Pension360

CalPERS officials said earlier this year that ESG factors would soon play a much larger role in the fund’s investment strategy, both for making in-house investments and for hiring outside managers.

At a UN conference this week, CalPERS senior portfolio manager Anne Simpson further explained how the fund is putting ESG principles in practice, and why its pushing companies to disclose their carbon footprints.

From Top1000Funds:

Simpson urges asset owners to push expectations among their managers, internally and externally.

Managers need to develop and use methodologies that incorporate a companies’ environmental practices.

Asset owners should requests data and modeling in their manager contracts and catalyze the change, she says. She urges for much more expertise in the area from managers.

[…]

However Simpson says a lack of underlying corporate information means CalPERS has to rely on proxy estimates to measure the carbon footprint of many of the companies in which it invests.

“We can’t model out of thin air. We need the information,” she says, arguing that carbon disclosure become a necessary part of corporate reporting for the investment community.

Raising industry awareness of the need for emissions disclosure is a first step.

“The first part of our work is around advocacy. We need a policy framework that will price in this externality. We need to be advocates for market reforms which will price this risk in a better way.”

CalPERS is the largest pension fund in the United States, and manages over $300 billion in assets.

 

Photo by  Paul Falardeau via Flickr CC License

 

 

Ohio Gov. John Kasich recently asked the state’s Public Employees’ Retirement System to divest from companies doing business with Iran.

The pension fund initially took a hard line against the idea; a spokesperson said that divesting for political purposes wasn’t a responsible way to use the System’s money – even if PERS had less than $13 million currently invested in Iran-related investments.

But a letter released yesterday by the System’s executive director indicates that the pension fund is willing to work with the governor, but will continue to keep its fiduciary duty in mind.

More from the Columbus Dispatch:

The head of Ohio’s largest pension system expressed willingness to work with Ohio Gov. John Kasich’s request to divest from companies doing business with Iran, although she noted such action must be taken with the best interests of a million current and past public employees as a priority.

“We appreciate your letter that recognizes our policy and look forward to working with you,” said Karen Carraher, executive director of the Ohio Public Employees Retirement System, in a letter made available to The Dispatch on Tuesday night.

Earlier, a PERS spokeswoman said the fund could not comply with requests to manipulate the investment of its $90 billion-plus in assets.

“No matter how worthwhile the purpose, such actions set a dangerous precedent of using the system’s money to achieve political or social agendas,” said Julie Graham-Price, the retirement system’s communication manager.

[…]

While the responses had contrasting tones, both Carraher and Graham-Price noted that a 2007 PERS board policy – reaffirmed this year – calls for investment to be pulled from companies doing business in Iran or the Sudan. However, the policy includes an important qualifier noting the fund’s fiduciary responsibility to present and past government workers: Such divestment can take place only “when comparable investments offering similar quality, return and safety are available.”

By mid-2015, the pension fund had just $12.6 million tied up with a Russian oil and gas company that has a subsidiary operating in Iran, Carraher said.

Read the executive director’s full letter here.

 

Photo by Michael Vadon via Flickr CC License

Early this summer, the New Jersey Supreme Court ruled that Chris Christie didn’t act illegally when he slashed state pension contributions by over $3 billion between 2013 and 2015, despite having signed a law in 2011 mandating such payments.

Now, 16 unions are petitioning the U.S. Supreme Court to put the pension case on its docket.

From NJ.com:

In a petition filed with the U.S. Supreme Court, lawyers for 16 labor groups — including the New Jersey Education Association, Communications Workers of America and the Policemen’s Benevolent Association — argued that the New Jersey Supreme Court should have applied the protections of the federal Contract Clause to the deal.

NJEA President Wendell Steinhauer said in a statement the state breached its contract with its members and it will “pursue every avenue to protect and enforce those rights and to ensure that the state meets its obligations to our members. Our members have done everything required of them by the law. It is time for the state to be subject to the law as well.”

[…]

[The petition] picks apart the New Jersey Supreme Court’s June 9 ruling that the contract, ostensibly created under a 2011 pension reform law, conflicted with state constitutional provisions that the Legislature cannot create large debts without the voters’ consent and that one Legislature cannot tells a future Legislature how to spend its money.

