Category: Pension Newsroom

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.

After the CalPERS staff gave the board a correction last week for providing misinformation about private equity fees, the board member who has been grilling staff on the issue walked out of a private staff meeting because he was not allowed to record it.

The nation’s largest public pension system, one of the first to invest in private equity firms and their lucrative leveraged buyouts, expected to be a leader again this year by launching a new fee tracking system after three years of development.

But when a question from board member J.J. Jelincic in April revealed that CalPERS did not know the amount of “carried interest” earned by its private equity firms, there was a small wave of criticism in the national media.

In the traditional “2 and 20” fee structure, the private equity firm gets to keep 20 percent of the profit after earnings reach a basic amount. This performance incentive is called the “carried interest,” a term said to date back to 16th Century sea voyages.

At a board meeting last month, Jelincic questioned staff at length about the 2 percent management fee. At one point the investment committee chairman, Henry Jones, threatened to rule him out of order.

After the meeting, Jelincic wrote a letter to Anne Stausboll, CalPERS chief executive officer, complaining that the private equity staff he questioned, Real Desrochers and Christine Gogan, gave inaccurate, evasive and condescending responses.

“Staff is perpetuating the talking points and mythology of PE fund managers, who are continuously — and largely successfully — trying to convince the limited partners (CalPERS and other institutional investors) that they receive a more favorable deal than they actually do,” Jelincic said.

His letter included an excerpt of his questions to the staff pointing out that a key reply by Desrochers was incorrect. Ted Eliopoulos, CalPERS chief investment officer, read a correction to the board last week.

“We were asked if a management fee is $100 and the fee to the portfolio company is $50 and there is a 100 percent offset to the limited partner, will the general partner (the private equity firm) ultimately collect $100,” said Eliopoulos. “The answer is ‘yes.’ We should have answered ‘yes’ instead of ‘no.’”

The Desrochers error and the Jelincic letter led to another small wave of criticism in the national media, notably in the Financial Times and Fortune magazine. CalPERS responded with a “For the Record” defense of its private equity investments, averaging 12.3 percent returns over the last 20 years.

Jelincic said in his letter to Stausboll that the staff should acknowledge a “breach of decorum” not only for being condescending and wrong, but also for “a general posture of implying that my questions about these topics were irrelevant, ill-informed, or silly.”

In a reply to the letter, Jones, the committee chairman, said he did not agree there had been a “breach of decorum” and would schedule a private meeting of Jelincic and top staff and consultants to get answers to his questions about private equity fees.

Jelincic said he walked out of the meeting last week after being told he could not record it. The former leader of the largest state worker union is a long-time CalPERS investment office employee, sometimes said to be at odds with top staff.

He has been on leave since 2010, when he was elected to the board by CalPERS members. After a sexual harassment reprimand was upheld, his fellow board members voted in 2011 to censure him, adding a six-month suspension of several board duties.

One thing that helped move private equity fees into the spotlight is financial reform legislation, the Dodd-Frank act in 2010, pushed through Congress with support from CalPERS and other public pension funds.

Private equity firms had generally been unregulated. The new law required firms with $150 million or more in assets under management to register as investment advisers, bringing an initial review of 150 firms by the Securities and Exchange Commission.

“In some instances, investors’ pockets are being picked,” Andrew Bowden, an SEC official, told the New York Times in May last year. “These investors may be sophisticated and they may be capable of protecting themselves, but much of what we’re uncovering is undetectable by even the most sophisticated investor.”

A Times report last October found, among other things, that CalPERS and other investors are on the hook for the uninsured part of a $115 million lawsuit settlement by the Carlyle Group for colluding to suppress the share prices of targeted companies.

Another force that has helped make private equity fees an issue is Yves Smith (the pen name of Susan Webber), who launched the “Naked Capitalism” website in 2006. She is mentioned in the national media stories this month and the Times report last October.

Smith published a 10-part series on CalPERS private equity fees, from Aug. 30 to Sept. 16, prompted by video of the board meeting last month when Jelincic questioned the two CalPERS private equity officials.

Her arguments often are supported or accompanied by comments she received from private equity experts, including Leon Shahinian, a former CalPERS private equity officer, and Michael Flaherman, a former CalPERS investment committee chairman.

“Thus the concerns we have raised about CalPERS’ program, that private equity has over the last decade persistently not generated enough in the way of performance to justify the risks, that private equity firms charge indefensibly high fees (and worse, CalPERS and other investors are ignorant of the full amount they are paying), and that SEC officials have determined many private equity general partners are stealing from investors, are all hazards to taxpayers’ health,” Smith said in her Sept. 16 post.

