Public Pension Plans Return Assumptions Fall To Record Low

From a median average of 8% in 2010, the return assumptions of public pension plans have fallen to record low of 7.45% as of November this year, according to a report from the National Association of State Retirement Administrators (NASRA). The trend has placed even more pressure on the finances of state governments.

Here is an excerpt from a report filed in Chief Investment Officer:

Since 1987, public pension funds have accrued approximately $7 trillion in revenue, said NASRA, of which $4.3 trillion, or 61%, is from investment earnings, with 27%, or $1.9 trillion, coming from employer contributions, and the remaining 12%, or $844 billion, coming from employee contributions. Because public pensions rely on investment returns for a majority of their revenue, the lower the investment returns are, the more governments will have to spend to cover the shortfall.

Of the 128 public pension plans tracked by NASRA, only six still have investment return assumptions at the 2010 median of 8.0%, which is the highest assumed rate of return among the plans, and only 22 have assumed rates of returns of 7.5% or higher. A majority of the plans (69) have assumed rates of return that range between 7.0% and 7.5%, and 37 plans have assumed rates that are 7.0% or lower. Kentucky’s Non-Hazardous Employee Retirement System pension registered the lowest assumed rate of return at 5.25%, and was the only plan among the 128 with an investment return assumption below 6.25%.

How a Former NY Pension Director Hid His Pay-to-Play Scheme

Back in 2016, an investment director at the New York State Common Retirement Fund was indicted on charges of steering pension money towards certain brokers in exchange for monetary bribes and drugs, among other things.

But how did Navnoor Kang, 37, hide his funneling of millions of dollars in business to two brokers?

A report, released by the New York Comptroller’s Office, reveals how he kept his scheme under wraps.

From the Wall Street Journal:

A move from paper tickets to electronic trade confirmations allowed Mr. Kang to avoid listing the broker who executed the trades, according to the report. Under Mr. Kang’s watch, the pension fund also stopped producing weekly trade reports that identified the brokers involved.

Unlike his predecessor or his counterpart who managed the pension fund’s stock investments, Mr. Kang traded himself rather than direct his staff to do so, according to the report. This meant that no one approved his transactions.

Mr. Kang would instruct his brokers to send the electronic confirmations to his subordinates—creating “the false impression that most of these transactions were conducted by the investment staff and then approved by him,” the report said.

“Kang’s manipulation of the electronic trade process had ripple effects that he capitalized on to further conceal his alleged criminal activity,” the comptroller’s office wrote in the report.

Additionally, the report points the finger at top headhunting firm Korn Ferry for finding Kang in the first place. Ferry and pension fund officials both ignored several red flags from his previous employer.

Kang had been previously fired from Guggenheim for unclear reasons; but when Korn Ferry followed his references, they didn’t uncover anything too fishy.

From the Journal:

In December, a pension employee wrote to colleagues noting Korn Ferry officials said they reviewed Mr. Kang’s references and contacted his former employer. One of Mr. Kang’s references, according to the report, was Deborah Kelley, a saleswoman eventually indicted by federal prosecutors for bribing Mr. Kang. Ms. Kelley has pleaded not guilty and her lawyer didn’t respond to a request for comment.

In July 2015, Mr. Kang and the pension’s chief investment officer traveled to California and met with Guggenheim executives, among others, according to the report. The Guggenheim executives greeted Mr. Kang warmly, and a top executive with the firm told the CIO that his firm “may have been too harsh” to Mr. Kang, who had “made a mistake,” the report said.

But the executive wouldn’t expand on what Mr. Kang did wrong and, when confronted by the CIO, Mr. Kang said he had rebuffed the advances of another employee and had lost his job for failing to report a dinner, according to the report. Guggenheim used that infraction, he told the CIO, to “get rid of him.”

The Common Retirement Fund will be changing several policies in the wake of the scandal, including re-instating the weekly and monthly trade reports that list the brokers involved in each transaction. These reports are reviewed by higher-ups, and would have certainly prevented this scandal had Kang not circumvented them.

