featured | Pension360

Military Pension Cuts a Tough Sell in Congress

Last month, the Military Compensation and Retirement Modernization Commission produced a report that recommended a series of changes to the military’s retirement benefit system.

Among the proposals: shrinking retirement pay by about 20 percent, and phasing out the military’s current defined-benefit plan, in favor of a hybrid plan that features characteristics of a 401(k).

Another proposal however, would make benefits richer for long-time military members.

But Congress remained skeptical on Wednesday. From the Military Times:

Some lawmakers questioned the piece of the new retirement system that would offer troops a lump-sum “continuation pay” at 12 years of service. The commission’s data claiming that career troops would accrue more total benefits under the proposed system assumes that individual troops invest that money into their personnel retirement account and not touch it until age 59 and a half.

Rep. Susan Davis, D-Calif., doubted that all troops will make that decision.

“What if that assumption doesn’t bear out?” she said. “Is the whole program impacted if they don’t do that? Does it rest on that assumption?”

[…]

Rep. Joe Heck, R-Nev., chairman of the personnel panel of the House Armed Services committee, who is also a trained physician, raised concerns about the commission’s claim that Tricare is reimbursing doctors at rates lower than government-run Medicare and fair-market value.

“As a health-care provider for over 30 years, I question that assumption,” Heck said.

Military compensation is a controversial area for cuts, so it’s unclear if the political will exists to move forward with any of the commission’s proposals.

However, John McCain said last month he was open to reforming the military’s retirement system. From Military.com:

Sen. John McCain, chairman of the Senate Armed Services Committee, took the opposite position, saying he was open to possible changes in pay and benefits.
“I can probably support a number of changes that need to be made,” McCain said without giving specifics. He singled out the military health care system, which he said “has to be reformed.”

California Bill Would Force CalPERS, CalSTRS To Divest From Coal

California Senate President Kevin de Leon has introduced a bill that would force the state’s pension funds to exit all coal investments.

Additionally, CalSTRS and CalPERS would be prohibited from making new coal investments until 18 months after the bill becomes law.

De Leon hinted in November that he would introduce such a bill, and the pension funds had already responded negatively to the proposal.

Ohio Pension Looking to Lead Suit Against Brazilian Oil Company

The Ohio Public Employee Retirement System has asked to be a lead plaintiff in a class-action lawsuit against Brazilian oil company Petroleo Brasileiro SA.

The pension fund is a shareholder of the company, and says it lost money – $50 million – when Petroleo stock declined after fraud allegations came to light.

Illinois Gov. Rauner Proposes Bankruptcy As Strategy for Taming Municipal Pension Debt

Illinois Gov. Bruce Rauner didn’t touch on pensions during his State of the State address this week.

But in a list of policy proposals handed out to lawmakers, Rauner suggested giving municipalities the power to file for bankruptcy as a way to tame pension debt.

Even if towns and cities didn’t act, the threat of bankruptcy could give them leverage in pension negotiations with workers.

From the Chicago Tribune:

Gov. Bruce Rauner wants to give cities, towns and counties the authority to file for bankruptcy protection, a move that could give local governments a stronger foothold when negotiating with local police and fire officials over costly pension obligations.

[…]

Rauner aides would not elaborate on how it might work.

But the single sentence calling for the state to “extend to municipalities bankruptcy protections to help turn around struggling communities” mirrors a proposed law introduced last month by state Rep. Ron Sandack, R-Downers Grove. Sandack said his aim was to give cities more tools for getting their financial affairs in order, including a “level field” when negotiating over pensions.

Federal law only allows municipalities to file for bankruptcy with explicit permission from the state where they are located, said James Spiotto, a municipal bankruptcy expert and attorney who is managing director of Chicago-based Chapman Strategic Advisors.

Currently, only the Illinois Power Agency has been given such authority. It would take passage of a new state law to extend the authority to municipalities.

Chicago Mayor Rahm Emanuel was quick to dismiss the idea that the city would use such a tactic to lower its pension costs, according to the Tribune.

European Pensions Have Two Years To Comply With Derivative Trading Rules

The European Commission is giving pension systems a two-year grace period before they have to begin complying with new derivative trading rules, according to Chief Investment Officer.

The new rules set up a central clearing house for derivatives trades. But the rules could be costly for pension funds – hence the two year exemption.

CalPERS, CalSTRS Nab $300 Million From Settlement With S&P in Suit Over Mortgage Ratings

It was revealed today that credit rating agency Standards & Poor’s has entered a $1.375 billion settlement with 18 states over the alleged inflated ratings it gave mortgage-backed securities which eventually turned toxic.

CalPERS and CalSTRS are the biggest individual beneficiaries of the settlement; the entities will receive more than $300 million combined.

Government Panel Likely to Call For Military Pension Changes

The Military Compensation and Retirement Modernization Commission has spent the last two years drawing up policy proposals to decrease the cost of military benefits, including retirement benefits.

The Commission will make the proposals to Congress on Thursday, but people familiar with the report have already been revealing its contents to the USA Today and the Military Times.

According to the sources, the report will propose big changes to the military’s retirement system – including the phase-out of the military’s current defined-benefit plan, in favor of a hybrid plan that features characteristics of a 401(k).