That ruling dealt a major blow to the public workers, who challenged Gov. Chris Christie’s cuts to annual pension contributions, but was a major victory for the governor, who was spared from scraping together $1.57 billion in the previous fiscal year, $1.8 billion this year and billions more in the future.

Last week, three police unions filed a similar petition.

 

Photo by Joe Gratz via Flickr CC License

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

The Canadian Press reports, Canada pension funds buy stake in South Korean grocer as part of $6 billion deal:

Two Canadian pension plans are part of a consortium that purchased South Korean supermarket chain Homeplus from British retailer Tesco for around US$6 billion on Monday.

The Canadian Pension Plan Investment Board said it spent US$534 million for a 21.5 per cent stake in the company.

The Public Sector Pension Investment Board, which manages investments for the federal public service and the Canadian Forces among others, was also a part of the deal but did not disclose its contribution.

The deal is expected to close in the fourth quarter of 2015, pending approval from the South Korean government and Tesco’s shareholders.

Homeplus is South Korea’s second-largest retailer, with more than 1,000 outlets across the country. It was originally founded as a joint venture between Samsung and Tesco in 1999.

South Korean private equity firm MBK Partners led the deal and said the consortium will invest US$831 million in the business over the next two years.

Canada’s national pension plan makes more than it currently pays out in benefits, and the CPPIB invests the excess money. At the end of June, the fund totalled $268.6 billion.

Homeplus is facing criminal and civil lawsuits in South Korea after company executives including CEO Do Sung-hwan were indicted in February for selling the personal data of millions of customers to insurance companies for marketing purposes.

This deal represents the first major deal between CPPIB and PSP ever since André Bourbonnais left the former organization to head the latter one.

Why buy a South Korean grocer from Tescco for around US$6 billion? Why not? CPPIB likes investing ‘Gangnam style’ and South Korea is Asia’s fourth largest economy with stable long-term growth prospects.

It’s also worth noting the currency bloodbath going in submerging markets after China’s Big Bang has battered many Asian currencies, including the South Korean won. Kyung-Jin and Kim Fion Li of Bloomberg report, Won Rebounds From Five-Year Low as Korea Plans Record Spending:

The won rose, erasing an earlier decline to a five-year low, as South Korea’s government unveiled a record spending plan for next year to boost growth in Asia’s fourth-largest economy.

The Finance Ministry on Tuesday proposed a 386.7 trillion won ($322 billion) budget for 2016, which is 2 trillion won more than this year’s. The announcement comes before Friday’s monetary policy review, at which the Bank of Korea is forecast to refrain from cutting its benchmark rate from a record low of 1.50 percent, according to 16 of 18 analysts surveyed by Bloomberg.

The won advanced 0.3 percent to 1,200.72 a dollar as of the 3 p.m. close in Seoul, data compiled by Bloomberg show. It dropped to 1,208.72 earlier Tuesday, the weakest since July 2010, and has lost 1.5 percent this month.

“There is some profit-taking” in the dollar versus the won, said Patrick Bennett, a strategist at Canadian Imperial Bank of Commerce in Hong Kong. “With monetary policy having done almost all it can do, it’s incumbent on the government to look at what they can do fiscally. It’s a positive for the economy.”

South Korea’s exports have deteriorated amid a global economic slowdown, Trade Minister Yoon Sang Jick said in prepared comments released by the ministry on Monday after the country last week reported that shipments in August fell the most since 2009.

Government bonds fell, with the yield on securities due June 2025 rising one basis point to 2.24 percent, Korea Exchange prices show. The three-year yield climbed two basis points to 1.67 percent.

We’ll see whether the South Korean government’s record spending plan boosts growth but the point I’m making is given the huge depreciation in Asian currencies, now maybe the best time to invest in these markets, especially for long-term global pension funds like CPPIB and PSP Investments which like buying private market assets and keeping them for a very long time.