View the full report here.


Photo by Martin Raab via Flickr CC License

All Teachers Deserve Adequate Retirement Benefits. It’s Harder Than You Think To Get Them

Chad Aldeman is an associate partner at Bellwether Education Partners and a former policy advisor at the U.S. Department of Education. This post was originally published on

How many teachers should be eligible for adequate retirement benefits?

My answer is all of them: For every year they work, teachers should accumulate benefits toward a secure retirement.

A reasonable person might say only those who stay for at least three or five years. That would require teachers to show some amount of commitment to the profession, and it would reward teachers for getting through the most challenging early years.

But that’s not the way current teacher retirement systems are designed. Most states require teachers to stay 20, 25, or even 30 years before they qualify for adequate retirement benefits. (The Urban Institute’s Rich Johnson and I calculated these “break-even” points across the country. Find info on your particular state here.)

In other words, today’s teacher pension systems only provide adequate benefits to teachers with extreme longevity. You don’t have to take my word for it. The California State Teachers’ Retirement System (CalSTRS) hired Nari Rhee and William B. Fornia to study whether California teachers were better off under the existing pension system or alternative retirement plans.

The chart below comes directly from their paper. It shows how benefits accumulate for newly hired, 25-year-old females under the current pension system (blue line), a defined contribution plan (red line), a defined contribution plan with no employer contributions (dotted blue line), and a cash balance plan (dotted green line). There are legitimate questions about whether these are perfectly fair comparisons—Rhee and Fornia ignore the large debts accumulated under traditional pension plans—but even in this analysis, it’s clear that the pension system is the most back-loaded benefit structure. Some teachers do better under this arrangement, but most don’t. Depending on the comparison, this group of teachers must stay two or three decades before the pension system offers a better deal.

Rhee and Fornia make a valid point that not all teachers enter the profession at age 25, and their paper also includes the graph below showing the actual distribution of California teachers by the age at which they began teaching. The most common entry ages are 23 and 24, just after candidates complete college (California requires most new teachers to go through a Master’s program before earning a license). The median entry age for current teachers is 29 (meaning half of all teachers enter at age 29 or younger), and the average is 33.

Rhee and Fornia’s point here is that people who begin teaching at older ages have shorter break-even points, and that teachers with shorter break-even points are more likely to benefit. This has a kernel of truth but obscures some key points.

First, it is true pension plans are better for workers who begin their careers at later ages. Pensions are based on a worker’s salary when she leaves the profession, and they don’t adjust for inflation during the interim. If a 35-year-old leaves teaching this year, she may qualify for a pension, but it will be based on her current salary right now. By the time she finally becomes eligible to begin drawing her pension, say in the year 2046, every $1 in pension wealth will be worth far less than it is today. Teachers who go straight from teaching into retirement don’t have this problem.

Consequently, it’s also true that teachers who begin their careers at later ages are comparatively better off than teachers who began at younger ages. They don’t have to wait as long, so the break-even points fall from 31 years for a 25-year-old entrant to just 7 years for a 45-year-old entrant.

But their argument starts to suffer when compared to teacher mobility patterns. Like other states, California sees much higher turnover in early-career teachers than mid- or late-career teachers. The result is that, even for a 45-year-old teacher with a relatively short break-even period of 7 years, only about half will actually reach that point.

The table below pulls together these two data points for teachers of various ages. The middle row illustrates how long the teacher would be required to stay until her pension would finally be worth more than a cash balance plan (Rhee and Fornia calculate slightly shorter break-even points for their defined contribution plans). The last column uses the state’s turnover assumptions to estimate how many California teachers will remain long enough to break even. Remember, the median teacher in California began teaching at age 29. The table below suggests this typical teacher would have had a break-even point of more than 25 years, and the state assumes that only 40.6 percent of this group of teachers will make it that far. Across the entire workforce, the majority of California teachers would be better off in a cash balance plan than the state’s current pension plan.

