Pension360

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

Anna Kitanaka and Shigeki Nozawa of Bloomberg report, World’s Biggest Pension Fund Finds New Best Friend in Trump:

One of the world’s most conservative investors has found an unlikely new ally in one of its most flamboyant politicians: Donald Trump.

The unconventional president-elect’s victory is helping Japan’s giant pension fund in two important ways. First, it’s sending stock markets surging, both at home and overseas, which is good news for the largely passive equity investor. Second, it’s spurred a tumble in the yen, which increases the value of the Japanese manager’s overseas investments. After the $1.2 trillion Government Pension Investment Fund reported its first gain in four quarters, analysts are betting the Trump factor means there’s more good news to come.

“The Trump market will be a tailwind for Abenomics in the near term,” said Kazuhiko Ogata, the Tokyo-based chief Japan economist at Credit Agricole SA. “GPIF will be the biggest beneficiary among Japanese investors.”

While most analysts were concerned a Trump victory would hurt equities and strengthen the yen, the opposite has been the case. Japan’s benchmark Topix index cruised into a bull market last week and is on course for its 12th day of gains. The 4.6 percent slump on Nov. 9 now seems a distant memory. The yen, meanwhile, is heading for its biggest monthly drop against the dollar since 2009.

GPIF posted a 2.4 trillion yen ($21 billion) investment gain in the three months ended Sept. 30, after more than 15 trillion yen in losses in the previous three quarters. Those losses wiped out all investment returns since the fund overhauled its strategy in 2014 by boosting shares and cutting debt. It held more than 40 percent of assets in stocks, and almost 80 percent of those investments were passive at the end of March.

Tokyo stocks are reaping double rewards from Trump, as the weaker yen boosts the earnings outlook for the nation’s exporters. The Topix is the fourth-best performer since Nov. 9 in local-currency terms among 94 primary equity indexes tracked by Bloomberg.

Global Rally

But they’re not the only ones. More than $640 billion has been added to the value of global stocks since Nov. 10, when many markets around the world started to climb on bets Trump would unleash fiscal stimulus and spur inflation, which has boosted the dollar and weakened the yen. The S&P 500 Index closed Wednesday at a record high in New York.

Bonds have tumbled for the same reasons, with around $1.3 trillion wiped off the value of an index of global debt over the same period. Japan’s benchmark 10-year sovereign yield touched a nine-month high of 0.045 percent on Friday, surging from as low as minus 0.085 percent on Nov. 9.

GPIF’s return to profit is a welcome respite after critics at home lambasted it for taking on too much risk and putting the public’s retirement savings in jeopardy.

The fund’s purchases of stocks are a “gamble,” opposition lawmaker Yuichiro Tamaki said in an interview in September, after an almost 20 percent drop in Japan’s Topix index in the first half of the year was followed by a 7.3 percent one-day plunge after Britain’s shock vote to leave the European Union. Prime Minister Shinzo Abe said that month that short-term losses aren’t a problem for the country’s pension finances.

Feeling Vindicated

“I’d imagine GPIF is feeling pretty much vindicated,” said Andrew Clarke, Hong Kong-based director of trading at Mirabaud Asia Ltd. “It must be cautiously optimistic about Trump.”

Still, the market moves after Trump’s victory are preceding his policies, and some investors are questioning how long the benefits for Japan — and GPIF — can last. Trump already said he’ll withdraw the U.S. from the Trans-Pacific Partnership trade pact on his first day in office. The TPP is seen as a key policy for Abe’s government.

“It looks good for GPIF for now,” said Naoki Fujiwara, chief fund manager at Shinkin Asset Management Co. in Tokyo. But “whether the market can continue like this is debatable.”

In my opinion, it’s as good as it gets for GPIF as global stocks surged, global bonds got hammered and the yen depreciated a lot versus the US dollar following Trump’s victory.

I’ve already recommended selling the Trump rally. Who knows, it might go on till the Inauguration Day (January 20th) or even beyond, but the truth is there was a huge knee-jerk reaction mixed in with some irrational exuberance propelling global stocks and interest rates a lot higher following Trump’s victory.

Last week, I explained why I don’t see global deflation risks fading and told my readers to view the big backup in US bond yields as a big US bond buying opportunity. In short, nothing trumps the bond market, not even Trump himself.

All these people telling you global growth is back, inflation expectations will rise significantly, and the 30+ year bond bull market is dead are completely and utterly out to lunch in my opinion.

As far as Japan, no doubt it’s enjoying the Trump effect but that will wear off fairly soon, especially if Trump’s administration quits the TPP. And it remains to be seen whether Trump is bullish for emerging markets and China in particular, another big worry for Japan and Asia.

In short, while the Trump effect is great for Japan and Euroland in the short-run (currency depreciation alleviates deflationary pressures  in these regions), it’s far from clear what policies President-elect Trump will implement once in power and how it will hurt the economies of these regions.

All this to say GPIF should hedge and take profits after recording huge gains following Trump’s victory. Nothing lasts forever and when markets reverse, it could be very nasty for global stocks (but great for global bonds, especially US bonds).

One final note, I’ve been bullish on the US dollar since early August but think traders should start thinking about the Fed and Friday’s job report. In particular, any weakness on the jobs front will send the greenback lower and even if the Fed does move ahead and hike rates once in December, you will see traders take profits on the US dollar.

If the US dollar continues to climb unabated, it will spell trouble for emerging markets and US corporate earnings and lower US inflation expectations (by lowering import prices).

Be very careful interpreting the rise in inflation expectations in countries like the UK where the British pound experienced a huge depreciation following the Brexit vote. These are cyclical, not structural factors, driving inflation expectations higher, so don’t place too much weight on them.

And you should all keep in mind that Japan’s aging demographics is a structural factor weighing down growth and capping inflation expectations. This is why Japan is at the center of the global pension storm and why it too will not escape Denmark’s dire pension warning.

Some banks are being more careful about lending to businesses — but down under, one pension fund is looking to fill the void.

The Australian pension fund Host-Plus Pty Ltd. says it will expand into lending to companies as it looks for strong returns in places other than equities.

The pension fund manages $16 billion USD for about a million Australians in the hospitality industry.

More from Bloomberg:

The fund will search for companies that are “distressed not because they themselves were distressed, but because their bankers were,” he said in a telephone interview from Melbourne. “These are perfectly well-operating companies, so the question is how can other pools of capital outside the banking system help.”

