPERS report for the Vallejo plans (June 30, 2013), the police and firefighter rate is forecast to rise from 57.6 percent of pay this fiscal year to 72 percent of pay in fiscal 2020-21, the miscellaneous rate from 32.7 to 41.2 percent of pay.

The Stockton city manager, Kurt Wilson, said the city continues to follow the long-range financial plan developed in bankruptcy and has had a series of favorable financial developments.

“As a result we currently have a 20 percent ($40 million) general fund reserve which not only places us in possibly the strongest financial position in recent memory, but combined with our forecasting, gives us one of the strongest fiscal foundations in the state,” Wilson said via email last week.

“While our service level will remain below what it was several years ago, we are meeting our current needs in a fiscally responsible way and are in no way near the financial condition that necessitated the bankruptcy,” he said.

In the latest CalPERS report for the Stockton plans (June 30, 2013), the police and firefighter rate is forecast to rise from 45.5 percent of pay this fiscal year to 58.1 percent in fiscal 2020-21, the miscellaneous rate from 22.4 to 29.5 percent of pay.

Photo by Pete Zarria via Flickr CC License

Canada Pensions Scout Indian Infrastructure

The Canada Pension Plan Investment Board (CPPIB) was very active in India in 2015. Now, other large Canadian pension funds are joining the party.

Caisse de depot et placement du Quebec (CDPQ) and the Public Sector Pension Investment Board (PSP Investments) are looking to invest in Indian infrastructure, according to a report.

From Deal Street Asia:

Two of Canada’s largest pension funds—Caisse de depot et placement du Quebec (CDPQ) and the Public Sector Pension Investment Board (PSP Investments)—are looking to invest in the Indian infrastructure sector and have started scouting for assets, according to two people familiar with the discussions.

[Neither] of them have any significant exposure to the Indian infrastructure sector so far, said the two people quoted above, requesting anonymity as negotiations are confidential.

As Indian infrastructure assets start to mature and companies look to divest cash-generating assets, these funds are starting to evaluate possible investments here, said the first person quoted above.

One Indian company, which the two Montreal, Quebec-based pension funds CDPQ and PSP Investments are in talks with is Tata Realty and Infrastructure Ltd (TRIL), confirmed both the people quoted above, adding that the discussions have not finalized anything due to a mismatch between valuations.

PSP Investments, CPDQ and TRIL did not respond to email queries sent on 12 October and subsequent follow-ups over phone and email.

TRIL, a subsidiary of Tata Sons, builds and operates real estate assets such as commercial office buildings, shopping malls, hotels and serviced apartments. It is also involved in infrastructure projects across highways and bridges and urban transport.

Caisse manages about $185 billion (USD) in assets; PSP manages a portfolio of about $86 billion.

Photo by sandeepachetan.com travel photography via Flickr CC License

Blackstone Real Estate Fund, Where Pensions Are Largest Investors, Comes Under Fire From Housing Rights Activists

Protesters in several cities around the world this week rallied against the Blackstone Group and one of its funds that invests heavily in foreclosed homes and other distressed real estate assets.

Tenants rights groups contend that Blackstone charges above-median rent, forces out low-income tenants and neglects their properties.

The fund in question is the Blackstone Real Estate Partners VII; and pension funds are getting caught in the crossfire because dozens of pensions have collectively invested billions in the fund.

Details from Al-Jazeera:

Protesters in Spain as well as U.S. cities such as New York and Atlanta demanded on Wednesday that the firm stop its purchases of foreclosed houses and troubled mortgage loans, which they believe put homeowners and tenants in both countries at risk. Of particular concern are Blackstone’s purchases of tens of thousands of single-family homes, which it now rents out at prices out of reach for low-income tenants, said demonstrators.

[…]

Blackstone names public pensions as the largest category of investor in the fund, Blackstone Real Estate Partners VII, and data from pensions’ annual reports and the investment research database Prequin show that more than 30 state and local pensions have committed at least $3.2 billion to the fund. Those include the California State Teachers Retirement System (CalSTRS) and the Florida State Board of Administration, which made commitments of $100 million and $300 million, respectively. Three New York City pension funds made a collective commitment of $300 million.

Additional investors in the fund include university endowments and private pension funds, including the Walt Disney Co. retirement plan.

