accountability | Pension360

Pennsylvania Lawmaker Pushes For Pension Reform Action Before New Governor Takes Office

Pennsylvania Gov-elect Tom Wolf, in stark contrast to his predecessor Tom Corbett, has been adamant that he is not on board with any sweeping changes to the state’s pension system.

But Wolf doesn’t take office until Jan. 20 – and some Republican lawmakers are still pushing for a quick passage of reform legislation before Wolf takes his seat.

Senator John H. Eichelberger Jr. [R] wrote in PennLive recently:

Gov.-Elect Tom Wolf has not yet set forth any legislative priorities, nor have his public statements provided any proposals to address the major concerns facing our state, including our greatest fiscal challenge — the pension crisis.

Given the magnitude of these problems, I urge the House and Senate leadership to reconvene both bodies immediately after the installation of new members and aggressively advance a pro-growth/good government agenda for the citizens of Pennsylvania.

The problems facing Pennsylvania are so pressing that waiting weeks more to address them is a disservice to the taxpayers.

The Legislature’s commitment eight years ago to not return for Sine Die session in the fall has been important for all the right reasons.

Sine Die sessions have been outlawed in many states because of their lack of accountability since outgoing members do not have to answer to the voters. An interregnum session in January poses no such concern.

The governor has no formal role in the legislative process and has no authority to act until after a bill, passed by a legislature representing the people, is sent to his desk for signature.

Waiting for Gov.-elect Wolf to take office before addressing the pressing needs of our state would be unnecessary and, some might argue, irresponsible.

Rep. Mike Tobash, R-Schuylkill introduced a bill in the previous session that would shift some employees into a 401(k)-style system.

But any sweeping pension reform proposals are unlikely to go anywhere under Tom Wolf, who says the state’s previous reforms need time to work.

Chicago Prepares For Pension Payment Spike, Creates Account to Set Aside Funds

Chicago must pay an additional $565 million in payments to its police and fire pension fund by 2016 – a fiscal strain that hasn’t yet been budgeted for.

But the city has now taken a step towards acknowledging the looming payments, by opening up a separate account in which money will be set aside for the pension contributions.

From Crain’s Chicago:

The Emanuel administration will start setting set aside money next year in a newly segregated account for increased pension contributions for municipal employees and laborers who agreed to reforms enacted earlier this year.

The city’s increased contribution from general revenues will be set aside in the new account even though the pension payment isn’t due until 2016, according to an Emanuel spokeswoman. However, increased payments required for its police and fire pensions next year aren’t even in the budget as negotiations continue with union leaders.

[…]

While it’s largely symbolic—the city must make the payments with or without a special fund setting them aside—it’s meant to highlight that the reforms are real and going into effect soon, even as the Illinois Supreme Court agreed Dec. 10 to expedite a case testing whether public worker pensions are totally protected by the Illinois Constitution.

While a segregated fund is a responsible thing to do, “it completely ignores the fiscal irresponsibility of not budgeting for police and fire pensions,” said Amanda Kass, research director at the Center for Tax and Budget Accountability in Chicago. “It sets up the potential for a huge fiscal nightmare” when about $565 million in additional payments for next year’s police and fire pension contributions are due in 2016.

Money for the fund will come from sources other than property taxes, including money freed up by an increased surcharge for 911 calls and miscellaneous small budget cuts, the spokeswoman said. Emanuel was forced to back off his original plan to finance the city’s increased contribution with a big hike in property taxes when Gov. Pat Quinn objected.

It was originally thought that a property tax hike would be the go-to method of revenue generation to raise money for the pension payments. But Emanuel has been adamant that property taxes won’t be raised.

Newspaper: Kentucky Pension Officials Have “Forgotten Whom They Work For”

Pension360 has covered the push in recent weeks by several Kentucky lawmakers to make the state’s pension system more transparent.

The secrecy surrounding Kentucky’s pension investments is well documented, and the issue has even spurred a lawsuit.

One Kentucky newspaper wrote Tuesday that pension officials have “forgotten whom they work for” – the public.

The Herald-Dispatch editorial board writes:

Apparently, [pension officials] are in sore need of a reminder that they are employed to serve the public and, as such, how they conduct their business should be open to scrutiny by the public.

[…]

Some want to know more about how the pension funds operate. As of now, Kentucky law allows the systems to operate partly shielded from the public. For example, the public is not allowed to know how much is paid out to individual retirees, nor does the systems have to reveal how much they pay out in fees to individual hedge fund managers who are investing the pension money and other external investment advisers. But we do know they are paying out hefty sums, to the tune of $55 million last year to investment management firms.