Age at which the teacher begins teaching How many years does it take for the teacher to break even on her pension plan? What percentage of teachers like her will break even?
















California is a bit of an outlier here compared to other states—it’s a big state and seems to have lower teacher turnover than other states—but it’s still worth asking if this system is working well enough for all teachers. Rhee and Fornia’s main point seems to be that, once you exclude short- and medium-term workers,  the remaining teachers tend to do pretty well under the current system. But that excludes lots of people!

I personally don’t think that’s the right way to look at things. I think it’s worth fighting for retirement systems that treat ALL teachers fairly and equitably. After all, teachers might not know how long they’ll stay in the profession. They might not like teaching as much as they thought, or life might take them on another path. And once we account for this uncertainty, the break-even points become less about raw numbers (do I have to stay 19 or 22 years?) and more about probability (what’s my realistic chance of teaching in this state for 31 years?). Looked at from that perspective, it becomes harder and harder to support pension systems with such extreme back-loading.

Photo by cybrarian77 via Flickr CC License

Asset Management Still Inflicted By Lack of Diversity As Emerging Managers Fight For Small Piece Of Pie: Report

Investment management is well known to be dominated by white males.

But it’s still startling to see what a small percentage of assets (1.1%) are managed by firms run by women or minorities, according to a new report authored by Harvard Business School and Bella Research Group’s Josh Lerner.

The stark number comes even as public pension funds create mandates to invest in emerging managers.

And the issue isn’t performance, because academic evidence suggests emerging managers perform just as well as white-male-run investment funds.

More on the study’s findings, from Chief Investment Officer:

They found that women-owned mutual funds control just 0.9% of assets under management, while minority-owned mutual funds control just 0.3% of assets. Among real estate funds, women-owned companies control just 0.3% of assets and minority-owned firms hold 1.5% of assets.

In the hedge fund industry, firms owned by women and minorities hold less than 1% of all assets, Lerner found. In private equity, the figure is less than 5%.

“Despite the potential economic and social benefits of utilizing diverse asset managers, the industry is afflicted by a lack of diversity,” Lerner wrote in his report.


“We highlight the need for data sources with comprehensive and detailed reporting of diverse ownership and diverse management,” Lerner wrote. “This demographic information is most notably absent in the PE and real estate spaces. Creating a publicly available, non-proprietary database with this information should be a top priority for the investment community.”


Photo by Satya via Flickr CC License

Class Action Suits Led By Pensions Rise For 3rd Straight Year: Report

Credit: Cornerstone report
Credit: Cornerstone report

The percentage of class action lawsuits with pension funds as lead plaintiffs has risen for the third consecutive year, according to Cornerstone Research.

The report analyzed trends in class action lawsuits in 2016; a few tidbits on institutional investors:

Screen Shot 2017-03-24 at 10.18.40 AM

View the full report here.

World’s Largest Pension Posts Record-Breaking Quarter

Japan’s Government Pension Investment Fund (GPIF) — the world’s largest pension fund — posted a $92 billion gain in the 4th quarter of 2016, fund officials said on Thursday.

The gain — 8 percent — is the largest quarterly return in the history of Japanese pension investing, in terms of dollar amount.

And it comes at a good time: in 2015 and 2016, the GPIF suffered several poor quarters and it retooled its portfolio and increased exposure to equities.

From Bloomberg:

The Government Pension Investment Fund returned 8 percent, or 10.5 trillion yen ($92 billion), in the three months ended Dec. 31, increasing assets to 144.8 trillion yen, it said in Tokyo on Friday. Domestic equities added 4.6 trillion yen after the benchmark Topix index recorded its best quarterly performance since 2013, outweighing a loss on Japanese bond holdings. Foreign stocks and debt jumped as the yen fell the most against the dollar in more than two decades.

The Japanese retirement fund’s second straight quarterly gain is a welcome respite after it posted losses that wiped out all investment returns since overhauling its strategy in 2014 by buying more shares and cutting debt. GPIF, which has more than 80 percent of its stock investments in strategies that track indexes, benefits when broader equity markets are rising.