Blackstone’s rental practices have drawn fire from tenant advocates in Atlanta, San Francisco and several other areas where its home purchases are concentrated. In a series of reports, housing groups such as Occupy Our Homes Atlanta have contended that Invitation Homes is a Wall Street slumlord that charges rents well above area medians, fails to return tenant phone calls and neglects its properties, forcing renters to pay for repairs themselves. In some cases, Invitation Homes has done this through leases that appear to violate local rental ordinances, including agreements for some Chicago residents that require them to rent properties as is — a measure that local housing attorneys say shifts risk and expense to the tenant, in contravention of the city’s residential landlord tenant ordinance.

Blackstone is the largest owner of single-family homes in the United States.

Photo by thinkpanama via Flickr CC License

Despite Cost, California Cities on Board With CalPERS’ Reduced Return Target

CalPERS may soon reduce its assumed rate of return, rolling it back from 7.5 percent to as low as 6.5 percent.

A lower return target means less reliance on investments and more dependency on contributions from participating government entities.

But despite the higher cost, a large majority of California cities support the pension fund’s rate rollback.

From Reuters:

The League of California Cities surveyed its members, which have been struggling to shoulder the burden of growing pension costs. The survey found that many cities prefer a more gradual increase in costs, as opposed to spikes following market downturns, said Bruce Channing, Laguna Hills city manager.

“As employers, more predictability and less spiking of rates from one year to the next is preferable,” said Channing, who is also chair of the league’s city managers pension reform task force.

[…]

The league said 77 percent of those surveyed supported Calpers’ strategy to reduce portfolio risk, even though the move would over time raise pension contributions more than currently planned. Ten percent of respondents opposed the strategy, and the rest were unsure, the survey of 115 cities found.

Opponents of higher contributions included Alameda, a city of nearly 76,000 near San Francisco. Its pension costs for safety workers like police and fire consume 48 cents of every dollar paid in salary and are expected to grow to 65 cents in five years.

“It’s devastating on our bottom line,” said Alameda Interim City Manager Liz Warmerdam. “We have very little input. Whatever they want to do, local governments have to sit here and deal with it. It’s extremely frustrating.”

The CalPERS board will debate the proposal next week.

Photo by Pete Zarria via Flickr CC License

Can Pensions Pick Hedge Funds?

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

Dan McCrum of the Financial Times asks, Where are the pension fund heroes?:

Here is a request, or perhaps a challenge, for nominations: which pension schemes are any good at picking hedge funds?

The question arises in a week when Fortress became the latest brand name hedge fund sponsor to suffer the humiliation of inadequate performance. The US asset manager’s flagship macro fund will close, after losing large amounts of investors’ cash, and Michael Novogratz, the flamboyant money manager responsible, is considering his options.

He is far from the only star investor to have had a bad few months, with losses widespread since June and the industry on track for its worst performance since 2011 — the year of the European debt crisis. However, Mr Novogratz’s fall is a reminder of the way the cast of highflying hedge fund managers rotates. The top of the league tables always show someone making big profits, but the names change every year.

The reason is weight of numbers. With thousands of hedge funds competing, it is inevitable some will shine at any given moment. What is far harder, and rarely lauded, is selecting a group of hedge funds to manage money for several years.

Choosing hedge funds is difficult in part because of the rotation and randomness in investment returns. Statistical studies of past performance show it really is no guide, meaning every year the investor starts with a freshly shuffled pack of cards. Hence, perhaps, the lack of fund of hedge fund managers famous for their investment prowess. At the same time, the life of a hedge fund is fleeting: those that make it past the first year last only another four, on average. The manager of retirement savings for spans measured in decades must always be vigilant for signs of decline.

So when it comes to pension scheme investment in hedge funds, what sort of performance should be celebrated?

As a starting point consider the average hedge fund as judged by HFR, keeper of one of the more popular databases of fund performance. It is not possible to invest in the “average” hedge fund but, if it was, $100 placed in the industry’s care at the start of 2010 would now be worth $123, after fees. Some might think this a relatively low hurdle to beat, given $100 invested in Vanguard’s Total Bond index fund at the same time would now be worth $124, after rather fewer fees.

Instead, let us try to consider the best performance which might be hoped for from a collection of hedge funds. Keepers of commercial databases tend not to let journalists rummage unsupervised in their annals of mediocrity so, as a proxy, imagine choosing hedge fund strategies with perfect hindsight.

HFR breaks the industry into 31 separate strategies, reflecting the more popular types of fund. Say the best hedge fund investor could forecast the three strategies that will generate the greatest investment gains each year, and splits all her money between them every New Year’s Day. In 2012 our imaginary genius went for activists, value-minded stock pickers and specialists in asset backed securities. A year later she would stick with the value guys, but swap in some funds focused on heathcare and technology stock pickers, as well as those that specialise in spotting pricing anomalies in energy and property-related securities.