Smith said in a footnote to her Aug. 30 post that, to CalPERS credit, even though she lost a lawsuit to get CalPERS private equity data, CalPERS gave her the data anyway, which took six months of “often heated exchange” with CalPERS lawyers.

“If CalPERS continues to be unwilling to grapple with what the public can now see are both a huge expertise gap in private equity and a propensity to side with private equity general partners over its beneficiaries’ interests, the organization will lose its power in the wider world,” Smith said in the Aug. 30 post.

“Indeed, one can sense that is already starting to occur. Needless to say, we at Naked Capitalism do not want that to happen.”

This fall, CalPERS expects its new Private Equity and Accounting Reporting Solution to issue the first report of carried interest paid to private equity firms. About $30 billion of the $293 billion portfolio is in 700 private equity funds.

“In November, we are planning an educational session for the board on private equity that will be presented by staff and invited industry experts,” Eliopoulos told the CalPERS board last week. “This will be concurrent with our annual review of our private equity program.

“It’s important that we don’t let the recent attention on our presentation eclipse CalPERS long-standing commitment to financial transparency and reporting, and in particular, the significant steps we have taken recently to address what has been a challenge for the entire industry.”

 

Photo by  rocor via Flickr CC License

After almost 29 years at the Kentucky Teachers’ Retirement System, chief investment officer Paul Yancey is hanging it up at the end of the month. He’ll be retiring October 1, according to a report from the Lane Report.

Deputy CIO Tom Siderewicz will step into Yancey’s shoes.

More on Yancey and Siderewicz, from the Lane Report:

The KTRS Board of Trustees approved a resolution honoring Yancey on Sept. 21 for his career with the teachers’ pension system, which is Kentucky’s largest financial institution.

Yancey began with KTRS in November 1986 as an analyst and, more recently, has been CIO since December 2004. The agency had about $2.4 billion in assets when he arrived and that total has grown during his KTRS career to $18.5 billion as of June 30.

Siderewicz started with KTRS in September 2011 and became deputy chief investment officer Jan. 1. He is a Chartered Financial Analyst with a bachelor’s degree in economics from California State University Long Beach.

The teachers’ retirement investment team’s work resulted in a 5.1 percent return in the fiscal year that ended June 30, better than the 3.1 percent average of other large U.S. pension plans. The investment fees paid by KTRS in the prior fiscal year represented two-tenths of 1 percent of assets.

The Kentucky Teachers’ Retirement System manages $18.5 billion in assets.

 

Photo credit: “Ky With HP Background” by Original uploader was HiB2Bornot2B at en.wikipedia – Transferred from en.wikipedia; transfer was stated to be made by User:Vini 175.. Licensed under CC BY-SA 2.5 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Ky_With_HP_Background.png#mediaviewer/File:Ky_With_HP_Background.png

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

Editor’s note: More Pension360 coverage of public pensions’ opposition to BoA’s governance shift can be found here and here.

Michael Corkery of the New York Times reports, Bank of America’s Fight to Keep Brian Moynihan’s Dual Roles:

Forget the Iowa caucuses or the New Hampshire primary. One of the more intense and dogged campaigns is currently being waged by Bank of America to convince shareholders that Brian T. Moynihan should keep his job as both chairman and chief executive.

Top bank executives and one of its board members have pounded the pavement from London to Houston, lobbying dozens of investors. They cut a deal to mollify one outspoken critic, and they enlisted the help of the former Massachusetts congressman Barney Frank, an architect of Wall Street’s regulatory overhaul. Mr. Frank said he agreed to make the case for Mr. Moynihan after discussing the issue with his neighbor, an executive at Bank of America, the nation’s second-largest bank.

The battle engulfing the bank has had, at times, the feel of a local City Council race. It has featured a cast of characters including a Roman Catholic priest, Warren E. Buffett and two giant California pension funds that have mounted an aggressive countercampaign to strip Mr. Moynihan of his chairmanship.

As many as 40 percent of shareholders were expected to vote against Mr. Moynihan from the outset, leaving about 60 percent up for grabs — a huge group that includes major money management firms like T. Rowe Price and BlackRock.

That the vote, scheduled for Tuesday in Charlotte, N.C., has proved so contentious shows the depths of discontent with Bank of America, mostly over how the bank’s board decided to give Mr. Moynihan both titles in the first place. It did so unilaterally last year, overturning a previous shareholder vote in 2009 that required the bank to have a separate chairman and chief executive.