The fund’s domestic bonds fell 1.1 percent for a second quarterly loss, bringing holdings to 33 percent of assets, as an index of Japanese government debt dropped 1.6 percent. Foreign bonds added 8.8 percent, accounting for 13 percent of GPIF’s investments at the end of last year.

Japanese stocks made up 24 percent of holdings, while overseas equities were 23 percent of assets. The target levels for GPIF’s portfolio are 35 percent for domestic debt, 15 percent for foreign bonds, and 25 percent each for domestic and overseas shares.

 Photo by Ville Miettinen via FLickr CC License 

Public Pensions Pushed Fees Lower, Improved Funding in 2016: Report

NCPERS 2016 Public Retirement Systems Study
NCPERS 2016 Public Retirement Systems Study

Public pension funds achieved lower investment and administrative expenses in 2016, according to an NCPERS study of 159 public funds.

The funds decreased their fees by only 4 basis points; but this trend was coupled with another year of improved funding ratios.

From the study:

Responding funds report the total cost of administering their funds and paying investment managers is 56 basis points (100 basis points equals 1 percentage point.) This is a decrease of four basis point from 2015. According to the 2016 Investment Company Fact Book, the average expenses of most equity mutual funds average 68 basis points and hybrid mutual funds average 77 basis points. This means funds with lower expenses provide a higher level of benefit to members (and produce a higher economic impact for the communities those members live in) than most mutual funds.


While the respondent pool between studies has fluctuated, the general theme is funds have reduced fees the last few years by automating processes, gaining workflow efficiencies and negotiating fee structures with investment managers.

On funding:

For the third consecutive year, responding funds experienced an increase in average funded level. The aggregated average funded level is 76.2, up from 74.1 in 2015 and 71.5 in 2014. While 1-year investment returns were not strong in 2015, almost 70 percent of responding funds have investment smoothing periods containing strong investment returns from the 2012, 2013 and 2014 fiscal years. In addition, funds continue to lower amortization periods which lowers the amount of time to fully fund the plan.

The full study can be viewed here.

Your Website Is Probably Harming Investor Relations, Says Survey

Credit: IR Halo Investor Relations Survey 2016
Credit: IR Halo Investor Relations Survey 2016

A majority of investors are not satisfied with the quality of information on hedge fund managers’ websites — and therein lies an opportunity for a competitive advantage for emerging managers, according to a recent survey of investors conducted by IR Halo.

One-hundred percent of responding investors said they use a hedge fund’s website to find information on a manager; however, few hedge funds see their websites as an investor relations tool.

That disconnect was one of the main takeaways of IR Halo’s 2016 Investor Relations Survey, which gathered responses from 109 investors and 126 fund managers.

From the report:

Fund managers need to invest in their websites, however. Investors are not at all happy with the quality of fund managers’ web presence, leading one investor to comment: “A Google search and a website visit are the first two things done when hearing from a new manager. If there is no website, or it’s not informative, [the manager] needs to work much harder to keep my interest”.

All 109 investors who participated in the survey said they use a manager’s website as a source of information.

But a “minority” of hedge funds actively use their websites as an IR tool, according to the report. That disconnect is reflected in investors’ dissatisfaction with fund websites:

Most importantly, all investors (100%) who responded to this survey said they used hedge fund managers’ websites as a source of information. Investors were also asked to judge hedge fund managers’ websites by both usefulness and content. None were able to proclaim themselves even ‘Somewhat Satisfied’. They were most critical on the overall usefulness of fund managers’ websites – a striking 66% of allocators said they were ‘Very Dissatisfied’ in this respect.

Of course, in the middle of difficulty lies opportunity.

Stellar websites, according to the report, offer an opportunity for emerging managers to gain a competitive advantage:

Certainly, an opportunity exists for smaller and / or growing funds to improve their competitiveness via an enhanced IR function. With most investor relations being undertaken on a part time basis or by only one individual, it seems critical that hedge funds address the operational issues this presents – e.g. the lack of updates to investor materials.