Of course, Canadian pension funds have Canadian dollars and the loonie has been sinking along with oil prices over the last year. I’ve been short the loonie ever since December 2013 when Leo de Bever was warning that oil prices are heading much lower but even he was caught off guard by the magnitude and speed of the drop. Private equity is now doubling down on energy but if Pierre Andurand is right, the slump in oil prices could last a longer than most analysts expect.

All this to say that while the Korean won just rebounded from a five-year low versus the mighty greenback which keeps surging higher as we await the Fed’s big move next week, it’s been pretty stable versus the Canadian loonie over the last six months (click on image):

So I don’t think currency considerations were a big factor behind this deal and they typically aren’t as pension funds invest over a very long investment horizon.

Still, when investing in foreign assets, Canadian pension funds do take significant currency risks. Interestingly, while CPPIB and PSP Investments are very similar funds, they take a different approach to currency hedging. PSP follows many other large Canadian plans and hedges currency risk (50% hedge ratio) whereas CPPIB doesn’t hedge foreign currency risk.

In his fiscal 2015 president’s message, Mark Wiseman clearly stated this when going over CPPIB’s exceptional fiscal 2015 results:

This year’s total Fund and absolute and relative returns demonstrate the benefits of a resilient portfolio that is broadly diversified across geographies and a mix of public and private asset classes. All of our investment departments generated significant investment income and dollar value-add.

CPPIB’s strong returns in fiscal 2015 are great news, as the income that the fund earned will continue to compound – however, we cannot place too much significance on our results in any given fiscal year. The CPP is designed to be exceptionally long-term in nature and that means we can afford to take on more risk (i.e. volatility in short-term returns) in order to achieve a higher long-term return. Our extraordinarily long investment horizon combined with the unique nature of the CPP simply allows us to invest differently from many other institutional investors.

A case in point is our view on currency hedging, which we describe on page 26 of the F2015 Annual Report. Many pension funds use substantial currency hedging to stabilize the values of their international assets in Canadian dollar terms. In comparison, for the most part, we do not hedge foreign currency holdings to the Canadian dollar. As a result we must tolerate significant impacts on our financial results in any given year due to currency gains/losses. For example, in fiscal 2010 alone the Fund experienced losses of $10.1 billion in the Canadian dollar value of our foreign holdings, however since fiscal 2010 we have realized gains of $16.1 billion, including $7.8 billion this year. Hedging to manage short-term results has a material financial cost with no expected benefit over the long term.

Our portfolio is highly resilient, but as an exceptionally long-term investor we cannot and should not escape exposure to general market movements. We have every reason to believe that the Fund will experience future shocks resulting in downward pressure, yet given our long investment horizon we can tolerate considerable negative short-term returns in continued pursuit of higher long-term returns. Thus, in the same way that we temper our enthusiasm for this year’s exceptional performance, we also do not let negative returns in any given period side-track our attention from our long-term strategy. The best measure of our performance is longer term and we must continue to focus on 10-plus year results.

While we can debate the merits of currency hedging at large Canadian pension funds, we can’t debate the focus on performance must be on the long-term. This is why I ignore short-term performance reports highlighting trouble at Canada’s biggest pensions because they’re utterly meaningless.

Anyways, enough on currency hedging. Getting back to the Homeplus deal, I was surprised that CPPIB and PSP would buy a South Korean company facing criminal and civil  lawsuits for selling personal data to insurance companies. But Homeplus paid a price for selling personal data:

The Fair Trade Commission on Monday fined discount hypermarket chain Homeplus 435 million won ($405,065) for collecting and selling the personal information of its customers to insurance companies.

The state-controlled antitrust watchdog said the nation’s second-largest retailer violated the Fair Labeling and Advertising Act.

The FTC said that when Homeplus advertised drawing events, it failed to clearly notify participants that their personal information would be provided to insurance companies for use in marketing.

For instance, to mark Korea’s participation in the FIFA World Cup last May and June, the retailer distributed coupons for a drawing to give away a Hyundai Genesis sedan. Participants were required to provide their names, birth dates, gender, telephone numbers, mobile numbers, number of children and signatures.

They also were asked to check two boxes permitting their information to be used by insurance companies, but the FTC said the fine print was too difficult to read.