The public has a right to know both of those aspects of the pension system.

[…]

Private investment companies doing business with governments also must realize who’s paying their fees and that accountability comes with gaining contracts with government-run pension systems. The excuse put forth by Kentucky officials and others about how revealing the investment companies’ contracts would reveal “trade secrets” doesn’t hold up. That argument simply is not sufficient to conceal how much money they are making from taxpayers and the public employees who contribute to the systems. Until that information is revealed, the public has no way to know whether it’s getting its money’s worth from those companies.

A couple of Kentucky lawmakers plan to introduce bills next month that would require the pension systems to use the state’s competitive bidding process, disclosing terms of the deals and the proposed management fees, as well as shed more light on the pension payouts to the state’s lawmakers. All of those requirements would be steps in the right direction and should be put into law.

Read the full piece here.

Questions Raised About “Dual Structure” of Governance At San Diego Pension Fund

Most of the news surrounding the San Diego County Employees Retirement Association (SDCERA) has been about the board’s decision to move on from its outsourced CIO, Salient Partners.

But also noteworthy are parts of SDCERA’s governance structure. At least one expert has raised concerns about the effectiveness of the fund’s “dual” reporting structure.

Dan McSwain of the San Diego Union-Tribune writes:

Structural woes were the main take-away from a parade of experts at a two-day workshop held last month by the system’s nine-member board of trustees.

[…]

One expert at the workshop, hired by the board to evaluate its governance, said the chief executive wasn’t clearly accountable for the fund’s investments. Indeed, the Houston-based chief investment officer appeared to report directly to the board.

This “dual structure” is found almost nowhere else. Instead, the CIO reports to the CEO, in a straight line of authority, at nearly every public or corporate pension fund in the world, not to mention insurance companies and private endowments.

Another expert said conflicts of interest were “inherent” in the county’s outsourced investment management structure. Yet another questioned the oversight of the retirement system’s outside lawyers, one of whom also reports directly to the board.

Still, the most obvious problem was the one nobody talked about, at least explicitly: Responsibility for this chronic buck-spreading lands squarely on White, the chief executive officer since 1996. If the county’s pension system has structural flaws, it’s hard to imagine how that’s not also a CEO problem.

Fund CEO Brian White defended the structure:

The outsourced CIO, Lee Partridge of Salient Partners, does in fact report to the CEO, White said, so the system already had the “linear” structure recommended by several governance experts.

“We’ve had a linear structure here, and I think what the board did Friday was confirm or reaffirm the linear structure,” he said, referring to the board’s vote on Nov. 21 to hire an internal CIO and have the position report directly to the chief executive.

White also said that, acting as investment strategist, Partridge was indeed supervising his own firm’s direct management of leveraged investments. But this wasn’t the “inherent” conflict of interest one expert asserted, because no money changed hands as additional fees, White said. Besides, the board of trustees endorsed the idea.

“I’m here to serve the board and support their decision,” he said. “That’s what they wanted.”

SDCERA manages $10.5 billion in assets.

Photo by Roland O’Daniel via Flickr CC License

NYC Comptroller Explains Boardroom Accountability Project in Open Letter

New York City Comptroller Scott Stringer is pushing corporations to give their biggest investors – often pension funds – more power over corporate boardrooms.

Stringer says pension funds can use their leverage as large shareholders to rein in excessive executive compensation and make corporate boards more diverse.

From a piece written by Stringer in Wednesday’s Daily News:

In partnership with the city’s pension funds, recently launched the Boardroom Accountability Project, a national initiative designed to improve the long-term performance of American companies by giving shareowners the right to nominate directors using the corporate ballot — also known as proxy access.

Proxy access promises to transform corporate elections from rubber-stamp affairs, where one slate of candidates is listed on an official ballot determined entirely by current officeholders, to true tests of merit and independence.

Bringing accountability to the boardroom will have real benefits for the retirement security of millions of Americans, including the 700,000 municipal workers , retirees and their beneficiaries who rely on city pension funds.

A recent report by the CFA Institute, the world’s largest association of investment professionals, concluded that on a marketwide basis, bringing more democracy to the boardroom could increase U.S. market capitalization by up to $140 billion.

We have focused our initial list of 75 companies being targeted around three core issues: those with excessive CEO pay, those with little or no gender or racial diversity on their board, and many of our most carbon-intensive energy companies. They include Urban Outfitters, ExxonMobil, Abercrombie & Fitch and Netflix.