Pick the three best hedge fund strategies every year and $100 at the start of 2010 would be worth almost twice as much — $193 — after fees.

Here’s the rub, however. Had our forecasting genius put $100 into the Vanguard fund that tracks the S&P 500 stock market index, it would also be worth $193.

The conclusion appears to be that the very best that might be hoped for from investing in smart, and expensive, hedge funds is simply to have kept pace with dumb old stocks.

One final, and perhaps more realistic benchmark, against which hedge funds and their investors might be measured, then. If a pension fund allocated 40 per cent of its money to Vanguard’s bond fund, 60 per cent to the US stock fund, and reset the balance back to those levels every year, its $100 would have grown to $164.

A hedge fund portfolio that has grown faster than that would be worth lauding indeed. Feel free to make nominations in the comments, or to the email address below.

For those pension funds left pondering the failures of their hedge fund programmes to keep up, perhaps a better question is worth asking: does it even make sense for them to try?

I answered Dan McCrum’s question in my last comment covering another shakeout in hedge funds. Let me briefly go over some points below:

There is no question in my mind that Ontario Teachers’ Pension Plan is one of the best hedge fund investors in the world. A big reason for this is the guy who was recruited to start this program back in 2001 and is now the leader of that organization, Ron Mock, had unbelievable experience co-founding and managing a huge hedge fund that blew up when one of his traders went rogue on him (Ron took full responsibility for that blow-up and learned first hand about operational risk). That and other harsh lessons taught Ron Mock all about the perils of investing in hedge funds and gave him and OTPP an edge over others who don’t have any experience managing a hedge fund.
The reins of hedge fund program have been handed over to Wayne Kozun who is responsible for Teachers’ Fixed Income and Global Hedge Fund portfolio (another great guy who knows his stuff). Wayne oversees a great team which includes a fellow called Daniel MacDonald, one of the best hedge fund portfolio managers in the pension fund industry (I know, I’ve seen him in action and he asks all the right questions). Together, the global hedge fund team pick and monitor a number of hedge funds and they make sure they’re all delivering alpha, not leveraged beta (As Ron Mock always reminds me: “Beta is cheap; true alpha is worth paying for“).
But even OTPP has gotten clobbered on hedge funds, especially in 2008 when it crashed and burned. So, if one of the most sophisticated and best funds of hedge funds can experience a serious setback, what makes you think that other much less sophisticated public pensions can navigate this space without being eaten alive by hedge fund fees?
The answer is quite simple. Most of these unsophisticated investors jumping on the hedge fund bandwagon are listening to their useless investment consultants which typically shove them in the hottest hedge funds they should be avoiding. This is why most investors consistently lose money on hedge funds, especially after you factor in the fees and illiquid nature of these investments.
So why do so many U.S. public pension funds keep piling into hedge funds instead of following CalPERS and nuking their program? Because many of them are chronically underfunded, poorly staffed, and they keep chasing the pension rate-of-return fantasy which forces them to take increasingly more risks in hedge funds and more illiquid alternative investments like private equity and real estate.
The central problem of course is governance. Unlike Canadian public pension funds, U.S. public pension funds are poorly governed, have too much government interference, are unable to pay their staff properly so they can manage public, private and hedge fund assets internally to significantly lower costs, and are pretty much at the mercy of their investment consultants which have hijacked the entire investment process. What this means is that U.S. public pension funds pay out insane fees to hedge funds, private equity funds, real estate funds and investment consultants. It’s all about milking that public pension cow dry and making overpaid hedge fund and private equity managers and their Wall Street buddies much richer.
But in a deflationary and low-return world, institutional investors from all over the world are starting to scrutinize fees and other hidden costs attached to investing in hedge funds and private equity funds. In California, both CalPERS and CalSTRS are being scrutinized by the state treasurer for the fees they pay out to private equity funds and I expect other states to follow suit with their own investigations (look at the mess in Illinois which is a disaster).
As far as hedge fund benchmarks, I don’t think it’s fair to compare them to the S&P 500 or even a balanced fund because hedge funds are suppose to deliver absolute returns in all markets or at least deliver much higher risk-adjusted returns than a balanced 60/40 fund. The problem is most hedge funds stink as do most hedge fund databases which are full of biases.
This makes the job of picking the right hedge fund nearly impossible (akin to trying to pick the right mutual fund) but just like in private equity, there is some performance persistence among top hedge funds which is why they garner the bulk of the industry’s assets.
But in this environment, where even brand name funds are taking a beating, I would beware of large hedge funds and start focusing my attention on some of the smaller ones that are far from perfect but tend to have better alignment of interests. The problem with this strategy is how do you pick the smaller hedge funds and is it worth devoting resources to managers and strategies that are not highly scalable?
Small hedge funds deal with other problems including insane regulations which are destroying their chances of getting up and running unless they have at least $250 million or more of asset under management. I was talking to a manager who wants to start a macro fund, has great experience, and he told me the regulatory environment in Canada is just insane. He also told me that anyone who wants to manage more than a billion dollars off the start in this environment is asking for trouble. I agreed and pointed out that even Scott Bessent, Soros’s protege, and Chris Rokos, the former star trader at Brevan Howard, are managing the growth of their new macro funds very carefully focusing on performance first and foremost.