But the battle also illustrates how the byzantine world of corporate governance can consume the time and attention of a company’s leadership.

Bank officials say Mr. Moynihan, chief executive since 2010, earned the right to also become chairman last year, having steered the company through a near-death experience after its costly acquisition of Countrywide Financial in 2008 and Merrill Lynch in 2009. They say there is no conclusive evidence that companies with separate chief executives and chairmen perform better than those that don’t divide the roles.

The two pension funds leading the charge against the bank — the California Public Employees’ Retirement System and the California State Teachers’ Retirement System — argue that an independent chairman would provide better oversight of a bank with a troubled history.

“Since Mr. Moynihan’s appointment as C.E.O. in January 2010, the company has continued to underperform, has failed important Fed stress tests, and has perpetuated a subpar engagement with its shareholders,” the California pension funds wrote in a joint letter to the bank’s lead independent director last month. “Given these missteps, we do not believe now is the time to reduce oversight of management by combining the roles of C.E.O. and chair.”

The pension funds’ sway goes beyond their less than 1 percent ownership of the bank’s shares. They have been calling and writing to the largest shareholders — including some firms they may pay to manage money on behalf of the California pensioners — urging them to vote against the combined role.

For some shareholders, the C.E.O.-chairman vote is more of an incidental bargaining chip. When the issue came up in 2009, for example, union groups that supported separating the roles were also pushing behind the scenes for the right to organize Bank of America employees, according to people briefed on the matter.

If anything, the current contest — which has reached a fever pitch this week — has been an unwelcome distraction for Bank of America just as it had put most of its legal and regulatory troubles behind it.

In 2013, JPMorgan Chase’s chief executive and chairman, Jamie Dimon, faced a similar vote, which had been stoked by the bank’s embarrassing trading loss, known as the London whale. Mr. Dimon prevailed.

Bank of America’s campaign is being run by its general counsel, Gary G. Lynch, and its head of global marketing, Anne M. Finucane, who has labored for years to burnish Mr. Moynihan’s image as a banker willing to work with regulators and community groups to right the wrongs of the financial crisis.

That image was dimmed by the board’s decision last October to overturn a bylaw that required the bank to keep its chairman and chief executive roles separate. The board argued that like most big American companies, Bank of America should have the ability to decide whether to grant its top executive one or both titles.

Still, some shareholders and others were outraged. Sensing his moment, the Rev. Seamus Finn proposed putting the issue to a vote at the bank’s annual meeting in May.

Father Finn, a Catholic priest who advises church groups on investment issues and is chairman of the Interfaith Center on Corporate Responsibility, said the leadership question was not his primary concern, but he figured that a proposal to split the role would probably get him a meeting with the bank’s top leadership.

It worked. Bank of America agreed to give Father Finn what he really wanted — a report detailing what went wrong at Bank of America during the mortgage crisis. And in return, Father Finn said he agreed to dropped his proposal to divide the top positions.

Even though the issue did not make it on the ballot at the annual meeting, the proxy advisory firms Institutional Shareholder Services and Glass Lewis urged the bank’s shareholders to vote against members of the board’s corporate governance committee because of the unilateral decision to combine the titles.

Acknowledging the extent of the shareholders’ displeasure, the bank decided to put the issue to a special vote and started campaigning.

A major player in the effort is the bank’s lead independent director, Jack O. Bovender Jr., a former health care executive and Duke University trustee. Described by a bank colleague as the consummate Southern gentleman, Mr. Bovender has been making the rounds of investors, explaining why the board moved to make Mr. Moynihan both chairman and chief executive.

Mr. Bovender has not been able to win over everyone, though. In a conversation last month, he told Institutional Shareholder Services how he agreed to take a leadership role at the bank only if no other board member wanted to step in.

Mr. Bovender was speaking “tongue in cheek,” a person briefed on the matter said. But apparently the proxy advisory firm did not see it that way, calling his anecdote “particularly telling.”

“While shareholders should be glad that Bovender stepped into this leadership vacuum by accepting the lead director role,” it wrote in its report, “it calls into question the board’s acceptance of an individual without relevant industry experience.”

With I.S.S. and Glass Lewis recommending that the jobs of chief executive and chairman be separated, the bank most likely lost as much as 30 percent of the vote because certain shareholders vote automatically with the proxy firms, people briefed on the matter said.