Excessive CEO pay is a problem in itself and can create perverse incentives for management to focus on short-term profits at the expense of long-term value creation. It is also often a sign of a captive board that puts the interests of management ahead of the interests of shareholders.

And while most agree that more diverse boards make better decisions, the pace of change is glacial. In 2006, women made up 11% of S&P 1500 board seats. By last year, that number had barely budged (to 15%), and also as of last year, 56% of S&P 100 companies had no women or minority-group members in their highest-paid senior executive positions.

That’s bad for business, investors and our economy, and we will use our leverage to change it.

Lastly, we know that transitioning the world’s energy production to low-carbon sources is essential if we are to stem the most extreme effects of climate change. But the CEOs of the world’s major energy companies have little incentive to make investments that may reduce earnings today to protect their companies’ long-term prosperity.

In corporate America, the buck stops with the board. As a result, the right of shareowners to nominate and elect truly independent directors that reflect a diversity of viewpoints is critical to ensuring that the interests of long-term shareowners triumph over the pressure for short-term gains that all too often drives decisions at our largest corporations.

Read the whole piece here.

CalPERS, New York Pensions Lead Push To Give Largest Shareholders More Control Over Corporate Boardrooms

Pension funds are often among a corporation’s largest shareholders, a position that gives them unique ability to influence corporate decision-making and governance.

But a handful of the nation’s largest public pension funds are leading a push for more oversight over corporate governance – namely, the ability to hire and fire a company’s director.

From the New York Times:

Weary of what they see as a dysfunctional dynamic, a band of institutional shareholders is mounting the first push ever at 75 United States companies to allow investors to hire and fire directors directly. The plan is intended to bring greater accountability to corporate boardrooms and eliminate some of the “clubby” aspects for which they have been criticized.

Leading the drive is Scott M. Stringer, the New York City comptroller and a Democrat, who oversees five municipal public pension funds with $160 billion in assets — much of it invested in the kinds of companies his effort will target. His office will submit a proposal at each of the 75 companies, asking the company to adopt a bylaw allowing shareholders who have owned at least 3 percent of its stock for three years or more to nominate directors for election to the board.

Among the 75 companies targeted by Mr. Stringer are eBay, Exxon Mobil, Monster Beverage and Priceline. None of the companies commented on the comptroller’s shareholder proposal.

[…]

“The bottom line is, friends still put friends on boards,” Mr. Stringer said in an interview Wednesday. “My job as a long-term investor is to make sure that these companies truly represent the interest of share owners.”

The effort by the New York City pension funds will focus on companies that have been unwilling to change practices in three areas: board diversity, climate change and executive compensation. Companies with no women as directors or those with little or no ethnic diversity were identified, along with companies whose shareholders had recently expressed dissatisfaction with executive pay practices but had done nothing to address them. On climate change, more than a third of the companies identified by the shareholder group are in the energy industry.

The proposals will be put to shareholder votes at the companies’ annual meetings in the coming months. While the companies would not be required to adopt the bylaw even if a majority of shareholders voted for it, advocates say the boards would be more likely to go along with the idea if it won strong support from shareholders.

Scott Stringer is leading the charge, but he has other powerful pension funds on board, including CalPERS. From the NY Times:

Working with Mr. Stringer’s office to drum up support are officials at the California Public Employees’ Retirement System, the nation’s largest public pension fund. Calpers said it would hire a proxy solicitor to discuss the proposal with other institutional shareholders. “We view this as a five-year project and will be back again and again as needed,” said Anne Simpson, senior portfolio manager and governance director at Calpers. “But making the commitment and getting an alliance formed on this issue is so important.”

Public pension overseers in other states, including Connecticut, Illinois and North Carolina, are also supporting the effort.

Pension360 covered last week how CalSTRS, CalPERS and New York’s largest pension systems were upset over governance changes at Bank of America.

Fiduciary Capitalism, Long-Term Thinking and the Future of Finance

John Rogers, CFA, penned a thoughtful article in a recent issue of the Financial Analysts Journal regarding the future of finance – and how pension funds and other institutional investors could usher in a new era of capitalism.