So after reading all my comments, let’s go back to Dan McCrum’s question above, where are the pension fund heroes? I’d say most of them are in Canada where plans like OTPP and HOOPP keep delivering stellar returns as they match assets and liabilities with or without external hedge funds and pension funds like CPPIB bringing good things to life on a massive scale, which is why it’s also posting great returns.

In fact, all of Canada’s top ten are performing well and providing great benefits to the Canadian economy which is why I’m a stickler for enhancing the CPP here. If the U.S. got its governance right, I would also recommend it enhances Social Security for all Americans.

Finally, since we are on the topic of pension fund heroes, Northwater Capital Management Inc. (“Northwater”) is pleased to announce the appointment of Neil J. Petroff to the role of Vice Chair, effective October 1, 2015:

Prior to joining Northwater, Mr. Petroff held the position of Executive Vice President of Investments and Chief Investment Officer at the Ontario Teachers’ Pension Plan (“OTPP”) since 2009, where he was responsible for all aspects of the firm’s investment activities as well as the pension fund’s asset-mix and risk allocations. Throughout his 22 year career with OTPP, Mr. Petroff held progressively more senior-level positions which have given him broad exposure and management experience in a wide range of asset classes and investment products. In 2014, Mr. Petroff was recognized as Chief Investment Officer of the Year and he received the prestigious Lifetime Achievement Award at the Industry’s Innovation Awards ceremony.

Before joining OTPP, Mr. Petroff worked at the Bank of Nova Scotia , Guaranty Trust Company and Royal Trustco Limited. Neil has served on several corporate and charitable boards including Cadillac Fairview Corporation Limited, Maple Financial Group Inc. and the Integra Foundation.

“Neil Petroff is truly a world-class investment professional” said David Patterson , Chair and Chief Executive Officer of Northwater. “His substantial experience and expertise will be invaluable to Northwater and its clients as we continue to offer industry-leading alternative investment solutions to institutional investors around the world.”

About Northwater Capital Management Inc.

Northwater Capital Management Inc. has, over the years, been known for being first into new and innovative investment strategies. It was the first Canadian firm in synthetic indexing, fund of funds in hedge funds, intellectual property funds, risk parity portfolios and bespoke liquid alternative strategies. Currently, it manages the Northwater Intellectual Property Funds and the Fluid Strategies portfolios. Founded in 1989, Northwater is a private investment company with offices in Toronto and Chicago.

I completely agree with Dave Patterson, “Neil Petroff is truly a world-class investment professional” and the folks at Northwater are truly lucky to have him on their team. [Note: You should read the latest from Northwater’s Neil Simons, The Missing Piece to Alternative Investing – Part 1.]

You know who else is very lucky? All of you who read my daily insights and don’t pay a dime for them! I’m no pension hero and will never receive a lifetime achievement award (couldn’t care less), but I’m damn proud of this blog and my unflinching and brutally honest comments on pensions and investments.

So, once again, please take the time to subscribe or donate (to PensionPulse) on the top right-hand side and support my efforts in bringing you the very best insights on pensions and investments. I thank all my institutional subscribers and I’m tinkering with an idea to provide those who subscribe with premium content to give you an edge over your peers and just to thank you for supporting my blog.

Photo by Dirk Knight via Flickr CC License

CalPERS Proposal Exemplifies Broader Trend of Target Return Reduction

This week, Pension360 covered a CalPERS proposal to lower its investment return assumption from 7.5 percent to as low as 6.5 percent.

If CalPERS goes through with the change, it will hardly be the first fund to do so in recent months. Pension funds across the country are scaling back their return targets and decreasing their reliance on high investment returns.