“To participate in a drawing, the matter of providing personal information to insurance companies is the most important condition,” said Oh Hang-lok, director of the FTC’s Consumer Safety and Information Division. “But Homeplus did not explicitly inform consumers of the fact that it would provide the information to insurance companies.”

The FTC’s fine came after the prosecution indicted six former and current Homeplus executives in February for violating the Personal Information Protection Act.

According to the prosecution, executives received 14.8 billion won from selling information for about 7 million people to seven insurance companies. In addition, they sold information on about 2.9 million registered members of Homeplus for a total of 8.3 billion won.

I guess this matter is now close to being settled and there’s no doubt in my mind that it was part of the legal due diligence at CPPIB and PSP.

But one thing this case proves to me is that unlike many other countries, South Korea takes consumer privacy issues very seriously and it has government watchdogs to enforce its consumer protection laws.

As far as the details of this US$6 billion deal are concerned, as is customary, PSP Investments put out no press release (they almost never do) but CPPIB did put out a very brief one:

Canada Pension Plan Investment Board (“CPPIB”) today announced that it has signed an agreement to acquire a stake of approximately 21.5% in Homeplus, Tesco’s South Korean business, for US$534 million. CPPIB made this acquisition as part of a consortium led by MBK Partners. The total transaction value is approximately US$6 billion.

Operating in South Korea since 1999, and with more than 1,000 retail outlets across the country, Homeplus is one of the largest multi-channel retailers in Korea and the number two player in both hypermarkets and supermarkets.

“We are pleased to invest alongside our longstanding partner, MBK Partners, in one of the leading retailers in South Korea,” said Pierre Lavallée, Senior Managing Director & Global Head of Investment Partnerships, CPPIB. “Homeplus is an attractive investment for CPPIB as it provides us with access to one of the largest retail markets in Asia through a well-established business with a strong cash flow profile.”

CPPIB has been investing in South Korea since 2008 and it remains a key investment market for CPPIB in Asia.

We don’t know the multiples of the deal but Tesco bagged £4 billion in the sale and there are some interesting details behind the deal:

The buyer, Asian private equity firm MBK, is understood to have beaten two other bidding groups – Affinity Equity Partners (which was working with US giant KKR), and Carlyle Group – to snap up Homeplus, once considered the jewel in Tesco’s crown.

MBK, which a led a consortium that included South Korea’s National Pension Service, the Canada Pension Plan and Singapore’s Temasek, will pay just over £4 billion before tax and other transaction costs, Tesco said in a statement.

Overall the deal gives Homeplus an enterprise value of £4.2 billion, it added.

The sale is part of a turnaround plan masterminded by Tesco chief executive Dave Lewis.

He took the helm a year ago after the grocer was hit by a £263 million accounting scandal and began urgent efforts to restore the company’s balance sheet.

Today Lewis, a former executive at Unilever, said: “This sale realises material value for shareholders and allows us to make significant progress on our strategic priority of protecting and strengthening our balance sheet.”

HSBC acted as the lead financial adviser on the transaction, while Barclays’ investment bankers were financial advisers and sponsor to Tesco for the deal.

Indeed, this deal will help Tesco reduce its net debt by as much as £3.35bn and it will provide CPPIB, PSP, South Korea’s National Pension Service and Singapore’s Temasek with a stake in a solid company in the consumer staples industry which will provide these funds stable cash flows over a long investment horizon.

As Sara Hemrajani of Reuters reports, it’s the retail giant’s first major disposal since it hit financial difficulties and decided to focus on its troubled domestic business. If you have problems viewing this clip, click here.

Also, South Korean news reports on the deal. “The purchase that marks the largest ever takeover deal in Korea comes as the British company suffers from falling sales and rising debt. Tesco is the latest global retail giant to pull out from Korea, following Walmart and Carrefour.”

Kind of makes you wonder why are these global retail giants pulling out of South Korea? Anyways, I trust MBK which a led the consortium on this deal, knows what it’s doing and that over the long-run, this will prove a very successful deal for all parties involved.

 

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Market volatility made August a rough month for pension plans in the private and public sector, according to a BNY Mellon report.

