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Survey: 88% of Pension Funds Prefer Hiring Firms They’ve Already Worked With

A recent survey from consulting firm Aon Hewitt suggests that pension funds looking to hire consultants or outsource investment management duties will overwhelmingly consider firms they’ve already worked with over those they haven’t.

This survey comes from Britain—but it’s a safe bet that funds in the U.S. behave similarly.

Reported by Financial News:

Pension funds that are contemplating bringing in a fiduciary manager – a single firm to take on most, if not all, active investment responsibilities – are overwhelmingly more likely to employ a firm they already know rather than a newcomer, a survey for consultancy Aon Hewitt suggests.

Only 12% of 125 funds said they would bring in a firm they did not already employ.

In choosing among firms that already worked for them, 59% would go for their consultant and 30% for a fund manager.

[…]

Sion Cole, head of client solutions at Aon Hewitt, who is responsible for its £6.2 billion fiduciary business, said: “Fiduciary management has to be built on a level of trust. What we’re seeing is that pension trustees are going out to market, assessing their options and then appointing someone they know and trust to do that job.”

Controversy Surrounds Pensions of Retired Detroit-Area Politicians

Some Michigan residents are questioning the retirement package of Detroit-area politician Robert Ficano, who lost re-election last month after becoming embroiled in several scandals but still retired with a 401(k) worth between $1.5 and $2 million.

But experts say the retirement package is relatively “normal”, and the public’s outrage should be directed at a policy implemented by Ficano that sweetened the pensions of his appointees. From Detroit News:

[Ficano’s deal] allowed workers to use retirement savings to buy into defined benefit plans that guaranteed them a percentage of their best years’ salaries.

In 2011, he upped the offer to his appointees, waiving rules that required retirees to be at least 55 and allowing them to buy years of service at a discount.

Among others, the plan created pensions that paid former Ficano adviser William Wolfson $124,000 per year at age 50; personnel director Tim Taylor $118,000 per year; and former chief of staff Matt Schenk $96,711 per year at age 41. Schenk’s plan alone will cost taxpayers $4 million over its lifetime if he lives to be 82.

Pension officials say the deals strained the retirement system, which is funded at 48 percent.

The average pension for county retirees is about $22,000 per year. Retired workers don’t feel bad for Ficano, said Joyce Ivory, president of AFSCME Local 1659.

“Our workers suffered tremendously under Bob,” said Ivory, whose 700-member union represents clerks, wastewater treatment workers and others.

“So there’s no sympathy for his retirement plan. It’s just ‘goodbye.’ ”

Ficano declined requests for comment.

Documents obtained by Detroit News contain estimates that Ficano contributed about $100,000 to his 401(k) during his career.

Is There A Major Problem With the Endowment Model?

Over at Institutional Investor, Ashby Monk has posted a thought-provoking piece on the university endowment model and its shortfalls. An excerpt:

The endowment investment model, which is widespread among university endowments (hence the name), is often flagged as the best-in-class framework for long-term investors. This is an approach to institutional investment that is almost entirely outsourced and seeks to generate high returns through an aggressive orientation toward private equity and other alternative assets. In 2013 the average U.S. endowment had an allocation to alternatives of 47 percent, down from the previous year’s peak of 54 percent but still much higher than a decade before.

The model was pioneered by David Swensen, chief investment officer at Yale University, through the investment policies he implemented at the school’s endowment. Using this model, Swensen managed to generate a remarkable 15 percent internal rate of return over a 20-year stretch leading up to 2007. Because of Yale’s wild success, the endowment model was copied by hundreds (and probably thousands) of other endowments and institutional investors around the world. Although the model remains popular today, some institutional investors now see it as being at odds with long-term investing and perhaps even damaging to the long-term investment challenge.

Here’s why: The success or failure of this model seems to be based on access to top-performing managers, as endowments believe that certain managers can and do deliver alpha (returns above a market benchmark). The institutions that have privileged access to top managers see themselves as lucky passengers on an investment return rocket ship powered by hedge funds, private equity firms and other alternative managers.

So most (though not all) endowments won’t do anything to rock the boat with these managers. Thanks to this fear of restricted access, the asset managers would seem to hold the power to discipline and influence asset owners. It’s for this reason that many university endowments are more secretive than the most-secretive sovereign wealth funds. They are protecting their external asset managers from scrutiny. In addition, they are protecting themselves from having to inform their stakeholders about how much they are paying in fees (if they even know what they’re paying managers).

And therein lies a fundamental problem with the endowment model: The agents seem to be in charge of the principals.

Read the full piece here.

Photo by Chaval Brasil

CalSTRS Weighs Worst-Case Scenarios in Latest Meeting

CalSTRS' Projected Funded Ratio. Credit: Chief Investment Officer and PCA — Credit: Chief Investment Officer and PCA

California’s pension reforms are designed to fully fund CalSTRS in the next 35 years. But that timeline assumes the fund will meet or exceed its assumed rate of return – 7.5 percent – year in and year out.

