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New Jersey Is Still Waiting For Return on Hedge Fund Investments

New Jersey Pension Returns — CREDIT: International Business Times

New Jersey is one of the most active states in the country when it comes to investing pension fund assets in hedge funds. That strategy carries risks and boatloads of fees—but it also carries potentially big returns.

Journalist David Sirota investigated the state’s investment decisions and the corresponding return data. He found that New Jersey was certainly straddled with management fees.

But the promised returns have not yet materialized. From Sirota:

Between fiscal year 2011 and 2014, the state’s pension trailed the median returns for similarly sized public pension systems throughout the country, according to data from the financial analysis firm, Wilshire Associates. That below-median performance has cost New Jersey taxpayers billions in unrealized gains and has left the pension system on shaky ground.

Meanwhile, New Jersey is now paying a quarter-billion dollars in additional annual fees to Wall Street firms — many of whose employees have financially supported Republican groups backing Christie’s reelection campaign.

Neither Christie nor the state pension fund’s top investment official responded to Sirota’s requests for comment. But to a certain extent, the numbers speak for themselves. Here’s a chart of the state’s management fees since 2009:

New Jersey's pension investment expenses since 2009 — CREDIT: International Business Times

Thousands of Early Retirements Coming In Indiana As New Law Takes Effect

A new law has pushed forward the retirement plans of thousands of Indiana workers, who may retire early to try and avoid lower interest rates on their monthly retirement benefits.

One state system, the Indiana Public Retirement System, said it expects 2,000 more retirements than last year, which amounts to a 25 percent increase. From the Lafayette Journal and Courier:

A law, passed by the General Assembly this spring, lowers the interest rate retirees will be paid if they choose to annuitize some of their retirement benefits, taking monthly payments for the rest of their lives rather than a lump sum.

For employees whose last day of work is before the end of August, the rate is 7.5 percent. It’ll drop to 5.75 percent thereafter and keep dropping until it’s tied to the market rate.

The change is supposed to prevent a changing world from bankrupting the system, according to INPRS documents. Concerns stem from longer life expectancies and the system’s return on investment, which is lower than the current interest rate.

While system administrators say the lower rates are necessary, the change has inspired government workers who were nearing retirement to move up their plans.

Of course, nobody knows for sure how many of those extra retirements were spurred specifically by the new law. From JC Online:

Local officials says it’s hard to judge the exact impact the new law has on retirees.

In the Lafayette School Corp. for example, 37 teachers retired this year, more than the typically 20 to 25 teachers, said assistant superintendent John Layton. But without asking each one point blank why they’re retiring, the reasons prompting that retirement aren’t always clear.

[…]

West Lafayette city human resources director Diane Foster said the change has had minimal impact on the city. The only retiree to cite that as a reason is soon-to-retire parks and recreation superintendent Joe Payne.

“Other than that I’m not aware of any other employees who have made that decision based on this,” Foster said. “It could be that if an employee is already considering retirement this may be just one more factor that could help them go ahead (and do it).”

It’s unclear how the change is impacting Lafayette. Human resources director Kim Meyer said retirement data wasn’t immediately available.

Rhondalyn Cornett, president of the Indianapolis Education Association, told the Lafayette Journal Courier that a retiree could see significantly less benefits under the new law—to the tune of $5,000 a year.

With that number in mind, it’d be surprising if the new law wasn’t at least a factor in most of these early retirements.

Photo by www.aag.com via Flickr CC License

Infrastructure Investments Becoming Big Part of Canadian Pensions

Infrastructure investments are becoming increasingly common endeavors for public pension funds. That’s true around the world, but nowhere is the trend more pronounced than in Canada, where the average pension fund has doubled its allocation to infrastructure since 2009. As reported by Benefits Canada:

Historically, Australian and Canadian investors—primarily pension funds—have dominated investment in infrastructure assets, accounting for 40% of historical allocations despite representing only 7% of total potential available capital.

Canadian pension assets totaled US$1.6 trillion in 2013, while infrastructure allocations by Canadian plans totaled US$47.2 billion. This contrasts with U.S. pension assets, which were in excess of US$18 trillion also in 2013, and whose allocations to infrastructure were only US$25.4 billion, less than those made by Canadian pension plans.

On average, Canadian pension funds have allocated 4% of their pension fund assets to infrastructure, up from 2% in 2009.