[…]

Host-Plus, which primarily serves workers in Australia’s hospitality industry, dumped all of its sovereign bond investments six years ago when it opted to pump more money into illiquid assets such as infrastructure and private equity.

The pension manager’s “MySuper” strategy, its default retirement savings option for members, has returned 9.4 percent during the 12 months to August, ahead of an industry average of 7.1 percent. The firm has the second best performance in that category, according to Morningstar Inc. data.

Sicilia said he has no plans to re-enter the sovereign bond market any time soon as the majority of Host-Plus’s members are young Australians who don’t need to make frequent redemptions.

“Bonds provide downside protection from equity markets, but we get our downside protection from unlisted assets,” he said.

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

Grace Macaluso of the Windsor Star reports, Opposition MPs, labour groups decry federal ‘anti-pension’ bill:

A growing number of seniors could face poverty if the federal Liberals proceed with proposed legislation enabling Crown corporations and federally regulated private sector employers to back out of defined benefit pension plans, Essex MP Tracey Ramsey said Monday.

“With less and less retirement security, seniors in Windsor-Essex are living more precariously than they ever have because of the erosion of benefits,” said Ramsey.

In Windsor-Essex, one in 11 seniors was living in poverty, according to figures compiled by the Windsor-Essex County United Way. For a single family household, the low income cutoff totalled about $19,900 a year.

The NDP member and labour groups are sounding the alarm over Bill C-27, which would amend the Pension Benefits Standards Act, and allow federally regulated employers and Crown corporations to replace defined benefit plans with target benefit plans.

More than 820,000 people, or six per cent of all Canadian workers, are employed in such sectors as banking, rail, air and ferry transportation, radio and television broadcasting.

Introduced by Finance Minister Bill Morneau last month, the bill has yet to be debated in the House of Commons.

The legislation is “an attack on retirees and working people,” Ramsey said. “There couldn’t be a more wrong-headed approach. When we talk about defined benefits, that’s deferred wages. That’s something workers know they can count on. These new target plans are extremely unstable.”

Defined benefit pensions guarantee a specified payment upon an employee’s retirement. Any funding shortfall must be covered by the employer. Target pension plans borrow attributes from defined benefit plans and defined contribution pension plans, which absolve employers from covering any funding deficits. Target benefits plans can place limits on the volatility of employer contributions; in the event of a funding deficit, part or all of it can be compensated by reducing benefits. A traditional defined benefit plan would require the entire deficit to be made up by the employer.

The proposed federal legislation will broaden the scope of retirement savings opportunities, a Department of Finance spokesman said in an emailed statement.

Target benefit plans “represent a new, voluntary, sustainable and flexible pension option for employees in federally regulated private sector and Crown corporation pension plans,” the statement said. “For those who choose this option, (target benefit plans) will provide a lifetime pension that benefits from the pooling of market risk and protects against the risk of outliving one’s retirement savings. At the same time, transferring benefits from an existing plan to a (target benefit plan) is optional.”

Hussan Yussuff, president of the Canadian Labour Congress, viewed the move as yet another attempt by employers to shift workers out of defined benefit plans.

“Currently, defined benefit pensions provide stability and security to employees because employers are legally obliged to fund employees’ earned benefits,” said Yussuff. “Bill C-27 removes employers’ legal requirements to fund plan benefits, which means that benefits could be reduced going forward or even retroactively. Even people already retired could find their existing benefits affected.”

Yussuff said the former federal Conservative government attempted a similar move but, after holding public consultations, dropped the plan ahead of the October 2015 election.

The Liberals, on the other hand, introduced the proposed legislation, without consulting Canadians, unions or pensioners, he said. “This proposal directly contradicts Prime Minister Justin Trudeau’s campaign promise to help the middle class by improving retirement security.”

It also smacks of hypocrisy given the fact that MPs are enrolled in defined benefit pension plans, noted Yussuff. “They maintain a defined benefits plan for themselves, and I don’t have an issue with that. But why would they treat workers with such disregard?”

Pension numbers

4,402,000 Canadian employees were in defined benefit pension plans in 2013, down 0.5 per cent from 2012.

71.2 per cent of employees in a registered pension plan in 2013 had defined benefits, compared with more than 84 per cent a decade earlier.

1,037,000 employees were in defined contribution plans in 2013, up 0.6 per cent from 2012.

86 per cent of employees with defined contribution plans in 2013 worked in the private sector.

746,000 employees belonged to other pension plans, such as hybrid or composite, in 2013 — up two per cent from 2012.

Source: Statistics Canada

I asked Bernard Dussault, Canada’s former Chief Actuary, to share his thoughts on Bill C-27 (added emphasis is mine):

For both concerned employers and employees, Bill C-27 is a poor, inappropriate and unduly complex solution to the possibly real, but generally highly overestimated debt of Defined Benefit (DB) plans sponsored by employers for their employees.

Such pension debt overestimates are caused by the DB plans-related legislation, i.e. the 1985 Pension Benefits Standards Act (PBSA), which compels these plans to be evaluated on a solvency as opposed to a realistic ongoing concern basis.

And as Bill C-27 allows any DB plan sponsor to shift to active and retired plan members the responsibility to assume any debt of the DB plan upon the effective date of its conversion into a Target Benefit (TB) plan, it plainly corresponds to an unfair and inappropriate legalized embezzlement of some pension benefits by the plan sponsor.

Actually, Bill C-27 is a replicate of the so-called Shared Risk Plan (actually and more precisely a TB plan that fully shifts the risks to, rather than shares risks with, plan members) introduced in New Brunswick on January 1, 2014, with the exception that DB plan members would have to consent to its conversion into a TB plan. It is to be reasonably feared that DB plan members would give such consent only pursuant to a misunderstanding of the complex TB plans provisions envisioned by Bill C-27.

By virtue of Bill C-27, a DB plan converted into a TB plan would no longer be subject to solvency valuations. Besides, the onus of any still emerging deficits would be assumed entirely by active and retired members.

Indeed, pension deficits would naturally continue to emerge from time to time as would surpluses. In this vein, Bill C-27 fails to address the existing unsuitable PBSA provision allowing plan sponsors to take possession of DB and TB pension plans surplus through contribution holidays (CH). These CHs are a sure recipe for financial disaster and are a very, if not the most important cause of financial difficulties encountered by DB plans.