From the article, titled “A New Era of Fiduciary Capitalism? Let’s Hope So”:

From my perspective, a new era of capitalism is emerging out of the fog. What I define as fiduciary capitalism is gathering strength and needs to become the future of finance. An era of fiduciary capitalism would be one in which long-term-oriented institutional investors shape behavior in the financial markets and the broader economy. In fiduciary capitalism, the dominant players in capital formation are institutional asset owners; these investors are legally bound to a duty of care and loyalty and must place the needs of their beneficiaries above all other considerations. The main players in this group are pension funds, endowments, foundations, and sovereign wealth funds.

Fiduciary capitalism has several attractive traits. It encourages long-term thinking. As “universal owners,” fiduciaries foster a deeper engagement with companies’ management teams and public policymakers on governance and strategy. In textbook terms, they seek to minimize negative externalities and reward positive ones. Because reducing costs is easier than generating alpha, we can expect continued pressure on financial intermediaries to reduce costs. To be sure, there are considerable gaps to bridge between today’s landscape and fiduciary capitalism. Transparency and disclosure, governance of fiduciaries, agency issues, and accountability are all areas that need more work.

On barrier in the way of fiduciary capitalism: lack of transparency. From the article:

Too many institutional investors are secretive and do not disclose enough about their activities. Their beneficial owners (including voters, in the case of sovereign funds) need more information to make reasonable judgments about their operations. Similarly, far more transparency is needed in the true costs of running these pools of assets. Investment management fees and other expenses often go unreported. Too much time and energy is spent comparing returns with market benchmarks, and not enough is spent defining and comparing the organizations’ performances against their liabilities—or against adequacy ratios.

Pension governance itself needs to be improved. As Ranji Nagaswami, former chief investment adviser to New York City’s $140 billion employee pension funds, has observed, public pension trustees are often ill equipped to govern platforms that are effectively complex asset management organizations. Compensation remains a complicated issue. In the public sector, paying for great pension staffers ought to be at least as important as a winning record on the playing field, yet in 27 of the 50 US states, the highest-paid public employee is the head coach of a college football team.

Rogers concludes:

The future of finance needs to be less about leverage, financial engineering, and stratospheric bonuses and more about efficiently and cleanly connecting capital with ideas, long-term investing for the good of society, and delivering on promises to future generations. In the public policy arena, governments that promote long-term savings, reduce taxes on long-term ownership, and require transparency and good fiduciary governance can help hasten this welcome change in our financial markets.

The era of finance capitalism wasn’t all bad, and an era of fiduciary capitalism wouldn’t be all good. In a time when leadership in finance is desperately lacking, fiduciaries have the potential to reconnect financial services with the society they serve. Let’s hope it’s not too late.

Read the entire article, which is free to view, here.

Denmark Ramps Up Oversight Of Alternative Investments in Pension Systems

The entity that regulates Denmark’s financial system has announced plans to tighten oversight of alternative investments made by pension funds.

The move comes as regulators in the Financial Supervisory Authority have reported an uptick in risk, illiquidity and opacity in pension investments. From Bloomberg:

The Financial Supervisory Authority in Copenhagen will require pension funds to submit quarterly reports on their alternative investments to track their use of hedge funds, exposure to private equity and infrastructure projects. The decision follows funds’ failures to account adequately for risks in their investment strategies, according to an FSA report.

The regulatory clampdown comes as Denmark deals with risks it says are inherent to a system due to be introduced across the European Union in 2016. The new rules will allow pension funds to invest according to a so-called prudent person model, rather than setting outright limits. In Denmark, the approach has proven problematic for the only EU country to have adopted the model, said Jan Parner, the FSA’s deputy director general for pensions.

“The funds are setting up for their release from the quantitative requirements, but the problem is, it’s not clear what a prudent investment is,” Parner said in an interview. “The challenge for European supervisors is to explain to the industry what prudent investments are before the opposite ends up on the balance sheets.”

Denmark, which has almost two years of experience with the approach after its early adoption in 2012, says a lack of clear guidelines invites misinterpretation as firms try to inflate returns.

[…]

Danish funds and insurers have overestimated the value of alternative investments they made while failing to adequately account for the risks, the FSA said in a February report.

Pension funds held 152 billion kroner ($26 billion) at the end of 2012, or about 7 percent of their balance sheets, in equity stakes and other assets sold on markets the FSA characterized as illiquid, opaque and thin. The agency said they need to account better for those risks and ordered reports from the third quarter. PFA, Denmark’s biggest commercial pension fund, said today it invested in a shopping mall in western Denmark as part of a strategy to increase its presence in retail properties.

Denmark’s pension systems hold $500 billion in assets, collectively.

