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Pension Transparency Bill Moves Forward in Kentucky House

A bill is moving forward in the Kentucky House that would increase the transparency around investments made by the state’s retirement systems.

The Senate unanimously passed the measure last month.

The bill would require the state’s pension funds to disclose the use of placement agents, any fees paid to those agents, and more. An official summary of the bill from Legiscan:

[The bill] require[s] the Judicial Retirement Plan, the Legislators’ Retirement Plan, the Kentucky Retirement Systems, and the Kentucky Teachers’ Retirement System to establish by reference in administrative regulation a placement agent disclosure policy; require the policy to disclose, at a minimum, to the boards of trustees of the plans and systems the name of the placement agent, dollar value of investment, and the fees or payments made to placement agent for each investment in which a placement agent was utilized; define placement agent; require the plans and systems to submit a quarterly update of the information disclosed to the respective boards of trustees to the Government Contract Review Committee; provide that the disclosure shall apply to contracts established or renewed on or after July 1, 2015.

The Senator sponsoring the bill, Chris McDaniel [R], told the State-Journal:

“The fact of the matter is there is nothing that forces them to disclose this to the General Assembly right now and by extension the public,” McDaniel said. “It’s important people know where money is and isn’t placed, the kinds of returns we are getting and to really force that.

“This will require that they do these things. It’s a bill that public employees want to see pass. It’s a bill transparency advocates want to see pass be it conservative, liberal or otherwise. People want to know how their tax dollars are being spent. I’m optimistic the House will pick it up.”

The bill is called Senate Bill 22.

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Actuaries Call on Obama to Address Aging Issues, Retirement Security in State of the Union

The American Academy of Actuaries is urging President Obama and the U.S. Congress to tackle retirement security issues through public policy over the next two years.

That includes addressing the solvency of Social Security, improving the governance and disclosure requirements of public pension plans, and ensuring adequate retirement income for seniors who are living longer.

From the AAA:

The American Academy of Actuaries is calling on the president and the 114th Congress to commit to a focus in the next two years on addressing the needs of an aging America. A concerted national strategy on policies to support systems such as retirement security and lifetime income, health care and long-term care for the elderly, and public programs such as Social Security and Medicare, is long overdue.

[…]

As President Obama prepares to address Congress and the American people this evening, the Academy (which celebrates its own 50th anniversary this year) would point out that the state of our union is inextricably linked to the demographic transition of proportionately greater numbers of Americans entering retirement, coupled with increased longevity, or life expectancies, that will compound the fiscal challenges to both private systems and public programs in the years to come.

The AAA goes on to provide specific points that comprise a public policy “wish list”:

* Take immediate steps to address solvency concerns of key public programs like Social Security and Medicare to ensure that they are sustainable in light of changing demographics. The Academy also urges action to allow the disability trust fund to continue to pay full scheduled disability benefits during and beyond 2016.

* Evaluate and address the risk of retirement-income systems not providing expected income into old age, especially in light of increasing longevity. The Academy’s Retirement for the AGES initiative provides a framework for evaluating both private and public retirement systems, as well as public policy proposals.

* Encourage the use of lifetime-income solutions for people living longer in retirement. The Academy’s Lifetime Income initiative supports more widespread use of lifetime-income options.

* Improve the governance and disclosures regarding the measurements of the value of public-sector (state/municipal) employee pension plans. The Academy’s Public Pension Plans Actuarial E-Guide provides information on the nature of the risks and the complex issues surrounding these plans.

* Explore solutions to provide for affordable long-term care financing, and address caregiver needs and concerns through public and/or private programs.

* Address the impact of delayed retirement, either voluntary or through future retirement age changes, on benefit programs, as well as the needs it may create with increased demand for early retirement hardship considerations and disability income programs.

Read the full release here.

UK Parliament May Require Pensions to Disclose Contracts With Asset Managers

UK pension funds could soon be facing higher transparency standards after Parliament members proposed measures recently to force pension funds to disclose contracts with asset managers.

From Investments and Pensions Europe:

Michael German, a Liberal Democrat peer in the UK upper house, tabled an amendment to the current Pension Scheme Bill – legislating for the introduction of defined ambition schemes – to allow members of trust schemes to request details of voting behaviour and the “selection, appointment and monitoring” of asset managers.

Nick Bourne, government whip in the Lords, said the amendments would go much further than currently proposed increases to scheme transparency, but that there was nonetheless merit in further examining all ideas tabled by German.

“However, we consider that greater transparency in relation to costs and charges, as well as about how schemes manage their investments, go hand in hand,” he said.

“As such, they would be better considered together as part of the same well-established transparency work programme, which is already under way and we are committed to consult on later this year.”

He said legislating for German’s proposals before the other changes surrounding fee disclosure came into force in April would risk introducing transparency in a “piecemeal and uncoordinated way”.