In light of the above considerations, I have been steadily promoting since 2013 the following three amendments to the PBSA, which would be much more sensible, effective and appropriate than Bill C-27 and would also counteract its severe inadequacies:

1. Evaluation of DB plans on a realistic (i.e. margin-free best estimate assumptions erring on the safe side, no asset value averaging, etc.) going concern basis rather than a solvency basis.
2. Full prohibition of contribution holidays.
3. Amortization of emerging surplus over 15 years, just as already are emerging deficits, i.e. through a generally small decrease or increase, respectively, in the contribution rate. This would well address one of the DB pan sponsors’ main aversion for DB plans, i.e. their highly fluctuating and unpredictable costs. In case where a given DB plan sponsor would still envision the higher stability of contribution rates under a TB pension plan, then there would be a case to maintain the DB plan (as opposed to convert it into a TB plan) and negotiate with plan members the transfer to them of the very light contribution rates volatility of my proposed DB plan financing policy.

I thank Bernard for sharing his wise insights with my readers. I’ve openly questioned the merits and logic of Bill C-27 in a recent post covering the Liberals attack on public pensions.

There is a wide gap in the pension policy the Liberals are implementing. On the one hand, they are enhancing the CPP for all Canadians which is a very smart move, and courting large funds to help them with their infrastructure program (another very smart move), but on the other hand they are introducing a bill which will potentially kill defined-benefit plans in Canada (a very dumb move).

This is a sleazy and underhanded move from a party which was attacking the Conservatives when they tried doing the same thing (at least they were upfront about it).

The global pension storm is gathering steam and one thing that worries me is bonehead policies like this which attack defined-benefit plans, the very plans we need to bolster and expand in a world where pension poverty and anxiety are on the rise. And make no mistake, if Bill C-27 passes, it will exacerbate pension poverty and negatively impact economic activity for decades to come.

Unlike Bernard Dussault and public sector unions, however, I don’t think DB plans can be bolstered just by prohibiting contribution holidays (something I agree with). I believe that some form of risk-sharing is essential if we are to safeguard DB plans and make sure they are sustainable over the long run. Target benefit plans are not the solution but neither is maintaining the farce that DB plans can exist with no shared-risk model.

[Note: To be fair, after reading my comment, Bernard sent me his proposed DB pension plan financing policy which “promotes true risk sharing at any level (ideally 50%/50%) between the plan sponsor and the plans members, in such a way that not only would both parties share the cost but also the 15-year amortization of surpluses and deficit.”]

I take Denmark’s dire pension warning very seriously and so should many policymakers and unions who think we can just continue with the status quo. We can’t, we need to adapt and be realistic about what defined-benefit pensions can and cannot offer in a world of low or negative rates.

President-elect Trump has plans to roll back many of President Obama’s marquee orders and laws, most notably the healthcare law and various regulations.

But in 2015, Obama went on a spree of retirement policy-related executive actions. The moves, some more controversial than others, made that year one of the most productive ever in terms retirement policy.

Over at the Brookings Institute, William G. Gale and Joshua Gotbaum write about Obama’s legacy as it relates to retirement policy:

Taken as a whole, the Administration’s actions undertaken in 2015 are likelier to have a positive effect on retirement security than anything that any administration or the Congress has done in many years.

Payroll Savings are Key to Retirement Security. By far the greatest success in saving for retirement occurs when saving is done automatically by deducting funds from a paycheck and having them invested automatically in a professional retirement program. However, under Federal law, such programs are entirely voluntary and employers that provide them must meet the many legal fiduciary, disclosure, and eligibility requirements of the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code. As a result, most employers, especially small businesses with fewer employees, decline to provide these programs.

Auto-IRA: Gridlocked in Washington, Unlocked in the States. In 2008, both major presidential candidates endorsed a proposal [2] by J Mark Iwry (then of Brookings) and David John (then of the Heritage Foundation) to require those small businesses without a plan automatically to enroll their employees in an Individual Retirement Account.

California and other states stepped in and proposed “Secure Choice” programs: a requirement that employers without a plan automatically enroll their employees (who could opt out at any time) into a professionally-managed retirement program, probably an IRA, that would be established by a state board. Legislation establishing such state boards to study and/or implement programs was enacted by California, Illinois, and Oregon.

DOL Allows Businesses to Encourage Retirement Saving without Full Federal Regulation. In July [4], the President announced that DOL would issue regulations and guidance to advance state savings plans. In November, DOL did so, publishing a proposal [5] under which state-sponsored IRA programs would exempt employers from ERISA fiduciary and other requirements.

DOL is doing more than just “legalizing” the IRA model that Illinois has legislated and other states are considering. They have also published a bulletin [6] outlining the ways they are willing to modify traditional ERISA requirements in order to facilitate state-sponsored pension and 401k-type plans. This would significantly increase and improve the options available for states to consider.

Adoption by states of an auto-enrollment requirement would extend coverage to an estimated 50-70 million working Americans who currently have no private retirement savings. It would be the largest expansion of retirement savings in more than 50 years.

Reducing Conflicts in the Marketing of Retirement Plans. After a false start in 2010, this year DOL proposed new regulations intended to limit the “conflict of interest” effects of commissions in biasing the advising and marketing of retirement products. DOL and others had shown that the presence of product commissions led financial advisors to favor the higher-commission retirement options. One survey by the Council of Economic Advisors estimated that biased compensation arrangements might result in extra fees on the order of $17 billion annually. [7]

DOL proposed that all advisors either forego product commissions in favor of asset-based or per-session compensation or that they enter into a legally-enforceable “Best Interests Contract” that both disclosed all fee arrangements and committed the advisor to placing client interests first. Although DOL’s proposal did not go as far as actions taken in the UK and elsewhere – which banned product commissions entirely—it has nonetheless generated substantial controversy. Many financial service firms and advisors argued that the DOL action is unnecessary, that it would reduce the supply of retirement advice, and/or that potential conflicts can be handled through existing industry self-regulation and by the Securities and Exchange Commission. (The SEC had been directed by Congress to provide guidance in 2010, but five years later had failed to reach any agreement.) Various Brookings scholars have studied these issues. Martin Baily and Sarah Holmes, reviewing the academic literature, concluded that conflicted advice is significant and that the approach proposed by DOL could, on net, benefit the country if it incorporated modifications to preserve investor education efforts and to reduce the likelihood that investors would avoid getting any advice at all. [8]

Offering a Federal Private Retirement Savings Option. Frustrated by Congressional unwillingness to legislate the Auto-IRA, the President announced in 2014 that Treasury would set up a voluntary retirement savings plan, My Retirement Account (“MyRA”) allowing voluntary payroll deductions to purchase a special Federal bond “to help millions of Americans save for retirement” [9]. Since the Administration had no authority to require employers to auto-enroll their employees in MyRA and there has not been significant willingness of employers to do so voluntarily, this year the Treasury announced that individuals would be permitted to join MyRA and make automatic contributions directly from their bank accounts. Nonetheless, there’s little evidence that this will lead to significant additional savings.