Photo: “Dannebrog”. Licensed under Creative Commons Attribution-Share Alike 2.5 via Wikimedia Commons

Few Details On New York Pension’s Partnership With Goldman Sachs As Comptroller Remains Quiet

New York State Comptroller Thomas DiNapoli, the sole trustee of the states $181 billion Common Retirement Fund (CRF), announced last month a partnership between the pension fund and Goldman Sachs.

CRF will give Goldman $2 billion to invest in global equities. But few other details have emerged about the partnership. That led one think tank, the Pioneer Institute, to push for more clarity. But the Comptroller’s office has remained mum on specifics. From Public Sector Inc:

The lack of transparency in portfolio management and the conspicuous absence of a board of trustees overseeing the investment process is troubling, if not perilous.

Matthew Sweeney, a spokesman for the comptroller’s office, answered some of a dozen questions about the GSAM deal. Here are a few of those he did not comment on, completely unedited:

– Which other investment management firms applied to the competitive bidding for the $2 billion allocation?

– What were the specific criteria on the basis of which GSAM was selected?

– Can you share the investment policy sheet that was publicized as part of the RfP for this portfolio segment? This would include targets like concentration risk and counterparty risk limits as well as a number of other parameters related to the asset classes included, long/short ratios, other risk metrics, geographies and other relevant characteristics of the desired portfolio.

– What are the performance targets in terms of risk and return for the performance-based compensation, if any?

– What are the benchmarks selected to evaluate the performance of this portfolio sleeve in the coming years?

Mr Sweeney did answer a question regarding the compensation structure in the contract – with the laconic: “Fees are disclosed on an annual basis.”

[…]

With so much pension money at stake, why didn’t Mr DiNapoli’s office publicize the selection process, a clear rationale for the investment and the performance objectives he has (or so one hopes) for Goldman? What value are Goldman’s undoubtedly well-compensated analysts and investment bankers supposed to add?

The so-called partnership “will initially focus on dynamic manager selection opportunities in global equities to enhance returns” and then provide “improved analytics and reporting on its portfolio and enhanced evaluation and due diligence on current and potential active managers.” In other words, the CRF added a potentially expensive actively managed distraction for its global investment team days before CalPERS announced ditching its $4 billion hedge-fund allocation precisely because it was too small to make a dent in overall return and too expensive in terms of time and money to manage.

The bottom line is that, because of their sheer size, most pension funds can do little but focus on efficient cost and risk management. An open and competitive bidding process is essential to keeping costs down. And a critical part of risk management is having a robust, transparent and accountable investment process, which the CRF appears to be patently lacking. One need not look far afield to see where this sort of conduct ultimately leads.

The Common Retirement Fund paid $575 million in management fees in fiscal year 2013-14. The fund manages $181 million in assets.

You can read more coverage of the Goldman Sachs deal here and here.

New York Comptroller DiNapoli Touts Pension Reforms in Letter

New York State Comptroller Thomas P. DiNapoli is likely to win re-election to his post without much trouble, according to recent polls.

But amidst questions about conflicts of interest in the New Jersey pension system, DiNapoli seized an opportunity to tout his own pension reform measures in a letter to the editor of the Times-Union:

A recent commentary rightfully condemned the culture of “pay to play” in which politically connected financial executives gain access to public pension money in exchange for political campaign contributions (“Public pensions, politics don’t mix,” Oct. 3).

After I was appointed state comptroller, my top priority was to restore the office’s reputation after it was badly tarnished by a scandal based on this corrupt practice. We took immediate steps to set new standards and controls to codify ethics, transparency and accountability.

In time, we have returned the office’s focus to where it should be – on the investments and performance of the New York State Common Retirement Fund. This was accomplished by: Banning the involvement of placement agents, paid intermediaries and registered lobbyists in investments; issuing an executive order and pressing the U.S. Securities and Exchange Commission to prohibit “pay-to-play” practices; and expanding vetting and approval of all investment decisions.

I’m proud to say the latest independent review of the pension fund by Funston Advisory Services found it operates with an industry-leading level of transparency and that our investment team acts within ethical and professional standards.

This review is a validation that we are on the right path and should reassure the people of New York that the pension fund is being managed properly and ethically.

DiNapoli (D) is running against political newcomer Robert Antonacci (R).

Photo by Awhill34 via Wikimedia Commons

Deprecated: Function get_magic_quotes_gpc() is deprecated in /home/mhuddelson/public_html/pension360.org/wp-includes/formatting.php on line 3712