In trying to win over other investors, the bank has had to navigate somewhat unfamiliar territory. Each large investor approaches these votes differently. Some firms consider the opinions of their portfolio managers and analysts, who recommend whether to buy the bank’s shares. Others allow only their corporate governance committees to weigh in.

Bank of America cannot even lobby its largest shareholder, BlackRock, directly. Because BlackRock is partly owned by another bank, PNC Financial Services, the giant asset manager has to outsource its vote to an independent fiduciary so as not to run afoul of the Bank Holding Company Act.

A BlackRock spokesman declined to name the outside fiduciary, citing “company policy.”

Last week, Bank of America got help from Mr. Buffett, who said in a television interview that Mr. Moynihan deserved both titles.

Then, Mr. Frank voiced support for the combined roles, calling Mr. Moynihan “one of the more constructive” bank leaders in helping shape recent financial regulation.

Mr. Frank is not a Bank of America shareholder. But his endorsement could persuade some unions or progressive-minded investors to break from the California funds and back the bank’s position.

Mr. Frank said he volunteered to speak publicly after discussing it with his neighbor in Newton, a Boston suburb, who works for the bank in communications and public policy. Mr. Frank, who recently joined the board of Signature Bank, a small commercial bank in New York, said the most important oversight of financial companies comes not from its directors but from regulators.

“People expect too much of boards,” he said.

I would have to disagree with Mr. Frank, people should expect a lot more from boards, many of which are filled by incompetent people who are not asking enough questions but are there to collect a cheque.

As far as the central issue, whether or not Mr. Moynihan should carry the dual role of chairman and chief executive, I’d have to agree with the recommendation of I.S.S., Glass Lewis, CalPERS, CalSTRS and New York City’s $165 billion pension funds which will also vote to strip Moynihan of his chairman title:

The funds, overseen by New York Comptroller Scott Stringer, hold 25.2 million shares, which would place them roughly in the top 60 shareholders based on the latest publicly available information.

Investors will vote on Sept. 22 on bylaw changes made last year to give Moynihan the additional job. That move undid a vote by shareholders in 2009 to require an independent chair.

The vote is expected to be close. Other large investors that have also said they will vote to separate the Chairman and CEO roles include the California Public Employees’ Retirement System and California State Teachers’ Retirement System.

Via email, a Bank of America spokesman said the bank has turned itself around since the financial crisis and wants “the same flexibility on corporate governance as 97 percent of the S&P 500. We respectfully recognize that stockholders have varying views, which is why the board committed to holding the vote.”

So, 97 percent of S&P 500 companies don’t split the role of chairman and CEO or have flexibility to decide who occupies such a role? If that’s the case, Congress should pass corporate governance laws making it illegal to occupy a dual role under any circumstance.

For me, it’s pure logic. Why would you want to give the CEO of a major bank, especially one that was embroiled in the mortgage crisis that led to the 2008 crisis, a lot more power? Big U.S. banks aren’t just any old S&P 500 company, they’re systemically important financial institutions and need a lot more scrutiny from regulators, board members and investors.

But Mr. Moynihan has some very big supporters who think he deserves the dual role. One of them is the Oracle of Omaha who came out to give him a vote of confidence at a critical time:

Warren Buffett thinks Bank of America CEO Brian Moynihan is doing a great job.

Business Insider reached out to Buffett, who took a huge stake of Bank of America preferred stock and warrants four years ago, and asked for his take on the bank’s shareholder vote coming up later this month.

To recap: Bank of America’s vote gives shareholders the opportunity to sign off on, or reject, its plan to combine its chairman and CEO role into one under Moynihan.

The plan has some critics, with a small group of shareholders representing less than 1% of its stock banding together to say they’re opposed to the consolidation.

The Oracle of Omaha, according to a representative for Berkshire, is “100% in support of Mr. Moynihan and believes he is doing an outstanding job for Bank of America shareholders.”

“When he took over as CEO, he was handed one of the toughest jobs in the history of American banking.”

The bad news for Moynihan is that neither Berkshire’s preferred shares or warrants hold a vote, meaning Buffett has no recourse to participate in the shareholder vote.

But having the billionaire investor on his side must be heartening for Moynihan.

Sure, having Warren Buffett on your side always helps, but I have to wonder why the Oracle of Omaha is praising Moynihan’s performance. The bank has turned around since the crisis and Moynihan has cleaned up a huge mess but when I look at the performance of Bank of America (BAC) relative to other big U.S. banks, I’m hardly enthralled and neither are many shareholders.