The entire report is worth reading, and offers several more key insights into the minds of hedge fund investors, managers and service providers. Find it here.

Former NY Pension Official Took Bribes in Pay-to-Play Scheme: SEC

The Securities and Exchange Commission on Wednesday levied fraud charges against a former New York pension official and two brokers.

Navnoor Kang, who was head of fixed income for the New York State Common Retirement Fund from January 2014 to February 2016, allegedly accepted bribes — included cocaine and prostitutes — in exchange for steering billions of dollars of business to two different broker-dealers.

Details, from the SEC:

Kang allegedly used his position to direct up to $2.5 billion in state business to Gregg Schonhorn and Deborah Kelley, who were registered representatives at two different broker-dealers.  In exchange for this lucrative business, which netted Schonhorn and Kelley millions of dollars in commissions, the brokers provided Kang with tens of thousands of dollars in benefits, including:

* More than $50,000 spent on hotel rooms in New York City, Montreal, Atlantic City, and Cleveland.

* Approximately $50,000 spent at restaurants, bars, lounges, and on bottle service.

* $17,400 on a luxury watch for Kang.

* $4,200 on a Hermes bracelet for Kang’s girlfriend, at Kang’s request.

* $6,000 on four VIP tickets to a Paul McCartney concert in New Orleans.

* An extravagant ski vacation in Park City, Utah, including a $1,000 per night guest suite.

The scheme was costly for the pension fund: not only did two broker-dealers win billions of dollars in commitments without having to prove merit, but those broker-dealers weren’t initially on the pension fund’s approved list of dealers.

That means the pension fund used “step-out trades”, in which the fund payed higher commissions for transactions.

From Bloomberg:

At the start of the scheme, Kelley’s and Schonhorn’s employers weren’t on the approved list to do business with the pension fund. Kang arranged for “step-out” trades that were routed through approved brokers, but shared with the duo’s employers, which resulted in the pension fund paying higher commissions, the U.S. said.

Kang later arranged for Kelley’s and Schonhorn’s employers to be approved to do business directly with the pension fund, at which time the bribes “escalated,” prosecutors said. At the same time, the value of business to the two firms skyrocketed, they said. Schonhorn’s firm became the third largest broker dealer with which the pension fund executed transactions in domestic bonds.

Featured image by Dave Rutt via Flickr CC License

CalPERS Staff Recommends Lifting Tobacco Ban

It’s been 16 years since CalPERS went cold turkey on tobacco-related assets.

But quitting tobacco is hard, even for an institution. When CalPERS looks at tobacco now, it sees dollar signs.

An eight-month study conducted by a CalPERS consultant concluded that the pension fund has lost out on significant returns because of the ban, and now pension fund staff have recommended the System re-invest in tobacco assets.

The board will likely vote on the matter at the next meeting on Monday.

But not everyone is on board with the plan, including at least one key trustee.

More details from the Sacramento Bee:

Wilshire Associates, one of CalPERS’ leading investment consultants, said in a report last spring that the decision has cost the pension fund about $3 billion. Seriously underfunded and struggling with declining investment profits, CalPERS has to jump back into tobacco to help improve its finances, the staff said.

The possibility of reinvesting in tobacco sparked immediate controversy Tuesday. State Treasurer John Chiang, a member of the 13-person CalPERS board, announced he will vote against the idea. “CalPERS should not put money into an industry that is so harmful to people’s health and so costly to the state,” he wrote in a letter to Henry Jones, chairman of the fund’s investment committee. Lt. Gov. Gavin Newsom, who isn’t on the CalPERS board, issued a statement that “we cannot sell our soul for profit.”

Chiang wants CalPERS to go even further with its tobacco ban and divest from all outside managers which hold tobacco assets.

 Photo by Fried Dough via Flickr CC License

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