CNBC reports:

“We’re in the midst of what I would call a secular shift in the return assumptions,” said Keith Brainard, research director of the National Association of State Retirement Administrators. “That has occurred particularly in the wake of sustained reductions of interest rates.”

“It’s a longer-term issue,” Brainard said of the trend by public pension funds to reduce their targets. “There’s a continuous, ongoing review of, among other factors, the [return] rate by all or most public pension funds, so there’s a continuous, multiyear trend toward lower rates.”

[…]

“From our perspective, this is sort of an ongoing trend,” said Amy Resnick, editor of the trade publication Pensions & Investments.

Resnick noted that Oregon’s public employee pension fund lowered its assumed rate of return this summer from 7.75 percent to 7.5 percent.

“Two years ago, they had gone from 8 percent to 7.75 percent,” she said.

The New York State Common Retirement Fund, which is the third-biggest public pension fund in the U.S., cut its target last month from 7.5 percent to 7 percent. The target had been as high as 8 percent in 2010.

CalPERS last lowered its return assumption in 2011, when it was reduced from 7.75 percent to 7.5 percent.

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Illinois Puts November Pension Payment on Hold; December Payment Also in Jeopardy

Illinois was scheduled to make its monthly $560 million payment to its pension systems soon. But the state Comptroller announced on Wednesday that the payment would be put on hold – and December’s payment may not be made, either.

From the Chicago Tribune:

Illinois Comptroller Leslie Munger warned Wednesday that the ongoing budget stalemate in Springfield has drained the state’s checking account and will force her to delay payments to state pension systems.

Pointing to the numerous court orders, consent decrees and laws that have allowed state government to continue operating without a full budget for more than three months, Munger said that come November there won’t be enough cash available to make the monthly $560 million pension payment. The December payment might be delayed as well, Munger said.

The state has until the middle of 2016 to catch up on the payments, and the comptroller’s office expects to have more cash available during the peak tax collection times around the holidays and in the spring.

Munger said putting off the pension payments was “choosing the least of a number of bad options,” as Republican Gov. Bruce Rauner and Democrats who control the General Assembly have been unable to reach a budget deal.

The state has a $7 billion bill backlog, Munger said, in part because it is spending billions of dollars beyond what it is set to collect while the impasse continues.

The delay won’t affect benefit payouts, according to Munger.

Corporate Pension Funding Drops, Liabilities Grow in 3rd Quarter

It was a tough 3^rd quarter for the 100 largest corporate pension plans, as their funded ratio collectively dropped by nearly 4 percentage points and investment returns fell by 2.5 percent, according to data from Milliman.

Details from Reuters:

Pension liabilities grew 1 percent in the third quarter, as returns fell 2.5 percent, according to global consulting firm Milliman. The increase in the pension shortfall has been largely driven by investment losses in August and September, low discount rates used to value pension liabilities, and recent studies showing that people are expected to live longer over the next 20 years.

[…]

“Things are moving in the wrong direction,” said Andrew Wozniak, head of BNY Mellon Fiduciary Solutions in New York.

Thirty seven of the top 100 U.S. corporate pensions by assets tracked by Milliman had funding ratios below 80 percent at the end of 2014, more than double that level in 2013.

The overall funding ratio for these U.S. companies fell to 81.7 percent in September this year, down from 85.5 percent at the end of June, Milliman data showed.

[…]

Despite expectations for a Fed rate hike, longer-term bond yields have declined, a factor in computing discount rates used to estimate pension liabilities. Lower discount rates, which are based on the yield of high-quality corporate bonds, increase a pension plan’s projected liabilities.

Pension discount rates fell to 4.19 percent in September, from 4.23 percent in August and down more than 2 percentage points since the global financial crisis in 2008.

The S&P 500 fell 6.44 percent in the third quarter of 2015.

Photo by Sarath Kuchi via Flickr CC License

New York City Pension Boosts Affordable Housing With $150 Million Investment

The five New York City pension systems on Thursday announced they would be collectively investing $150 million in the AFL-CIO Housing Investment Trust (HIT).

The investment will “create and maintain” about 20,000 affordable housing units in the city, and will generate safe returns, according to city Comptroller Scott Stringer.

Two-Thirds of State Pensions Got Healthier in 2014

Two-thirds of state pension plans saw their funding improve in fiscal year 2014, according to data compiled by Bloomberg.

The median funding level of state plans improved as well, from 69.2 percent to 70 percent.

Among states, Wisconsin and South Dakota’s pension systems remained the healthiest. Illinois plans sported the worst funding in the country, with a collective funded ratio of 39 percent.