In fact, South Korea’s sovereign wealth fund wants Moynihan out and Deirdre Fernandes of the Boston Globe reports, Wellesley banker faces challenge to his Bank of America leadership:

Brian T. Moynihan, the Boston banker and lawyer who became chief executive of Bank of America, is facing the first shareholder challenge of his five-year tenure as concerns mount over his leadership and the bank’s performance.

Moynihan, a Wellesley resident, has shepherded the nation’s second-largest consumer bank through the financial crisis and its aftermath, settling billions of dollars in federal lawsuits over bad mortgages and faulty foreign-exchange practices, shedding unprofitable units, closing hundreds of branches, and shoring up capital to withstand another economic shock.

But shareholders are wondering whether the 55-year-old executive, known for hard work and sharp thinking rather than salesmanship, is best able to lead the bank into a new era of growth.

On Tuesday, they’ll vote during a special meeting on whether to bless a decision made last year — without consulting shareholders — to expand Moynihan’s authority by making him chairman of the board of directors as well as CEO.

On paper, it may be a vote about corporate governance, but analysts and bank observers say that it has become much more, a test of the confidence shareholders have in Moynihan, the board, and the bank’s direction.

“The stakes are exceptionally high,” said Cornelius Hurley, the director of Boston University’s Center for Finance, Law & Policy. “Is this a referendum on him? Absolutely.”

Moynihan is expected to win the vote, and even if he doesn’t, he would still run the bank’s operations, fetching a $13 million salary. But a smaller margin of victory — less than 60 percent of the vote — could weaken Moynihan, analysts said.

“Now, if he loses the vote, it does mean a damn thing. He’s gotten a clear no vote of confidence,” Richard Bove, a financial analyst with Rafferty Capital Markets LLC, a New York brokerage firm. “The board of directors has gotten a clear vote of no confidence. It’s going to create a crisis for the management for Bank of America.”

Bank of America officials seem well aware of stakes.

Anne Finucane, a Lincoln resident who is global chief of strategy and a vice chairwoman of Bank of America, has been rallying support among the bank’s largest shareholders. One very prominent Bank of America investor, Warren Buffett, has spoken out in favor of Moynihan, crediting him last week with resuscitating the bank.

Former US representative Barney Frank, the Newton Democrat who crafted the post-financial crisis banking law that bears his name, has also backed Moynihan, doing a round of interviews during the past few days. Frank noted that the bank has settled federal charges over its mortgages and that Moynihan was one of the few top banking officials to publicly support the formation of a federal financial watchdog agency, the Consumer Financial Protection Bureau.

“He’s done a pretty good job,” Frank said. “He’s managed problems he has inherited.”

Other banks, including JP Morgan Chase & Co. of New York and Wells Fargo & Co. of San Francisco, have dual CEOs and chairmen, and no research suggests that splitting the roles improves performance, Moynihan supporters add. But several institutional investors, including the Massachusetts pension fund, plan to vote against combining the chairman and CEO roles.

The California public pension funds, the largest in the country, are telling shareholders that management needs stronger oversight from an independent chairman. The pension funds point to the bank’s poor financial performance and a $4 billion accounting error made last year.

The bank has also struggled with its Federal Reserve stress tests, earlier this year earning a warning from regulators about deficiencies in its ability to predict how it would perform in a severe downturn.

Bank of America’s share price closed at $16.33 Wednesday, a 4 percent increase from January 2010, when Moynihan took over. The stock fell 2.9 percent Thursday, to $15.86.

Meanwhile, the stock of its competitors has soared. Shares of Wells Fargo, the nation’s third-largest bank by assets, have nearly doubled in price during that period. The share price of JP Morgan Chase, the nation’s largest bank, has climbed almost 50 percent.

Aeisha Mastagni, portfolio manager for the California State Teachers’ Retirement System, said directors should hold Moynihan accountable for this performance.

“They need to make the decision who’s best positioned to lead Bank of America going forward,” Mastagni said. “Whether they win or lose, it’s going to be close. They’re going to have to reflect on that and what they need to do.”

Moynihan’s rise was somewhat circuitous. As a lawyer, one of his primary clients was Fleet Financial Group, which he advised on acquisitions that helped make Fleet the largest financial institution in New England. Fleet eventually hired Moynihan as deputy counsel and later put him in charge of the bank’s investment and wealth-management unit. Bank of America bought Fleet in 2004; Moynihan continued to lead the combined company’s wealth management operations and then consumer banking.