Limiting Employers’ Ability to Cash Out their Pension Obligations via Lump Sum Payments. ERISA’s intention was to preserve traditional defined benefit (DB) pension plans and ensure that pension commitments, when made, were honored. Ironically, the response by most employers has been instead to limit their DB obligations; DB plans now cover only a small minority of private sector workers and many current DB plan sponsors are “de-risking” either by freezing their plans and purchasing annuities to replace them, or by offering to cash out individual pension obligations via lump sum payment. Unfortunately, the passage of the Pension Protection Act of 2006 accelerated “de-risking” activity.

Read the entire article here.

New Jersey state lawmakers are again pushing a bill that would require the state to make its pension payments on a quarterly basis, instead of once annually.

The bill flew through the state Senate and Assembly unanimously, by votes of 72-0 and 35-0.

Quarterly payments would let the pension funds invest the money sooner, with more time for return on investment.

Gov. Chris Christie has vetoed similar legislation in the past, but this version of the bill might be more palatable.

From NJ.com:

It would require governor to make pension payments on a quarterly basis by Sept. 30, Dec. 31, March 31 and June 30 of each year, instead of at the end of the fiscal year in June. In exchange, the pension fund would reimburse state treasury for any losses incurred if the state has to borrow money to make a payment.

[…]

In his 2014 veto of the bill, Christie called it “an improper and unwarranted intrusion upon the longstanding executive prerogative to determine the appropriate timing of payments” so those expenditures line up with tax collection cycles.

But the change in the bill which would have the pension fund pick up the cost of borrowing if needed may address the governor’s previous concerns.

Asked whether the GOP governor would support the measure, the Senate Republican leader, Sen. Tom Kean Jr. (R-Union), said he believes he will.

The response from unions was lukewarm; they support quarterly payments, but they also support full payments — and they are skeptical that lawmakers can consistently deliver.

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

Frances Schwartzkopff of Bloomberg reports, World’s Best-Funded Pension Market Has a $650 Billion Warning:

No country on the planet is better prepared to pay for its aging population than Denmark. But a nation whose pension industry has been ahead of the curve for decades is now bracing for a fundamental shift that most people probably aren’t prepared for, according to the financial regulator.

Jesper Berg, the director general of the Financial Supervisory Authority in Denmark, wants to warn policy makers of the backlash he says they may face once households understand the risks they run. More specifically, Berg says people haven’t grasped that they will lose money if their banks or the investments their funds make fail.

“While people applaud if money doesn’t go out of their pocket as a taxpayer, they have yet to realize that it will go out of their pocket as a depositor or pensioner or investor,” Berg said in an interview in Copenhagen. “These are enormous amounts of money, so this is an important discussion to have.”

Berg says the FSA has called for talks with politicians and industry representatives to take place in March to discuss the issue.

Privatizing Risk

Denmark’s life insurers hold more than $650 billion in assets, which is roughly 2 1/2 times the size of the economy, according to UBS’s Pension Fund Indicators 2016. At $118,214, assets per capita are among the highest in the world. In Switzerland, the figure is $98,287. In the Netherlands, it’s $79,721.

Berg says the redrawing of financial regulation since the crisis of 2008 has had some profound consequences. New solvency rules for pension funds mean clients are being pushed out of defined benefit plans and into defined contributions plans, to help providers cut their capital requirements. That helps insurers stay solvent. It also frees them to take riskier bets. But, crucially, that risk is transferred to pensioners on an individual basis.

This privatization of risk that has followed the global regulatory overhaul is “the new reality” that “we need to discuss,” Berg said.

Global Leader

Denmark’s warning is worth heeding. The country has been at the forefront of pension reform, ensuring that companies can meet their obligations and that people have enough savings to live comfortably in retirement. It’s repeatedly topped rankings in the Melbourne Mercer Global Pension Index on adequacy and sustainability.

In practical terms, the risk is that a pension fund invests in something “that makes huge losses with the result that pensioners lose money and have to live with lower pensions or stay in the labor market longer,” Berg said.

And demand for risky assets is growing as funds look for ways to generate returns in an era of record-low interest rates. Denmark’s regulator has started looking more closely at funds’ investments in less liquid assets and found that holdings of so-called alternative investments surged 66 percent from 2012 to 2015.

Berg says it’s not the role of the supervisor to question the model. But he’s worried about how well it’s understood.

“While I believe in the economic incentive to privatize risk, my biggest fear is that people aren’t aware of that, and as a consequence we’ll have a backlash,” he said.

A new regulation called the prudent person principle guides funds’ investments, but it’s “still a very general principle,” Berg said. It is for the politicians to decide whether additional rules are necessary and the FSA will provide them with options, “but I just want that discussion to be taken before we have the first meltdown.”

Politicians around the world better heed Jesper Berg’s warning because if they think Brexit, Trump and Marine Le Pen are all part of the anti-establishment revolution, wait till they see millions of retired people succumb to pension poverty. This will really shake up politics like never before.

Last week, I discussed the global pension storm, noting the following:

[…] last week was a great week for savers, 401(k)s and global pensions. The Dow chalked up its best week in five years and stocks in general rallied led by banks and my favorite sector, biotechs which had its best week ever.

More importantly, bond yields are rocketing higher and when it comes to pension deficits, it’s the direction of interest rates that ultimately counts a lot more than any gains in asset values because as I keep reminding everyone, the duration of pension liabilities is a lot bigger than the duration of pension assets, so for any given move in rates, liabilities will rise or decline much faster than assets.

Will the rise in rates and gains in stocks continue indefinitely? A lot of underfunded (and some fully funded) global pensions sure hope so but I have my doubts and think we need to prepare for a long, tough slug ahead.