But what if CalSTRS doesn’t meet its investment return targets?

That was the topic of the fund’s most recent investment board meeting. Reported by Chief Investment Officer:

CIO Chris Ailman posed that question [of failing to meet return expectations] during the fund’s September 5 investment board meeting. A number of top asset managers and economists have predicted market returns below historic averages for the coming years, and CalSTRS has chosen to confront that possibility head-on.

Economic growth risk is the foremost factor determining asset returns, according to Pension Consulting Alliance (PCA), CalSTRS’ primary investment adviser. Weak growth brought on by cyclical recessions, another financial crisis, or geopolitical events pose the largest threat to the fund’s short-term returns. In turn, these draw-down events present the likeliest path to sub-7.5% returns over the long term and, taken to an extreme, plan insolvency.

“Mitigating short-term drawdown risk may improve the likelihood that the long-term pension reform measures will succeed,” PCA said in its presentation. But CalSTRS faces a “key tradeoff” in hedging. “Addressing major crisis risks could push the long-term expected rate of return lower,” the consultancy continued.

During the discussion, PCA Founder Allan Emkin, Ailman, and others expressed trepidation over equities’ long bull run and lofty valuations. According to research by Investment Officer Josh Diedesch, the US stock market’s price-to-earnings ratio (20) suggests annual returns below or barely surpassing the 7.5% threshold for the next five years.

As Ailman put it during his opening CIO report, the “US bull market is getting long in the tooth.”

The topic will be broached again at the next board meeting, according to Chief Investment Officer.

Moody’s: Illinois Pension Debt Is Worst In Country

Moody’s released a report last weekend measuring the pension liabilities of all states relative to state revenue. By that measure, Illinois has the worst pension debt in the country, according to the report. From the Sun-Times:

Illinois’ pension liability as a percentage of state revenue is far and away the nation’s highest, according to a new report from a major credit-rating agency.

The state’s three-year average liability over revenue is 258 percent, Moody’s Investors Service says.

The next closest? Connecticut, at about 200 percent.

The Moody’s report averaged the Illinois percentage from 2010 through 2012. In 2012 alone, the state’s rate was 318 percent.

The state has a $100 billion deficit in the amount of money that should be invested in the portfolios of five state-employee pension accounts.

[…]

In the latest report, Moody’s sets [the median] level at 51 percent.

Several larger states, similar to Illinois, are well below the median and rank in the 10 lowest percentages of adjusted net pension liability, including Ohio, Florida and New York. The group also includes Illinois neighbors Iowa and Wisconsin — the latter having the lowest level next to Nebraska.

Only three others states — New Jersey, Hawaii and Louisiana — have rates higher than 120 percent.

The report acknowledged the state’s pending pension reform, which currently sits in court. From the Sun-Times:

Lawmakers adopted an overhaul plan last fall that cuts benefits and increases worker contributions to significantly cut that debt.

But the law has been challenged in court. A Sangamon County judge indicated last week he wants the case moved swiftly to appellate courts, suggesting the Illinois Supreme Court’s rejection in July of a law affecting retiree health insurance could prove a model for the pension challenge.

Moody’s points out that even if the pension overhaul gets constitutional approval from the state’s high court, it still will take decades for Illinois government to dig out of its financial hole.

Photo by Chris Eaves via Flickr CC License

St. Louis Fund Files Shareholder Lawsuit Against General Motors

A flood of lawsuits has hit General Motors in the wake of numerous recalls. At least one pension fund has now gotten in on the action: The St. Louis Police Retirement System has sued GM for the “systemic failure” of its board in handling the safety issues and recalls of recent years.

Reported by the St. Louis Business Journal:

A shareholder lawsuit filed on behalf of a St. Louis police pension fund and an individual shareholder takes issue with General Motors’ handling of safety issues.

The suit alleges board members are “guilty of a sustained and systemic failure” to keep the shareholders’ informed of safety and recall issues, the New York Times reports. David Honigman, the attorney representing the plaintiffs, told the newspaper that the company “set up a system that is calculated not to inform them about safety issues.”

GM has been hit with recalls of nearly 30 million vehicles since February, as well as at least 13 deaths linked to a defective ignition switch. The company is now facing multiple investigations and has set aside nearly $4 billion to cover associated costs, according to the New York Times.

General Motors is currently being investigated by the SEC, the Justice Department, and over 40 state attorney generals.

Photo Credit: “General Motors logo” by Gage. Licensed under Public domain via Wikimedia Commons

Newspaper: Report on Canadian Investment Expenses “Misses the Point”

Last week, Pension360 covered a report questioning the Canada Pension Plan’s new investment strategy, which had led to a more than 100 percent increase in investment expenses since 2006.

But one newspaper, the Hamilton Spectator, says the report missed the point entirely. From the Hamilton Spectator editorial:

Rousing displays of verbal fireworks could not conceal the study’s failure to find out what Canadians need to know. […] The country needs to know whether private-sector plans or the public plan is a more efficient way of saving for retirement.