More recently, there have been some noticeable trends in infrastructure investing, both in terms of investor location and type. To date, pension funds have accounted for 72% of allocations made to infrastructure assets. Based on prospective allocations, sovereign wealth funds are expected to increase their “market share” from 13% of the total allocations to 40%, with a corresponding decrease in the percentage attributed to pension funds (45% versus the present 72%).

Funds in the United States might not be in on the game yet, but insiders say they expect state-level pension funds to significantly boost their allocations to infrastructure investments. More from Benefits Canada:

American state pension funds, as well as Asian investors[…]have started to take an active interest in infrastructure investing. These two groups currently account for 20% of allocations, but based on surveys by Preqin, are expected to increase these to 48% of total infrastructure allocations. Most notably, the Government Pension Investment Fund of Japan has committed 0.2% to infrastructure, though this translates into US$2.7 billion in investments over the next five years.

It’s a very interesting trend, and one that likely won’t reverse course in the near future. The exception may be smaller funds, who will have more trouble navigating direct investments in infrastructure. They’ll have to hire third-party managers, and that may not be appetizing to some funds who are becoming increasingly allergic to fees and investment expenses.

Photo by Kyle May via Flickr CC License

Fitch Weighs In On New CalPERS Compensation Rules

This week, CalPERS approved 99 types of additional income that workers can include in their pension calculations.

The change will increase the pensions of many workers in the CalPERS system, and the fund has already drawn flak from California Governor Jerry Brown.

Now, the credit rating agency Fitch is in on the game, too. Fitch says the changes will increase pension liabilities and present additional costs to the state. From Fitch:

The expanded definition of pensionable compensation exposes public employers to higher pension liabilities and contribution expenses, and appears to be a step backward from recent reforms. The Public Employees’ Pension Reform Act of 2013 (PEPRA) narrowed the definition of pensionable compensation for public employees in an effort to address “pension spiking,” the inflation of base pay for purposes of pension benefit calculations. This decision expands the definition of pensionable compensation, in apparent conflict with PEPRA, and will increase pension costs for public employers if implemented.

The magnitude of impact from this decision is not yet clear, but it raises more questions about the sustainability of California’s pension reform efforts, which continue to face legal and institutional challenges. Particularly worrisome to Fitch is the absence of detailed information on the analysis of its projected costs. The decision has been sharply criticized by Gov. Jerry Brown, who cited its conflicts with recent state legislation intended to reduce pension costs. City-led pension reform efforts in San Diego and San Jose remain mired in litigation while this CalPERS decision appears to open up a new front for challenging reform efforts.

Gov. Brown was actually open to most of the 99 “special pay items”. But he adamantly opposed the measures that contradicted the reform law Brown passed in 2012.

“Today Calpers got it wrong,” Brown said in a statement on Wednesday. “This vote undermines the pension reforms enacted just two years ago. I’ve asked my staff to determine what actions can be taken to protect the integrity of the Public Employees’ Pension Reform Act.”

CalPERS Board Member Facing Stiffer Penalty After Latest Failure To File Campaign Documents

What do the years 2002, 2007, 2008, 2010, 2012 and 2013 all have in common?

Those are the years that Priya Mathur, Vice President of the CalPERS board, failed to submit campaign finance documents or conflict of interest statements in a timely manner.

She was fined three times by the Fair Political Practices Commission over that period for those violations. Now, another fine is coming for her latest transgressions. From the LA Times:

At issue in the recent enforcement action was the failure to file four semiannual campaign financial statements for 2012 and 2013 in a timely manner.

In a recent email, she described the missed reports as an oversight. “I had inadvertently failed to file the proper forms in 2012 to close my campaign committee,” she said.

The proposed fine of $1,000 was announced Aug. 11 after she and FPPC attorneys reached an agreement to settle the charges. In turn, Mathur and her board reelection committee pledged not to contest the punishment.

But the panel reversed course on the $1000 dollar fine and decided they should quadruple it—raising it to $4000. The Sacramento Bee reports:

Mathur, the pension fund’s vice president, had agreed to a $1,000 fine with the staff of the state Fair Political Practices Commission. But the commissioners refused to accept the fine Thursday, arguing that Mathur should get a higher penalty because she had been fined several times before by the FPPC.

Gary Winuk, the agency’s chief of enforcement, said commissioners sent the case back to the FPPC’s staff and suggested the fine be increased to $4,000.