The 2,826-day-old bull market could be a headache for Trump but the real headache will be for global pensions when rates and risk assets start declining in tandem again. At that point, President Trump will have inherited a long bear market and a potential retirement crisis.

This is why I keep hammering that Trump’s administration needs to include US, Canadian and global pensions into the infrastructure program to truly “make America great again.”

Trump also needs to carefully consider bolstering Social Security for all Americans and modeling it after the (now enhanced) Canada Pension Plan where money is managed by the Canada Pension Plan Investment Board. One thing he should not do is follow lousy advice from Wall Street gurus and academics peddling a revolutionary retirement plan which only benefits Wall Street, not Main Street.

You should read my comment on the global pension storm to understand why I continue to worry about global deflation, the rising US dollar and why bond yields are likely to revisit new secular lows, placing even more pressure on global pensions in the years ahead.

This is why I respectfully disagree with Bob Prince and Ray Dalio at Bridgewater who called an end to the 30-year bond bull market after Trump’s victory. I have serious concerns on Trump and emerging markets and I wouldn’t be so quick to rush out of bonds (in fact, I see the big backup in bond yields as an opportunity to buy more long dated bonds (TLT) and will cover this in a separate comment).

But Jesper Berg’s critical point is this, as defined-benefit pensions become a thing of the past, retirement anxiety will grow as risk is transferred to pensioners, many of which risk outliving their savings and succumbing to pension poverty. This will have profound social, political and economic consequences for all countries.

And he’s absolutely right, this privatization of risk that has followed the global regulatory overhaul is “the new reality” that “we need to discuss.”

Why? Because pension poverty is part of rising inequality, and along with aging demographics, these are major structural forces driving global deflation. You simply cannot have increasing aggregate demand and inflation when a large subset of the population is succumbing to pension poverty.

The other part of Jesper Berg’s warning is equally important, namely, global pensions are responding to record low yields by increasingly shifting their portfolio into illiquid assets. I touched upon it last week when I covered Bob Prince’s visit to Montreal:

So what in a nutshell did Bob Prince say? Here are the main points that I jotted down:

• Higher debt and low rates will impact asset values, limit credit growth and economic growth over next decade
• Monetary policy and asset returns are skewed  (so you will see bigger swings in risk assets)
• Currency swings matter a lot more in a low rate/ QE world (expect higher currency volatility)
• Low rates and low returns are here to stay (expected returns in public markets will be in low single digits over next decade)
• We are reaching an important inflection point where valuations of illiquid assets are nearing a peak at the same time where dollar liquidity dries up.

I emphasized that last point because it’s bad news for many pensions, insurance companies, sovereign wealth funds and endowments piling into illiquid assets like private equity, real estate and infrastructure at historically high valuations.

Not that they have much of a choice. Bob Prince said in this environment, you have three choices:

1. Do nothing and accept the outcome
2. Take more risk
3. Take more efficient risk (like in illiquid assets)

Institutions have been taking more efficient risk in illiquid asset classes but the pendulum may have swing too far in that direction and if he’s right and we’re at an important inflection point, then there will be a big correction in illiquid asset classes.

Even if he’s wrong, expected returns on liquid and illiquid asset classes will necessarily be lower over the next decade, so the diversification benefits of illiquid assets won’t be as strong going forward.

[Note: Admittedly, this is a bit of self-serving point made by the co-CIO of the world’s largest hedge fund which invests only in liquid assets. He’s trying to steer investors away from illiquid to more liquid alternatives like Bridgewater but he forgets that pensions and other institutional investors have a very long investment horizon, so they can take a lot more illiquidity risk.]

Taking more “efficient risk” by investing billions into private equity, real estate and infrastructure makes sense for pensions with a long investment horizon but it’s no panacea and if it’s not done properly, it could spell ruin for many chronically underfunded pensions taking more risk at the worst possible time.

Pension deficits are path dependent. If your pension is chronically underfunded, taking more risk in public or private markets praying for a miracle, then that is not a strategy, that is a recipe for disaster.

What is a better strategy? Politicians need to bolster defined-benefit plans, get the governance and compensation right, bolster the social safety net (enhance the Canada Pension Plan and US Social Security) and set up a system that allows pensions to invest billions in domestic infrastructure.

I’ve discussed my thoughts on this recently going over how pensions can make America great again and why the Canadian federal government is courting large global and domestic funds to develop its infrastructure program.

Of course, pensions have a mission to maximize returns without taking undue risk. This means that if they invest in infrastructure, they will necessarily expect a return on their investment or else they are better off investing elsewhere.

I mention this because I’m a bit dismayed at some of the nonsense I’m reading from Nobel-laureate Paul Krugman warning of an infrastructure privatization scam before even seeing the details of the program. My former BCA colleague Gerard MacDonell loves praising Krugman for being ‘wonderfully non-centrist‘ but there’s is nothing wonderful about spreading nonsense on infrastructure program whose details have yet to be unveiled.

And the problem is that unions read Krugman as if he’s some kind of economic god and take his economic articles very seriously (sure, he’s a brilliant economist but he has a political axe to grind because Clinton undoubtedly promised him a high-profile cabinet position). When I read articles like this one on public risk, private profits, I’m disheartened by the leftist union rhetoric which quite frankly goes against what is in the best interests of public defined-benefit pensions and the economy over the long run.

Let me be a little blunt here, after all I hate skirting around an issue. Yes, we need to address the concerns of unions but we also need a reality check when it comes to infrastructure and courting pensions and private equity firms. Governments are constrained in terms of borrowing and spending and when it comes to managing infrastructure assets, I trust the people at Ontario Teachers, OMERS, the Caisse, CPPIB, PSP, and other large Canadian pensions a lot more than some government bureaucrats who do not have a profit motive.

Does this mean we need more tolls and higher user fees to pay for infrastructure? You bet it does and there’s nothing wrong with this as it’s not only fair for pensions looking to make long-term steady returns on their infrastructure investments, it’s fair for taxpayers and it helps alleviate the fiscal burden on governments.

All this to say, Denmark’s dire pension warning is real and policymakers and the elite intelligentsia better discuss solutions to the global pension crisis like adults, not like left-wing or right-wing adolescent brats that place ideology and politics over logic and what is in the best interest of pensioners and the country over the long run.

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.

The state’s two largest public pension systems never recovered from huge investment losses during the deep recession and stock market crash in 2008. CalPERS lost about $100 billion and CalSTRS about $68 billion.