The authors found the government collects the contributions to the Canada Pension Plan and pays out the pensions, for an administrative cost of around $550 million a year. The government recovers that cost by skimming an administrative charge off the contributions. If the CPP Investment Board counted that cost as part of its operating costs, those costs would be $550 million higher.

But we need to know if the government’s costs for collecting contributions and mailing out cheques are out of line with operators of private-sector pension plans. The study’s authors make no inquiry on that point.

A more useful study would produce evidence both from the public and private spheres. That study would have to be written by authors who gather the evidence first and then draw their conclusions. The study published last week seems more like the work of an agency with a narrow agenda — what you might call a self-serving bureaucracy.

The report, released last week, found the Plan’s investment expenses had increased from $600 million or 0.54% of assets in 2006 to $2 billion or 1.15 per cent of its assets in 2013.

Report: New Jersey Pension Investments Trailed S&P 500 For Seven of Last Eight Years

New Jersey's investment returns vs. the S&P 500 CREDIT: IB Times — New Jersey’s investment returns vs. the S&P 500
CREDIT: IB Times

Last week, journalist David Sirota reported on the New Jersey pension system and its drastic shift towards hedge fund investments under Chris Christie.

This week, Sirota has analyzed the state’s financial records. His finding: despite the increased allocation toward hedge funds and other alternatives, the pension system has mostly underperformed relative to the broader market.

Sirota writes:

In seven of the eight years since the state began shifting pension funds into so-called alternative investments, returns have fallen well short of the broader stock market, an analysis of state financial records shows. In those seven years, New Jersey’s alternative investment portfolio has produced gains of just more than half of the S&P 500, the widely watched index seen as a proxy for shares of large corporations.

[…]

The below-market results from the state’s $20 billion alternative investment portfolio belie repeated assurances from New Jersey officials who said the investments would overperform the stock market. Instead, the results buttress arguments by investors like Warren Buffett and some local lawmakers, who assert that pension money should be invested in stock index funds rather than hedge funds, private equity, venture capital, real estate and other alternative investments.

Christie has responded to the fund’s under-performance by claiming that, although it has under-performed the broader market, it has beaten the fund’s internal projections.

Pennsylvania Schools Feeling Pension Pinch

Pension payments for school districts have increased significantly in the last decade. CREDIT: Lancaster Online — Pension payments required of school districts have increased significantly in the last decade.
CREDIT: Lancaster Online

Pension costs have skyrocketed over the last decade for Pennsylvania public school districts, as the state’s pension liabilities and the contributions required from schools have both increased dramatically. From Lancaster Online:

The key concern is the underfunded Pennsylvania School Employees Retirement System. Due mainly to past actions by the Legislature — under both Democratic and Republican control — the statewide pension program currently carries a nearly $50 billion liability.

To make that up, districts have seen the amount they’re forced to pay skyrocket over the past several years.

– Elanco has seen its contributions rise from $350,000 in 2004 to $3.1 million in 2014.

– Lampeter-Strasburg had its payments grow from $325,000 in 2004 to $2.2 million in 2014.

– Hempfield has stretched those costs from nearly $1.5 million in 2004 to $5.4 million in 2014.

– Penn Manor was forced to increase that portion of the budget from just over $1 million in 2004 to $6.3 million in 2014.

Pennsylvania’s Public School Employees’ Retirement System (PSERS) was 66.3 percent funded as of 2012.

Rhode Island Primary Draws Interest of Political Scientists; Can a Democrat Win After Agitating Unions?

Political observers are eagerly awaiting the results of tomorrow’s Democratic primary in the race for Rhode Island Governor. That’s because the results will be a case study on what happens when a Democratic candidate runs without much support from labor groups.

Gina Raimondo’s 2011 pension reforms agitated many unions who said the cuts were too steep and the negotiations too one-sided. Most union groups have publicly endorsed Raimondo’s challengers, Angel Taveras or Clay Pell. Reported by Bloomberg:

As U.S. states and cities contend with underfunded worker retirement systems that are crowding out spending for services, roads and schools, the vote is a test of whether a Democrat can challenge unions that have been a pillar of the party’s support and still win at the ballot box.

“It will send a real signal to other politicians about what it means to take on this particular interest group,” said Marion Orr, a political scientist at Brown University in Providence and former head of its Taubman Center for Public Policy and American Institutions. “She may be able to pull this off.”

Pensions are an issue in the race because the overhaul was Raimondo’s main achievement since winning election four years ago. Her efforts have led Taveras to portray her as a tool of Wall Street.

Government unions have divided their support between Taveras, who was raised in public housing by his Dominican immigrant mother, and Pell, a former official in President Barack Obama’s Department of Education and husband of Olympic figure skater Michelle Kwan. All three candidates went to Harvard University.

A recent poll found that 32 percent of Democratic voters would vote for Raimondo; 27 percent of Democratic voters would back Taveras, and 26 percent would vote for Pell.

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