When former chief executive Ken Lewis abruptly retired following the disastrous acquisition of the mortgage lender Countrywide Financial Corp., the purchase of the investment company Merrill Lynch, and multiple investigations by state and federal authorities, the board turned to Moynihan. He took over as CEO of the sprawling bank in 2010, but by that time shareholders angry with Lewis had already separated the roles of chairman and CEO.

While managing the company — with headquarters in Charlotte, N.C. and a significant presence in New York — Moynihan has remained rooted in Wellesley. He still goes to the dump on the weekends, attends Mass, and on Thursday chaired a Boston gala to raise money for priests’ retirement and health care costs.

Under him, the bank has spent about $70 billion on fines, settlements, and legal costs and cut 15 percent of its employees and 20 percent of its branches and offices. His supporters say Moynihan spent the first two years of his tenure cleaning up past problems and putting the bank on firmer footing.

Deposits have grown by nearly 25 percent to $1.2 billion, and profits are up nearly 70 percent to $5.3 billion in the second quarter, from $3.1 billion in the same period in 2010.

“A simpler, straightforward business model is at the heart of the company’s turnaround since the financial crisis,” said Lawrence Grayson, a spokesman for Bank of America. “Our balance sheet has never been stronger.”

We’ll see how the vote proceeds on Tuesday and there may be a lot more at stake here for Brian Moynihan than whether or not he deserves to be chairman and CEO, which is why the the bank’s board has started lobbying investors, ranging from top-20 investors to small-time, individual shareholders. I don’t question Moynihan’s character, integrity, or intelligence but I do wonder whether he’s the right person to lead this bank during the next phase of (hopefully) expansion.

By the way, you’ll notice U.S. financials (XLF) sold off on Friday following the Fed’s big decision. There’s a reason for this. Big banks make money off spread and need economic growth and an upward sloping yield curve so they can borrow cheap and lend out at higher rates. The Fed’s deflation problem also concerns big banks as well as big hedge funds. These are challenging times for all financial institutions and while the U.S. economy is in better shape than the rest of the world, it’s hardly running on all cylinders and is vulnerable to global economic weakness. This is why the Fed did the right thing and didn’t hike rates this week.

 

Photo by Sarath Kuchi via Flickr CC License

CalSTRS on Monday announced its involvement with a project that will create a benchmark for the energy productivity of publicly traded industrial companies.

It’s called the Energy Productivity Index for Companies, and it aims to provide investors with an energy risk profile of certain sectors and companies, among other things.

More from Virtual Strategy:

The project is a partnership between CalSTRS, ClimateWorks Australia and the US-based ClimateWorks Foundation. CalSTRS is participating in the project as lead investor, providing valuable industry knowledge as well as a portfolio of companies to demonstrate the analysis and engagement methodology.

[…]

CalSTRS Portfolio Manager, Corporate Governance, Brian Rice said, “Improving energy productivity is a business tactic with growing importance. It is associated with mitigating carbon pollution– which in turn reduces business risk. The project will demonstrate the process investors need to implement to identify and engage with companies and succeed in improving energy productivity performance.”

ClimateWorks Australia Head of Research, Amandine Denis said the Energy Productivity Index for Companies project would quantify energy risks and the financial value of improving energy productivity for companies involved in the analysis.

“The project will provide investment funds with a greater understanding of energy-related issues in their portfolios and drive companies to improve their energy performance,” she said.

Ms Denis said investors often could not access the information necessary to help them assess the energy risks faced by companies. Many investors also want to be able to assess the financial benefits that energy productivity can deliver these companies in their portfolio.

“This project will help equip investors with evidence-based information crucial to conducting meaningful engagement with companies on this topic. It will also build an energy risk profile for selected industry sectors and highlight the differences between companies within each sector,” she said.

CalSTRS manages $184 billion in assets for California’s public school teachers.

 

Photo by Stephen Curtin

Pennsylvania has now gone two months without a budget, and the end of the impasse isn’t in sight.

In an attempt to jump-start negotiations, Democratic Gov. Tom Wolf on Thursday proposed his biggest set of pension reforms yet: under Wolf’s plan, all new state hires making over $75,000 per year would be shepherded into a 401(k)-style plan.

Wolf has traditionally opposed any pension reforms that result in benefit cuts or shift more risk onto retirees; but he is desperately trying to bring Republicans to the negotiating table to get a new budget up-and-running.