Now after a lengthy bull market, most experts are predicting a decade of weak investment returns, well below the annual average earnings of 7.5 percent that CalPERS and CalSTRS expect to pay two-thirds of their future pension costs.

The two systems are still seriously underfunded, CalPERS at 68 percent and CalSTRS at 65 percent. This is not money in the bank. It’s an estimate of the future pension costs covered by expected employer-employee contributions and the investment earnings forecast.

Last week, the CalPERS and CalSTRS boards got separate staff briefings on how the “maturing” of the two big retirement systems creates new funding difficulties. Both are nearing a time when there will be more retirees in the system than active workers.

The California State Teachers Retirement System board, for example, was told that in 1971 there were were six active workers in the system for every retiree. Today CalSTRS only has 1.5 active workers for every retiree, similar to the CalPERS ratio.

A wave of baby boom retirees that began around 2011, and the continuing increase in the average life span of retirees, have added to the growing cost of paying pensions, giving both systems what actuaries call “negative cash flow.”

The annual cost of paying pensions is more than the annual contributions from employers and employees. So, the pension funds are forced to “eat their seed corn” by selling some investments to cover the gap, thus reducing potential investment earnings.

The California Public Employees Retirement System had about $14 billion in contributions in fiscal 2015-16 and pension payments totaling $19 billion. By 2035, the board was told, contributions are expected to be $17 billion and pension payments $35 billion.

Mature pension funds also have another difficulty. The pension investment fund becomes much larger than the active worker payroll, which means that replacing an investment loss requires a larger employer contribution increase.

The CaSTRS board was told that replacing a 10 percent investment loss in 1975, when the teacher payroll and investment fund were about equal, would have required a contribution increase of 0.5 percent of payroll.

Replacing a 10 percent investment loss today, when the investment fund is six times greater than the payroll, requires a contribution increase of 3 percent of pay. CalSTRS has had losses of 10 percent (below the 7.5 percent forecast) four times in the last two decades.

Both systems recently adopted modest “risk mitigation” strategies to reduce losses. When CalPERS earns 11.5 percent or more, half of the excess will be shifted to conservative investments. CalSTRS is shifting 9 percent of its fund to more conservative investments.

Gov. Brown’s modest cost-cutting pension reform gives new CalPERS and CalSTRS employees hired after Jan. 1, 2013, lower pension formulas, capped at the upper end, and possibly higher contributions. Significant employer savings are decades away.

Meanwhile, CalPERS and CalSTRS are still phasing in record high employer contribution increases. And both will be considering more rate increases in the next several months.

A CalPERS rate increase of roughly 50 percent was enacted in three consecutive years: a lower earnings forecast in 2012, an actuarial method that no longer annually refinances debt in 2013, and a longer average life expectancey for retirees in 2014.

A staff survey of more than 600 CalPERS employers in October and early this month found that most are aware of discussions about another drop in the earnings forecast used to “discount” pension debt.

Nearly two-thirds have begun planning for a rate increase with budget forecasts and 13 percent are “prefunding” by contributing more than the required rate. Their top priorities are less volatile and more predictable rates and a phase-in rather than lump-sum increase.

A League of California Cities lobbyist, Dane Hutchings, told the board the association has no formal position on another rate increase. But he thinks most cities expect an increase and pressure to improve funding after new accounting rules expose more pension debt.

Pensions are needed to help cities remain competitive in the job market, Hutchings said, but another rate increase will be painful for some. “We have cities that are very close to filing for bankruptcy,” he said.

The governor unsuccessfully pushed for a major CalPERS rate increase when the risk mitigation streategy was adopted last year. The CalPERS staff is concerned that its consultant, Wilshire, dropped its 10-year earnings forecast to about 6.1 percent, echoing many experts.

“Given that, we think it’s appropriate for this committee to look at our discount rate,” said Ted Eliopoulos, CalPERS chief investment officer.

A Wilshire consultant, Andrew Junkin, told the board the 30-year earnings forecast is still 7.5 percent or more. But, he added, that assumes there is no major investment loss, like one big enough to cause officials to question whether the state should continue to offer pensions.

“I’ll use this phrase, I don’t mean to be inflammatory, there could be a return that puts you out of business somewhere before you get to year 30,” Junkin said.

CalPERS was 100 percent funded in 2007 before the stock market crash dropped funding to 61 percent. Experts have told CalPERS, now only 68 percent funded, that if funding drops below 50 percent getting back to full funding could require impractical rate increases and earnings forecasts.

The board was told that a rate increase must be approved by April to take effect for the state and schools in the new fiscal year beginning next July and for local governments in July 2018.

Supporters suggested a rate increase by April would allow a phase in before a recession, if one is on the way, while being fiduciarily responsible. “Pay now or pay more later,” said board member Richard Gillihan, a Brown administration official.

Alarmed union representatives, backed by some board members, urged the board to go slow and follow the regular two-year process leading to a full “asset liability management” review scheduled in 2018.

Dave Low of the California School Employees Association said many non-teaching school workers have not had a pay raise for five or six years. He said if Brown is not putting money in the state budget to offset a rate increase his members could be harmed.

“If you’re not at the table, you’re probably on the menu,” Low said, apparently referring to an old saying about labor bargaining. “We feel like we are on the menu in this discussion.”

With the consent of other board members, Richard Costigan, chairman of the CalPERS fionance committee, directed staff to prepare a report for the December board meeting on a vote for a rate increase by April.

Unique among large California public pension systems, CalSTRS has been unable to raise employer rates, needing legislation instead. That changed with a long-delayed rate increase two years ago that is phasing in a $5 billion rate increase over seven years.

School district rates will more than double, going from 8.25 percent of pay to 19.1 percent by July 2020. Teachers got a small rate increase, going from 8 percent of pay to 10.25 percent for most and to 9.21 percent for teachers hired after the reform on Jan. 1, 2013.

The state rate (a way that CalSTRS remains unique, since other systems only get contributions from employers and employees) is scheduled to go from 5.5 percent of pay to 8.8 percent.

The legislation also gave the CalSTRS board the new power to raise annual rates for the deep-pocketed state, limited to a 0.5 percent of pay each year. And now for the first time, the CalSTRS board is scheduled to consider an annual state rate increase next April.