The funded status of the average corporate plan fell 2.4 percent last month, according to the report. Meanwhile, public sector plans lost 4.1 percent of their value.

More from BenefitsPro:

According to BNY Mellon Fiduciary Solutions, the funded status of the typical U.S. corporate pension plan fell 2.5 percentage points, thanks to asset values that fell faster than liabilities, benefiting from widening credit spreads.

In fact, funded status dipped as low as 81.2 percent on August 24, according to the firm, but it has since recovered some of its lost ground.

Because asset values were down, public plans, endowments, and foundations failed to meet their targets. Public defined benefit plans missed August return targets by 4.7 percent, because assets fell by 4.1 percent, according to the August BNY Mellon Institutional Scorecard.

[…]

“The second half of August served as a wakeup call to investors who had been lulled to sleep by several months of low volatility in the markets,” said Andrew D. Wozniak, head of BNY Mellon Fiduciary Solutions, in a statement. “Corporate defined benefit plan sponsors were somewhat insulated from the full brunt of the volatility due to rising credit spreads, which led to a decline in liabilities.”

Wozniak added, “The decline in asset values that hit typical public defined benefit plans, endowments and foundations was primarily due to poor equity performance across the globe. Weakness in China is likely to emerge as the culprit behind the declines.”

Read the BNY press release here.

 

Photo by www.SeniorLiving.Org 

Towers Watson and Pensions & Investments released their “Global 300” report this week, in which they update us on the assets of the 300 largest pension funds in the world.

Click here to view the abstract for the report, and click here to download a PDF of the report itself and view the various insights — including the increased prominence of DC plans on the list.

Here’s a list of the 40 largest pension funds on earth:

 

Feature Photo by  Horia Varlan via Flickr CC License

Standard & Poor’s Ratings Services last week lowered Kentucky’s credit rating to A+ — the third lowest rating in the nation, behind only Illinois and New Jersey.

The reasoning for the downgrade, S&P explained, was the “chronic underfunding” of the state’s pension system by lawmakers.

From the Courier-Journal:

“The downgrade reflects our view of Kentucky’s substantially underfunded pension liabilities that are the result of chronic underfunding and that we view as placing long-term pressures on the state’s finances …” said S&P credit analyst John Sugden in a news release on Thursday. “Despite pension reform efforts that began in 2008, Kentucky lawmakers have yet to make meaningful progress in reducing its long-term pension liability, especially as it relates to Kentucky Teachers’ Retirement System.”

[…]

Kentucky Teachers’ Retirement System has about $14 billion in unfunded liabilities, and KTRS officials have said the system needs about $500 million more per year from the state to dig out of the hole. This summer, Beshear created a task force to study the problem and recommend solutions before he leaves office in December.

The Kentucky Retirement Systems for public employees has reported unfunded liabilities of about $17 billion. Lawmakers have passed reforms to shore up its problems, but it too will be seeking more state funding in the next state budget.

Moody’s Investors Service and Fitch Ratings have both assigned Kentucky a slightly higher rating than S&P.

 

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A long-sought CalSTRS rate increase, more than doubling the bite from school districts, is the reason given last week for a proposal to increase the lump-sum death benefit, unchanged in the last 13 years.

The CalSTRS board, unlike most California public pensions, lacks the power to raise employer rates, needing legislation instead. But the board is authorized to make annual increases in the lump-sum death benefit to keep pace with inflation.

Because the system is underfunded, the CalSTRS board has made no inflation adjustment in the death benefit since 2002. The board was told that it could have increased the death benefit by about 34.7 percent during the period.

One level of coverage with a payment of $6,163 would have increased to $8,299, the payment for another from $24,652 to $33,196. The long-term CalSTRS actuarial obligation would have increased by $238 million.

Now the big phased-in rate increase enacted last year for school districts, with smaller increases for teachers and the state, allows the California State Teachers Retirement System to project reaching a funding level of 100 percent by 2046.

Last week the staff, responding to an earlier board request, recommended a plan to resume death benefit inflation adjustments, but only in years with better-than-expected investment returns.