“Given her history … they felt it warranted a higher penalty,” he said. He said the matter could be brought back to the commission next month.

At this point, Mathur and the ethics panel probably know each other on a first name bases. But repeated disciplinary actions haven’t changed Mathur’s behavior. From the Sac Bee:

The FPPC has already fined Mathur a total of $13,000 for earlier transgressions, including late filing of campaign documents and her conflict-of-interest statements. The most recent fine came in 2010, prompting the CalPERS board to punish her by removing her as chair of the health benefits committee and suspending her from traveling on pension fund business.

In the latest case, Mathur was late filing four campaign finance statements in connection with her re-election bid. Mathur told The Sacramento Bee last week that the late filing was the result of a paperwork mix-up.

The FPPC staff, in its report to the commissioners, said it took “numerous requests” from investigators to get Mathur to finally file the documents. That conduct played a role in the commissioners’ desire for a stronger penalty, Winuk said.

The board’s election takes place next week. The election is conducted by mail.

Photo by Blake O’Brien via Flickr CC License

Russia Diverts Pension Contributions To Plug Other Budget Holes

pensii_941 — CREDIT: Natalia Mikhaylenko, RBTH

For the second straight year, Russia has decided to freeze its contributions to its pension funds and instead use the money to plug budget holes elsewhere.

Russia says the money will be used for more pressing needs elsewhere in the budget. But critics claim the action could be a costly one. Russia Beyond The Headlines reports:

For the second year in a row, the Russian government has decided to freeze the portion of pension contributions allocated for investment.

Contributions for 2013, amounting to some 550 billion rubles ($15.2 billion), have already been frozen, with the government intending to do the same with a further 700 billion rubles’ worth of pension savings for 2014.

The move, which the Ministry of Labor and Social Protection says is necessary in order to finance current pension payments, will leave major Russian companies without investment and will force banks to raise interest rates.

The negative effects are already being felt by ordinary Russians: At the end of last year, minimal interest rates for individuals started at 8 percent, whereas in 2014 loans have become 2 percent more expensive, with interest rates starting at 10 percent.

This year’s situation will be further exacerbated by the departure of foreign investors, Baranov adds.

“This will result in the cost of loans and debt refinancing growing in 2015 for banks and corporations, for the federal and regional finance ministries. It is hard to estimate the exact figure that they will have to pay extra, but it will be comparable with the amount of frozen funds, i.e. the very same 700 billion rubles or maybe even more,” Baranov says, predicting the potential consequences.

Russia’s pension funding is experiencing turbulence due to a demographic shift that has more people retiring and less people contributing to the system. From RBTH:

Sergei Khestanov, an economist for the ALOR Group, explains that the deficit in the Pension Fund has occurred because of the country’s demographic decline. The population is aging, and while 20-30 years ago there were 6 workers to one pensioner, now there are fewer than two, and their contributions do not cover current needs.

That demographic shift won’t be reversing itself anytime soon. So while the pension freeze helps plug current shortfalls, it only exacerbates future problems.

Reuters reported earlier this month that there was “deep disagreement” among Russian officials regarding the contribution freeze.

Union Coalition Wants Illinois Court To Act Faster In Case Against Reform Law

A coalition of some of the largest labor groups in Illinois filed a motion today calling on the court to speed up its ruling regarding the constitutionality of Illinois’ pension reform law.

The coalition, We Are One Illinois, says the Supreme Court’s July decision—where the court ruled retirees’ health benefits are protected under the state’s constitution—confirms that Illinois’ pension reform law is illegal.

From CapitolFax:

Yesterday, the We Are One Illinois coalition, along with other plaintiffs, filed a motion in Sangamon County urging the Circuit Court to enter judgment in the plaintiffs’ favor on the State’s affirmative defense in light of the recent Supreme Court decision in the case of Kanerva v. Weems. The We Are One Illinois coalition and other plaintiffs assert that the Kanerva decision confirms that the Pension Protection Clause in the Illinois Constitution is absolute and without exception, even with respect to the fiscal circumstances alleged by the State in its defense.

Illinois says its dire fiscal situation gives it the authority to cut to pension benefits, even if they are constitutionally protected. From Reuters:

The state has contended that its sovereign powers allow it to act in a fiscal emergency. Illinois has a $100 billion unfunded pension liability and the country’s worst funded state retirement system. Illinois’s credit ratings are also the lowest among U.S. states.