If the board maximizes its new power, the current state rate of about 6 percent of pay theoretically could go to 21 percent before the legislation expires in 30 years, when the system would be fully funded if investments hit their earnings target, the board was told last week.

The legislation gave the CalSTRS board another new power to annually adjust school district rates beginning July 1, 2021. But the employer rate is capped at 20.5 percent of pay, allowing only small changes in the phased-in rate reaching 19.1 percent by 2020.

“There is no need to increase state contributions further, based on what we have seen to date, even with the 1 percent return last year,” David Lamoureux, a CalSTRS actuary, told the board last week.

The CalSTRS board is scheduled to review “actuarial assumptions” in February, including estimates of the average retiree life span and probably a discussion of the earnings forecast.

“There is a possibility, depending on where we end up with the assumptions, that it could trigger an increase in the normal cost of more than 1 percent (of pay), and it could increase the member contribution rate,” Lamoureux said.

The “normal” cost is the rate for the pension earned during a year, excluding the debt or “unfunded liability” from previous years usually resulting from investment earnings that fall below the forecast.

Under the pension reform, employees are required to pay half of the normal cost when it increases by 1 percent or more.

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

Robin Respaut of Reuters reports, CalSTRS calculates total fees in likely first for public pension:

The California State Teachers’ Retirement System announced on Wednesday that it had calculated the total costs and fees paid to manage its entire investment portfolio, likely the first public pension fund to do so.

CalSTRS found total expenses, including carried interest, reached $1.6 billion in calendar year 2015, or less than 1 percent of the portfolio’s $186 billion net asset value.

Presented for first time at Wednesday’s meeting of CalSTRS’ board, the new cost report marks a milestone among public pension funds to keep tabs on investment expenses and may motivate other funds to track their fees.

It also comes at a time when public pension funds, which manage the retirement benefits of public sector workers and retirees, face growing pressure to disclose the fees that they pay.

The task was not an easy one, however. CalSTRS has over 600 partnership investments, separately managed accounts, joint ventures and co-investments within its portfolio, and there is no industry standard for cost reporting.

As a result, to tally up all of the carried interest, management fees, partnership expenses and portfolio company fees paid by CalSTRS, information had to be collected one investment at a time through direct engagement.

“To the best of my knowledge, this is the most comprehensive review of investment costs,” Allan Emkin of Pension Consulting Alliance said at Wednesday’s meeting. “On the issue of transparency and disclosure, you will be seen as the new leader.”

On Monday, CalSTRS sister fund, CalPERS, announced it had shared about 14 percent of the profit made on private equity investments in the past year with firms managing its private equity asset class.

CalSTRS took fee disclosure a step further, calculating the fees and costs for its entire portfolio. Of the $1.6 billion, approximately 61 percent was external and internal costs, while 39 percent was carried interest, or profits shared.

CalSTRS said it paid an outside firm to compile the data, with the total cost of the project reaching $425,000 plus 1,500 hours of staff time.

Board members said the report was worth the money because it clarified important investment costs.

“This is absolutely fantastic,” said Board Member Paul Rosenstiel. “I think it’s very well worth the time and the expenditure.”

CalSTRS is leading the way once again with this initiative to be completely transparent by disclosing all the fees it pays out to external managers and track total expenses more closely.

Why is this exercise important? Because in a world of historically low rates, fees and other costs matter a lot more and they can add up fast, eating away at the investment returns over a long period.

You’ll recall last month CalSTRS cut about $20 billion from its external manager program. A big part of this decision was a consequence of this exercise where they delved into what they were paying in fees and what they were receiving in return.

Kudos to CalSTRS as I honestly think it’s essential to be as transparent as possible on every aspect of pension investments, including fees and benchmarks used to evaluate performance of various investment portfolios.

I give CalSTRS an A+ on benchmarks, communication and transparency. It was actually one of the pension funds I used as an example when I wrote a big report on the governance of the federal public sector pension plan back in the summer of 2007 for the Treasury Board of Canada.

Where CalSTRS fails to meet my governance standards is that it still has too much state government interference in its affairs, there is no independent qualified board to oversee its operations and while compensation is solid, it can be significantly improved as they bring more assets internally.

Think about it, they paid 39 percent of $1.6 billion in carried interest in calendar year 2015 which translates into $640 million. That doesn’t include management fees, this is only carried interest (performance fees).

No doubt, pensions need to pay for performance, especially if they cannot replicate it in-house, I totally agree with this. But imagine they took 5% of that $640 million to hire people to manage assets internally across public and private markets, wouldn’t they be better off?

In order to do this, they need to get the governance and compensation right, the way Canada’s large public pensions have done. And that’s where CalSTRS, CalPERS and most US public pensions run into trouble as there is way too much political interference in the operations of their pensions.

Having said this, sometimes you need some political interference to get these large public pensions to disclose things, like fees and total expenses. Here, I applaud California’s State Treasurer John Chiang as he has put the screws on CalPERS and CalSTRS to disclose these fees.

Is it perfect? No, far from it, there are tons of hidden fees that were probably not accounted for because they were hidden and hard to find or because they decided to ignore these fees.

And let’s not make this out to be more than it truly is, an accounting exercise. In fact, Leo de Bever, the former head of AIMCo who ran a similar exercise back in 2009 when AIMCo paid out $174 million in external fees to highlight the need to compensate internal staff properly, shared this with me:

This is just accounting – how hard can this be?

The problem may be that they used to subtract carried interest from return.

Capitalization of some structuring cost can be another issue – there are rules about what is capital and what is not.

Sure, accounting for all these internal and external costs isn’t easy, especially if you don’t have the right systems in place to track all these fees and costs, but let’s not get ahead of ourselves here as there is nothing earth-shattering in tallying up fees and costs and many senior pension fund managers reading this will agree with me.

Still, let me be fair and crystal clear, I am for more transparency when it comes to fees and internal costs, and if CalSTRS is ready to set the standard in terms of reporting fees and costs, then I’m all for it.

In an ideal world, we should be able to read the annual report of any public pension to understand how much was paid out in management fees, how much in performance fees (carried interest), how much for internal salaries, how much to vendors, brokers, consultants, accountants, lawyers, etc. and exactly who received what amount.

This information is readily available but I doubt any public pension is willing to provide such granular detail. However, I remember a long time ago, a senior private equity manager of a large Canadian pension telling me how it would be nice if pensions reported the IRRs of their internal staff relative to their external managers. A lot of things would be nice, but they will never happen.