The funding level could not drop below the path to full funding scheduled in the rate hike legislation. For example, the schedule expects 64.5 percent funding this year, and the latest funding level as of last year is 68.5 percent.

If the board had approved the plan, the death benefit could have been increased enough to drop the funding level back to 64.5 percent. But action was delayed until next April, mainly due to opposition from Gov. Brown’s appointees on the board.

The issue is not likely to go away. A retired school administrator, Dave Davini, told the board CalSTRS members would like some assurance that the board will continue to try to restore the original purchasing power of the death benefit if funding is available.

“What members are interested in is enhancing that benefit and keeping that benefit as the legislation originally intended,” Davini said.

The lump-sum benefit is regarded as a “vested right” that cannot be cut if increased. Pension boards also have a fiduciary duty under the state constitution (labor-backed Proposition 162 in 1992) to give member benefits priority over taxpayer costs.

Using a temporary funding “surplus” to pay for increased benefits or cuts in employer rates is a long-standing practice in the management of California’s public pension funds.

Twenty county retirement systems operate under a 1937 act that allows “excess” earnings, amounts exceeding 1 percent of total assets, to be diverted for retiree bonuses, retiree health care or lowering employer contributions.

Some city retirement systems allow a “13th check” bonus for retirees, if investment earnings exceed the annual forecast. In San Jose, the bonus check was eliminated by a pension reform approved by voters three years ago.

Two CalPERS funds that used “excess” earnings to maintain pension purchasing power, the Extraordinary Performance Dividend Account and the Investment Dividend Disbursement Account, were replaced by a different program in 1991.

As its funding soared to 138 percent during a boom in the late 1990s, CalPERS cut employer rates to near zero and sponsored a retroactive pension increase, SB 400 in 1999, telling legislators the surplus and “superior” earnings would cover the cost.

Under a lesser-known bill, AB 1509 in 2000, a quarter of the teacher contribution to CalSTRS (2 percent of pay from the total of 8 percent) was diverted for a decade into a new individual investment account with a guaranteed minimum return.

The Legislature was told, in an echo of the CalPERS claim for SB 400, that a decade-long diversion of a quarter of the teacher contribution would have “no effect to the solvency of STRS” and the cost would be absorbed by a funding surplus.

The CalSTRS individual investment account created by the bill, the Defined Benefit Supplement, and a similar account for part-time teachers, the Cash Balance Benefit, can be awarded additional earnings credit if there is “excess” funding.

After an analysis of the impact on long-term funding, the CalSTRS board last April adopted a tighter policy for awarding additional credit to the two individual investment accounts.

Last week, the board decided to get a similar actuarial analysis of the long-term funding impact before considering an increase in the death benefit next April, a move suggested by a Brown representative.

“I recognize the issue you have raised about constituents and the concern that it hasn’t been raised in a long time,” Eraina Ortega of Brown’s finance department said during the board discussion.

“I completely respect and understand that view,” she said. “But it feels to me that our primary concern ought to be the funding status overall before we consider any benefit changes.”

Paul Rosenstiel, a Brown appointee, reminded his colleagues that CalSTRS is considering shifting up to 12 percent of its portfolio, about $20 billion, to investments with less risk of big losses that could lower the funding level.

“Our investment consultants are saying we can move (the funding level) in the wrong direction and not be able to recover,” Rosenstiel said. “That’s what they told us yesterday.”

Controller Betty Yee and Treasurer John Chiang’s representative, Grant Boyken, agreed with the proposal to get an actuarial analysis of death benefit increases under the current policy that uses the consumer price index as a guide.

A CalSTRS staff survey of death benefits provided by 22 retirement systems throughout the nation, including one in Canada, found that CalSTRS is among the more generous.

Most of the retirement systems offer some form of continuing income to the survivors of retirees. Fewer provide income to the survivors of active workers. CalSTRS does both.

“In addition, only slightly more than half of the plans investigated provide a one-time lump-sum death benefit, other than the return of contributions and interest in the member’s account, to survivors of members who die while in active service and less than half provide a similar benefit to members who die after retiring,” said the staff report.

The standard lump-sum death benefit for members of the California Public Employees Retirement System is the return of contributions with interest.

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.

 

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