But the court’s July decision doesn’t bode well for the state’s case. At the time, the court wrote:

“[I]t is clear that if something qualifies as a benefit of the enforceable contractual relationship resulting from membership in one of the State’s pension or retirement systems, it cannot be diminished or impaired … Giving the language of article XIII, section 5, its plain and ordinary meaning, all of these benefits, including subsidized health care, must be considered to be benefits of membership in a pension or retirement system of the State and, therefore, within that provision’s protections.”

We Are One Illinois issued the following statement after filing the motion:

“The Kanerva decision confirms what we have always argued, that the state’s constitutional language guards against any diminishment or impairment of pension benefits that Senate Bill 1 imposes. We believe, then, that the State’s defense is without merit and so have asked the Court in this motion to rule in our favor on the State’s defense that seeks to justify Senate Bill 1. We maintain that the constitution protects the hard-earned and promised retirement savings of our members and remain ready to work with any legislator willing to develop a fair and legal solution to our state’s challenges.”

Photo credit: “Gfp-illinois-springfield-capitol-and-sky” by Yinan Chen, Via Wikimedia Commons

Defined benefit pension plan distribution decisions by public sector employees, by Robert L. Clark, Melinda Sandler Morrill and David Vanderweide

Authors: Robert L. Clark, Melinda Sandler Morrill and David Vanderweide

Journal: Journal of Public Economics

Abstract: Studies examining pension distribution choices have found that the tendency of private-sector workers is to select lump sum distributions instead of life annuities resulting in leakage of retirement savings. In the public sector, defined benefit pensions usually offer lump sum distributions equal to employee contributions, not the present value of the annuity. Thus, for terminating employees that are younger or have shorter tenures, the lump sum distribution amount may exceed the present value of the annuity. We discuss the factors that may influence the choice to withdraw funds or not in this environment. Using administrative data from the North Carolina state and local government retirement systems, we find that over two-thirds of public sector workers under age 50 separating prior to retirement from public plans in North Carolina left their accounts open and did not request a cash distribution from the pension system within one year of separation. Furthermore, the evidence suggests many separating workers, particularly those with short tenure, may be forgoing substantial monetary benefits due to lack of knowledge, understanding, or accessibility of benefits. We find no evidence of a bias toward cash distributions for public employees in North Carolina.

Get access to the entire article here: http://www.sciencedirect.com.flagship.luc.edu/science/article/pii/S0047272713001126

An analysis of critical accounting estimate disclosures of pension assumptions, by Mark P. Bauman and Kenneth W. Shaw

Authors: Mark P. Bauman and Kenneth W. Shaw

Journal: Accounting Horizons

ABSTRACT: Accounting for defined-benefit pension plans is complex, and reported financial statement amounts are significantly impacted by a myriad of assumptions. In its interpretative release FR-72 (2003), the SEC called for more informative and transparent Management Discussion and Analysis (MD&A) disclosure of critical accounting estimates (CAE), including those regarding pension plans. This paper uses a random sample of 147 firms with relatively large defined-benefit pension plans to analyze firms’ MD&A pension-related critical accounting estimate disclosures.

Get access to the rest of the article here: http://aaajournals.org/doi/abs/10.2308/acch-50823

Which Pension Fund Is Best At Investing In Private Equity? The Results Are In

Reuters PE Hub recently surveyed 160 public pension funds across the country in an attempt to pinpoint the fund with the highest-performing private equity portfolio.

The results of the survey were released this month, and the fund with the best performance from private equity was the San Diego City Employees Retirement System (SDCERS). From KUSI News:

SDCERS’ private equity portfolio consists of 45 different funds, with commitments of $580 million. The survey noted 47 percent of SDCERS’ funds performed in the top 25 percent of all funds surveyed. The private equity program invests in all types of assets and strategies globally, including buyouts, special situations and venture capital funds.

“The success of SDCERS’ private equity program can be attributed to the thoughtful way in which the program was constructed, and the quality of the dialogue between staff and consultants,” SDCERS CEO Mark Hovey said. “I am proud of our investments team and the Board of Administration, who work tirelessly to secure a retirement future for more than 200,000 members through an effective investment strategy focused on delivering long-term results.”

SDCERS shouldn’t be confused with the San Diego County Employees Retirement Association, which gained notoriety this week when the Wall Street Journal reported on the fund’s heavy reliance on alternative investments.

SDCERS was 68.6 percent funded as of 2013.

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