One thing is for sure, I applaud CalSTRS’ new initiative and hope all other pensions follow suit in terms of disclosing total fees and costs and providing more specific information in terms of external manager fees.

Of course, the devil is in the details. I reached out to Chris Ailman, CalSTRS’ CIO, to discuss this new initiative but he’s tied up in board meetings today.

The latest CalSTRS board meeting (November 16-17) isn’t available yet but it will soon be made public here.

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

Doing what it has never done before, the CalPERS board voted yesterday to slash the pensions of all five former employees of a small Sierra County town, Loyalton, by an estimated 60 percent.

It’s a rare situation in which Loyalton, population 769 in the last census and shrinking since the closure of a century-old sawmill in 2001, voluntarily terminated its CalPERS contract in March 2013 without paying off its $1.7 million pension debt.

A New York Times headline last month said the nation’s largest public pension fund ($300 billion) giving little Loyalton a pay-up-or-else ultimatum would be a “test of ‘bulletproof’ public pensions.”

A staff report said CalPERS went to unusual lengths to avoid blowing a big hole in the Loyalton pensions — 50 telephone calls and 10 collection notices — and waited more than three years before pulling the trigger on the deep pension cuts.

A divided Loyalton city council attempted to get back into CalPERS, talked about getting a loan with installment payments, and pleaded ignorance about the need to pay off the big debt to preserve the pensions of four retirees and one person not yet retired.

The division continued yesterday after the CalPERS board was told the Loyalton city council voted the previous day to make payments from the city budget to replace the roughly 60 percent cut in the pensions, ensuring that retirees receive 100 percent of the promised amount.

Loyalton Councilwoman Patricia Whitley, a former mayor who voted to leave CalPERS, said the council voted unanimously this week to offer the retirees a supplemental city payment to restore their full pensions.

“It’s really not a settled thing,” said Whitley. “The employees have to agree. We have to have some sort of agreement between us, because now it becomes a contract between us and the employees.”

Loyalton Mayor Mark Marin said there was no vote at the council meeting this week, only an understanding, and he was skeptical about the retirees accepting the proposal.

“The employees are not going to go for this,” Marin said. “The city is so broke. They will start paying the benefits. But what happens if the city goes bankrupt? Then people are screwed.”

Marin said some of the retirees are talking to an attorney about possible legal action. A CalPERS staff report said there is a risk that a pension cut could trigger an employee lawsuit against the city requiring CalPERS involvement.

Whitley has said a 50 percent pay raise that may not have been legitimate increased the cost of unaffordable pensions. The CalPERS report said Loyalton generously increased its pension formula to “2.7 at 55” in 2004, more than the “2 at 55” for most state and school workers.

Marin said he has been told that the vote to leave CalPERS may have been illegal because it was done as an “emergency” action. He said city council members wanted to divert the pension contribution to a city museum and other uses.

“PERS has been really good to us,” said Whitley. “They have at least listened to us and taken it to heart. So we have gained some mutual respect, I think. This is really their first case, I guess.”

Marin said he thinks “Pandora’s box” was opened by the CalPERS vote to let Loyalton off the hook for its pension debt: “It’s going to open it up big time. There is going to be other cities doing this crap, because Loyalton got away with it.”

Putting a lien on Loyalton assets or attaching its revenue were mentioned at the CalPERS board in September. But the financially distressed city would be further harmed, the board was told, and cities often are able to block attempts to take their revenue.

Modest annual pensions are shown for three Loyalton retirees in 2015 on Transparent California, a searchable public database on the internet that lists the pay and pensions of state and local government employees and retirees:

Patsy Jardin $36,035, John Cussins $36,034, and Orville McGarity $6,814.

The giant California Public Employees Retirement System, with more than 2,000 pension plans for more than 3,000 government employers, maintains a pool to pay the pensions of retirees in terminated pension plans.

The Terminated Agency Pool paid $4.7 million to 716 retirees and beneficiaries from 93 terminated plans last fiscal year. The pool has a large surplus and was 261.9 percent funded as of June 30, 2014.

If its financial health allows, the pool can under state law continue to pay the full pensions of retirees whose employers did not pay off their debt — but not when, like Loyalton, the employer voluntarily terminates its CalPERS contract.

So, apparently for the first time, CalPERS declared an employer, Loyalton, in default and cut the pensions of its retirees “in proportion” to the amount of the debt. The Loyalton debt was 39.5 percent funded as of March 31, 2013.

An updated calculation could change the estimate of a 60 percent pension cut. Until then, said Whitley, Loyalton won’t know whether the payments offered retirees will be more or less than the annual contributions the city had been making to CalPERS.

The large CalPERS termination fee for Loyalton’s five modest pensions, $1.66 million, is the amount CalPERS expects to need to make the lifetime payments with no new contributions from the city or active employees.

CalPERS had been using its investment earnings forecast, now 7.5 percent, to calculate termination fees before switching in 2011 to a risk-free bond rate, 3.25 percent recently, that sharply boosts the regular debt or “unfunded liability.”

A federal judge in the Stockton bankruptcy said a termination fee that boosted the city’s pension debt from $211 million to $1.6 billion was a “poison pill” if the city tried to move to another pension provider, such as a county pension system.

Several small cities that considered leaving CalPERS did not after looking at the high termination fee, among them Pacific Grove, Villa Park, and Canyon Lake. CalPERS has given employers a hypothetical termination fee in their annual plan valuations since 2011.

The CalPERS viewpoint: If the terminated pool falls short under the collapse of a large pension plan, the funds of all the state and local government plans in CalPERS could be used to cover the shortfall, possibly jeopardizing their ability to pay pensions.

The CalPERS board president, Rob Feckner, said in a news release the Loyalton pension cuts, made with regret, are part of a fiduciary duty to keep CalPERS funding secure by ensuring that employers adhere to contracts.

“When they don’t, the law requires us to act,” he said. “The people who suffer for this are Loyalton’s public servants, who had every right to expect that the city would pay its bill and fulfill the benefit promises it made to them.”

As for two other delinquent employers given demand letters, the CalPERS staff report said, the California Fairs Financing Payment made a “significant” payment last month and expects to be “fully current by June 30, 2017.”

The Niland Sanitary District is voluntarily terminating its CalPERS plan. The staff report said there is reason to doubt Niland’s claim of no active employees since 2013, which will be checked by an audit.