More on the plan from Pensions & Investments:

The proposed plan includes a mandatory, 401(k)-style plan for all new employees making at least $75,000 annual income. In addition, all employees could be given the option to participate only in a defined contribution plan at their time of hire. The plan also features a risk-sharing component for all new employees. Mr. Wolf anticipates this proposed plan would reduce Wall Street management fees within the state’s two largest retirement systems by a combined $200 million annually.

[…]

The governor’s office is continuing negotiations with state congressional Republicans to reach an agreement on a final budget.

The reforms would save the state $20 billion, according to the Governor’s office.

 

Photo by Governor Tom Wolf via Flickr CC License

More and more pension fund money is flowing overseas, according to a report released this week by PricewaterhouseCoopers that examines pension funds’ investment trends over the last 8 years.

Pension funds around the globe – but particularly in the Asia Pacific – have increased their allocations to international investments, including equities, real estate and foreign funds.

More on the growth of international investment, summarized by ISS-Mag:

In North America, pension funds’ overseas investments stood at 16% of the region’s total portfolio in 2008, reaching 21% in 2014.

In Europe, the average percentage of pension fund portfolios allocated to foreign markets increased from 32% in 2008 to 34% in 2014, with the Netherlands, Finland and Portugal investing the highest percentage of their pension fund portfolios overseas in the last six years – in the Netherlands foreign investment reached 76% of the country’s total portfolio in 2014.

Asia Pacific’s pension funds invested, on average, 19% of the region’s total portfolio in foreign markets in 2008, and expanded that to 31% in 2014. Hong Kong and Japan are the most aggressive investors in foreign investments within Asia, with Japan’s pension fund allocation to foreign markets rising from 16% in 2008 to 32% in 2014.

Dariush Yazdani, Partner of PwC Luxembourg Market Research Centre, adds: “The unique ability of pension funds to focus on long-term investments allows them to absorb short-term volatility while bearing market and liquidity risk through diversification – one of the most effective means of achieving diversification is through foreign exposure.”

Read the full PwC report here.

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.

A Moraga-Orinda fire chief drew national attention six years ago for retiring at age 50 with a pension much larger than his base pay. He went back to work as chief the following Monday, hired as a consultant with full salary.

“People point to me as a poster child for pension spiking, but I did not negotiate these rules,” Peter Nowicki told the Wall Street Journal.

Last week, the Contra Costa County pension board, following a review by its law firm, voted to reduce Nowicki’s initial pension, $240,923, to an amount, $172,818, that is below his final base pay, $193,281 — a cut of $68,105 or 28 percent.

The board also voted to recover a $617,458 pension overpayment to Nowicki during the last six years, including cost-of-living adjustments and interest. An actuarial estimate of the future pension system savings from the pension cut is $1,289,331.

The review found that Nowicki, with two amendments to his contract, inflated or “spiked” the final pay used to calculate his pension, mainly by cashing out unused vacation time with smaller amounts from holiday, terminal and retroactive base pay.

Pay deals were negotiated behind closed doors and benefits were retroactive, the review said, raising questions about legality. But the board acted under a state law authorizing pension cuts when an employee improperly increases final pay.

“It seemed to us that under the circumstances presented to this board that constituted improper behavior,” said Harvey Leiderman, the board’s attorney. “I’m not calling it illegal behavior. But I’m saying it is improper behavior, in our opinion.”

The review was prompted by anti-spiking bills that became part of broad pension reform legislation three years ago. Reports by the Contra Costa Times of Nowicki’s pension and similar pensions in the San Ramon fire district were cited.

Nowicki told the board last week that when he became chief in 2006, he had a “gentlemen’s agreement” with the former fire chief and a board director that he would be “made whole” later, rather than get annual pay raises like his predecessor.

His pension was little more than he would have received by remaining a battalion chief, Nowicki said, and lacking an assistant he was usually unable to take time off. A rare vacation was marred by the need to write a response to a consolidation proposal.

A skeptical pension board mentioned the lack of a written agreement, “self-dealing,” and email that undermined Nowicki’s statement that he had not yet decided to retire when obtaining the second contract amendment enabling a large vacation cash out.

“I think the fact that the employer (Moraga-Orinda fire district) isn’t here today speaks volumes,” said board member Scott Gordon. “I think the fact that Meyers-Nave (Moraga-Orinda legal counsel) isn’t here today speaks volumes.”

An email that Nowicki sent to fire department employees announcing his retirement (three days after approval of the second contract amendment) refers to a pension formula, “3 at 50,” that some say is too costly and may be “unsustainable.”

The formula was negotiated by the Highway Patrol union and placed in CalPERS-sponsored legislation, SB 400 in 1999, that gave state workers a large retroactive pension increase.