“Introducing these requirements through the amendment would remove the opportunity to consult all relevant stakeholders,” he said.

Instead, Bourne said the government would include the proposals in a forthcoming consultation planned by the Department for Work and Pensions, and could then potentially enact any changes as regulation.

ShareAction, which had been working with German on the amendment, welcomed the government’s commitment.

The responsible investment charity’s chief executive Catherine Howarth said: “We warmly welcome the government’s commitment to action that will give UK pension savers long overdue rights to information about what happens to their money.

“We urge pensions minister Steve Webb to move swiftly to set a consultation timetable to make these rights a reality in 2015.”

Read more about the proposed transparency standards here.

Photo by @Doug88888 via Flickr CC License

How Can Troubled California Cities Address Rising Pension Costs?

Matthew Covington penned a column for the Sacramento Bee on Thursday that dives into California’s recent spree of municipal bankruptcies — and postulates that, with pension costs rising, bankrupt cities of the future may not opt to preserve pensions the way Vallejo, Stockton and San Bernardino did.

Covington is a managing director at Conway MacKenzie, a financial firm that advises distressed governments. He proposes two possible solutions that could help troubled municipalities deal with pension costs. His ideas:

– Establish a protocol for restructuring municipal pensions out of court.

For troubled municipalities, pensions are typically the single largest expense, the most intractable and the most uncontrollable (because CalPERS determines what the municipality will pay each year). If CalPERS decides to change its investment return or mortality assumptions, or its investment performance suffers, the municipality will have to pay more, regardless of its own activities. If a municipality is in dire straits and cannot meet its obligations, an orderly restructuring would likely be superior to a bankruptcy filing.

This could save tens of millions of dollars for the city in fees on lawyers and other advisers. Additionally, plans could be tailored to minimize the impact on vulnerable groups such as the elderly and long-retired pensioners whose pensions were set in the premillennial sane era, something which might not be possible in a bankruptcy case.

– Provide uniform budgeting rules and guidance.

Too many municipalities have made promises that jeopardize their long-term fiscal health. While no one wants another bureaucracy meddling in local affairs, the task force could establish certain basic rules such as requiring municipalities to have long-term budget forecasts that clearly show pension expenses and require additional disclosure when a threshold is crossed.

For example, municipalities whose pension expenses exceed 20 percent of total expenditures (the levels at which voters in the non-CalPERS cities of San Jose and San Diego ratified pension amendments) could be forced to explain why the expenditure levels do not threaten the city’s financial stability.

The costs of municipal bankruptcies are borne not just by the creditors who invested in these cities, but also by residents hit with plummeting property values and deteriorating services. California can do more to protect its citizens from these failures. Let’s put systems in place to ensure this dangerous game isn’t played again.

Read the full column here.

Photo by Pete Zarria via Flickr CC License

Pension Funds: Hedge Funds Should Meet Benchmarks Before Charging Fees

Pension funds and other investors called for changes Tuesday in the way hedge funds charge fees.

The proposed changes were outlined in a statement by the Alignment of Interests Association (AOI), a hedge fund investor group to which many pension funds belong.

The group said that hedge funds should only charge performance fees when returns beat benchmarks, and that fee structures should better link fees to long-term performance.

More details from Bloomberg:

The Teacher Retirement System of Texas and MetLife Inc. are among investors that yesterday called on managers to beat market benchmarks before charging incentive fees in a range of proposals that address investing terms. Funds should base performance fees on generating “alpha,” or gains above benchmark indexes, and impose minimum return levels known as hurdle rates before they start levying the charges, said the Alignment of Interests Association, a group that represents investors in the $2.8 trillion hedge fund industry.

“Some managers are abiding by the principals to some extent but we are hoping to move everyone toward industry best practices,” said Trent Webster, senior investment officer for strategic investments and private equity at the State Board of Administration in Florida. The pension plan, a member of the association, oversees $180 billion, of which $2.5 billion is invested in hedge funds.

[…]

To better link compensation to longer-term performance, the AOI recommended funds implement repayments known as clawbacks, a system in which incentive money can be returned to clients in the event of losses or performance that lags behind benchmarks. The group said performance fees should be paid no more frequently than once a year, rather than on a monthly or quarterly basis as they are at many firms.

AOI also called on the hedge fund industry to lower management fees – or make operating expenses more transparent so higher management fees can be justified. From Bloomberg:

Management fees, which are based on a fund’s assets, should decline as firms amass more capital, the investor group said.

“We need good managers, not asset gatherers,” Webster said. “The incentives are currently skewed.”

[…]

Firms should disclose their operating expenses to investors so they can assess the appropriateness of management fee levels, the group said.

“Management fees should not function to generate profits but rather should be set at a level to cover reasonable operating expenses of a hedge fund manager’s business and investment process,” the AOI said.

The fees should fall or be eliminated if a manager prevents clients from withdrawing money, according to the group.