Under the Highway Patrol formula, the pension is 3 percent of final pay for each year worked at age 50, a big increase from the previous “2 at 50” formula. The “3 at 50” formula has since been widely adopted by local police and firefighters.

“As you are all aware, the 3 percent at 50 retirement system very much dictates when an employee will discontinue employment,” Nowicki said in an email dated Dec.13, 2008. “The decision is predominantly based upon a fiscal plateau, at which point the employee then loses income by coming to work.

“I’m very fortunate to be a part of such a lucrative system, yet I philosophically find it to be very troubling at the same time. The ability to retire at the age of 50 is certainly a nice option, but I do not believe that workers should be ‘put to pasture’ due simply to a lack of any other viable alternative.

“That concept is akin to the government paying farmers not to grow crops — I never understood that practice either. Nonetheless, I’ve reached that financial plateau and it’s no longer economically feasible to continue in my current capacity.

“For that reason, my retirement will become effective on January 30, 2009. But before everyone starts to help me pack and shows me the on-ramp to the freeway … my retirement will be in ‘status’ only.

“The Board of Directors and myself have been entertaining discussions on my continued service to the District as a contract employee. Should that come to fruition, it would be nothing more than a ‘paper conversion’ and a seamless transition to a new classification.

“So, in essence, this message is most likely much ado about nothing. I’ll keep you informed as this matter evolves.”

Nowicki’s email (review, exhibit 16) did not say that he had taken unusual steps three days earlier to boost his pension well above his base pay. Nor did it mention that he had not worked long enough to maximize his pension under the “3 at 50” formula.

He was credited with 28.3 years of service, giving him 85 percent of final pay. If he had worked less than two more years he would have had 30 years of service, reaching the cap of 90 percent of final pay under the “3 at 50” formula.

At the Contra Costa County Employees Retirement Association board hearing last week, Nowicki said he was told at the pension system’s retirement workshops he could make full use of allowed pension enhancements, including cashing out vacation time.

“My counselor, Marge Rosenberg, sat with me in this building and twice went over the numbers with me and congratulated me on what a well-deserved job, or well-deserved method, of making it through my career and having this final outcome in my retirement,” he said.

Nowicki said it was from Rosenberg that he first learned he could return to his job after retiring and receiving a pension. “Double-dippers” or “retired annuitants” can cut employer costs because they do not earn additional retirement benefits.

“I made my life decisions based on what I was told my retirement was going to be,” Nowicki said. “And again, the Reed document (Reed Smith law firm) condemns me for having used what calculations were put on a piece of paper and given to me.”

Contra Costa is one of 20 county retirement systems operating under a 1937 act. Spiking is a particular issue for them because of a 1997 state Supreme Court ruling in a Ventura case expanding pensionable pay to vacation time and dozens of other items.

In 1993 the giant California Public Employees Retirement System had sponsored anti-spiking legislation for its members, SB 53, that limits the use of supplemental pay and created a screening unit.

But similar legislation in 1994 for the 20 county systems, SB 2003, failed to pass.

Three state pension funds made big commitments this week to a new timber investment partnership, and several other pension funds are expected to follow.

The Washington State Investment board, the Oregon Public Employees Retirement Fund and the Alaska Permanent Fund have collectively committed $600 million to the venture, which owns 260,000 acres of timberland in the Southern United States.

More from Reuters:

The Washington State Investment board has committed $300 million, the Oregon Public Employees Retirement Fund put up $200 million and the Alaska Permanent Fund Corporation committed $100 million to the joint venture called Twin Creeks Timber LLC.

The joint venture is being run by Plum Creek Timber Company, the biggest landowner in the United States, which owns a big chunk of the trees that will be in the portfolio, and alternative investment boutique Silver Creek, which will do the monitoring of the investments for the institutions.

Two other pension funds, one on the east coast and one in California, are expected to commit another $150 million to the investment. “We think we will end up with five investors,” said Bob Ratliffe, a managing director at Silver Creek, adding “what’s new here is having public pension funds partner with a publicly traded timber company.”

Investors will lock up their money for 15 years at a time where annual investment returns are seen to be between 4 percent and 5 percent.

The new investment partnership comes as institutional investors are hungry for fresh asset classes that are not tied to stock and bond markets and can help beef up returns over the long term. The trees in the portfolio are earmarked for building new homes, repairing existing homes and other industrial purposes.

More information on the venture can be read here.

 

Photo by Rick Payette via Flickr CC License