Hedge funds typically utilize a “2 & 20” fee structure; but in the second quarter of 2014, hedge funds on average were charging “1.5 & 18”.

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Do Public Pensions Need Federal Regulation?

The federal law ERISA – the Employee Retirement Income Security Act of 1974 – regulates many aspects of private pension plans.

Should public pension funds be beholden to similar federal regulation? Alicia H. Munnell of the Center for Retirement Research explored this issue in a recent column published on MarketWatch.

Munnell writes:

In a recent meeting, an expert very supportive of public-sector employees raised the question of PERISA. These initials are shorthand for federal regulation of state and local pension plans—essentially extending some or all of the Employee Retirement Income Security Act of 1974 (ERISA), which covers private-sector retirement plans, to the public sector.

I had not thought about such legislation since the early 1980s, and am not sure how I feel about it. On the one hand, proposals these days with regard to federal regulation tend to have a punitive tone—focusing mainly on getting public plans to stop using excessively high discount rates. On the other hand, serious underfunding in some plans is usually the result of delinquent behavior on the part of the sponsor.

So some regulation might be helpful, particularly now that the Governmental Accounting Standards Board (GASB) has clarified that its financial reporting standards do not constitute funding policy guidance, leaving a vacuum when it comes to public pension funding policies. But it is not clear that federal legislation could actually include funding requirements.

Munnell explores the origins of ERISA, and the reasons the federal law wound up covering private plans:

Here’s what I remember from the old days. Originally, governmental plans were included along with private plans in the legislative proposals leading up to the passage of ERISA. In the end, Congress exempted public plans from the Act and instead mandated a study of retirement plans at all levels of government to determine: 1) the adequacy of existing levels of participation, vesting, and financing; 2) the effectiveness of existing fiduciary standards; and 3) the necessity for federal legislation. The study concluded that serious problems existed and that federal regulation was necessary.

The experts believed that the federal government had the constitutional authority under the Commerce Clause of the Constitution to regulate reporting, disclosure, and fiduciary standards of state and local plans. On the other hand, the imposition of funding standards might affect the fiscal operations of state and local governments in a way that could threaten the sovereignty of the states. Hence, early legislative efforts omitted any funding regulation.

Some form of public plan legislation was introduced in each of the next four Congresses. While reporting, disclosure, and fiduciary standards may sound dull and routine, the proposed federal regulation met with passionate opposition during its long legislative history in the early 1980s. Opponents claimed that most public plans were under large systems that were generally well managed, and the public sector had not seen the flood of participant complaints witnessed in the private sector. Supporters contended that major reporting and disclosure deficiencies still existed and that the problems would persist since a major conflict of interest often exists between the goals of elected officials and sound financial management. In the absence of adequate reporting and disclosure, public officials could grant generous benefit increases and shift the costs to future taxpayers.

The two sides battled it out for several years but, in the end, no legislation was enacted for the federal regulation of state and local plans. My sense at this point, three decades later, is that federal regulation would be useful given the importance of state and local plans to the economy and the well-being of millions of workers. But the effort to pass such a bill would be worthwhile only if the legislation included funding requirements. And only the lawyers know whether funding requirements could pass constitutional muster.

Read Munnell’s entire piece here.

Kentucky Teachers’ Pension Continues to Shield Investment Information From Public View

Pension360 covered last month the Kentucky teacher, Randy Wieck, who is suing the Kentucky Teachers’ Retirement System (KTRS) claiming the fund has “failed in their fiduciary duty” by letting the system become one of the worst funded teachers’ plans in the country.

Another component of his lawsuit deals with the lack of transparency surrounding the fund’s investments, a complaint of many stakeholders. Last week, KTRS stoked the flames of that complaint by denying Wieck access to contracts with investment firms.

Reported by the Kentucky Center for Investigative Reporting:

Randolph Wieck, a history teacher at DuPont Manual High School, sent an open records request Oct. 28 to the Kentucky Teachers’ Retirement System, which covers more than 140,000 school system workers statewide. Wieck asked for details of the contracts with some of the investment firms that manage part of KTRS’ $18 billion-plus in assets.

Wieck, who recently filed a lawsuit against the teachers’ pension system, wants to know what his retirement money is being invested in—and how much in fees KTRS is paying to big private equity firms. Among the funds he asked for details on were the Carlyle Global Financial Services Partners II fund and the Blackstone Partners VII L.P. fund.

KTRS denied his request in a Nov. 26 letter. Because KTRS agreed with the investment firms to keep contract details secret, it told Wieck that state law forbade it from disclosing them.

“Disclosure of these trade secrets would permit an unfair commercial advantage to their competitors,” wrote KTRS General Counsel Robert Barnes.

KTRS manages $17.5 billion in assets. The system was 51 percent funded in 2013 — but that ratio could drop to as low as 40 percent once the system begins measuring liabilities according to new GASB standards.