More details from USA Today:

The Military Compensation and Retirement Modernization Commission will propose detailed legislation to phase out the current 20-year cliff-vesting pension payable immediately upon leaving service, according to people who have been briefed on the report but requested anonymity before discussing its recommendations.

The plan calls for Congress to create a hybrid system that includes a smaller defined-benefit pension along with more cash-based benefits and lump-sum payments. A significant portion of troops’ retirement benefits would come in the form of government contributions to 401(k)-style investment accounts, those familiar with the report told Military Times.

Specifically, the proposal calls for automatically enrolling each service member in the federal government’s Thrift Savings Plan, or TSP, an investment account that accrues savings. Individual troops will be responsible for managing their accounts, and the money is typically not available for withdrawal without penalty until age 59.5.

But that same proposal would make it easier for troops to keep their retirement benefits after leaving the military. USA Today reports:

By allowing many troops to keep their TSP government contributions after separation, the new proposal would give limited retirement benefits to the vast majority who leave the military before hitting the traditional retirement milestone of 20 years of service, most of them enlisted members who do four, six or eight years, then leave.

That’s a big potential change from a system that now offers retirement benefits to about only 17% of the force — many of them officers — who serve 20 years.

The retirement changes would only apply to new troops – not anyone currently enlisted or retired.

All of these proposals would still need to get through Congress to become law. Military compensation is a controversial area for cuts, so it’s unclear if the political will exists to move forward with the retirement system changes.

Photo by Brian Schlumbohm/Fort Wainwright PAO

Pension Funds, Other Shareholders Pressure Oracle CEO Over High Pay With Letter to SEC

The CEO of the Oracle software company, Larry Ellison, is one of the highest paid executives in the United States ($67.3 million in 2014) despite numerous calls by shareholders to reduce his compensation package.

Shareholders are fed up. They, led by two of Europe’s largest pension funds, are on Monday filing a letter with the Securities and Exchange Commission (SEC) regarding their concerns with the Oracle’s corporate governance.

From the Financial Times:

Larry Ellison, one of the highest paid executives in the US and co-founder of the Oracle software company, has come under renewed pressure from shareholders over his “excessive” remuneration and “unprecedented” failure to engage with investors.

The Netherlands’ second-largest asset manager and one of the UK’s largest pension funds, will on Monday file a letter to Oracle with the Securities and Exchange Commission, outlining their corporate governance concerns.

More than half of the group’s shareholders have voted against the executive compensation scheme in each of the past three years.

[…]

PGGM of the Netherlands and Railpen, the UK’s Railway Pension Trustee Company, say the company’s “lack of communication” has heightened their concern over pay, boardroom accountability and the independence of non-executive directors.

It is rare for such groups to go public with criticism of a company they invest in, underlining their anger and frustration after four years of trying to engage with the board and company executives.

In their letter to the company, they say: “As global investors, we believe that governance risk is particularly heightened in companies in which the founder serves as CEO or otherwise remains in a leadership role with the company.”

The pension funds aren’t a particularly large shareholder in Oracle – combined they only own about a 0.16 stake in the company, according to the Financial Times.

Photo by Securities and Exchange Commission via FLickr CC License

Dallas Pension Overvalued Real Estate Investments by Millions, According to Review

An audit of the Dallas Police and Fire Pension System has revealed that the fund overvalued a number of risky real estate investments, including a vineyard in California and luxury homes in Hawaii.

The fund invests heavily in real estate but suffered $96 million in real estate losses in 2013 [Read the Pension360 coverage here].

From the Dallas Morning News:

After a year of wrangling and delay, an independent review of the $3.3 billion fund has confirmed what many suspected: accounting problems.

The review, which focused on the fund’s real estate holdings in 2013, estimates that it overvalued some properties by tens of millions of dollars.

The new appraisals and the city’s push for an audit came after The Dallas Morning News flagged problems with the fund’s accounting. The News reported in early 2013 that the fund valued many of its real estate ventures by what it had invested, rather than by appraisals or other methods. This was contrary to widely accepted standards.

“This report shows we need better governance and more transparency into our pension fund so we can address issues as they come up — not years after the damage has been done,” said Mayor Pro Tem Tennell Atkins, reading from a statement at a news conference he called Tuesday.

The specific findings:

[The review] found that $772 million in assets were at risk of being overvalued “because the valuation approaches or methods … appear to have been improperly applied and/or inconsistent with commonly accepted valuation practice.”

From this pool, Deloitte selected nine large assets that the fund had valued collectively at $585 million. The firm estimated the actual value of these assets instead to be between $507 million and $559 million.

Overvaluing assets on a fund’s books can create a falsely optimistic picture of its overall health, leaving police, firefighters and taxpayers on the hook for the future.

Fund officials, in a statement released Tuesday by their public relations firm, called the overvaluation flagged by Deloitte “financially immaterial when measured against DPFP’s entire investment portfolio.”

The Dallas fund allocated nearly 50 percent of its assets towards real estate investments as of 2012.

Photo by thinkpanama via Flickr CC License

New Congress Likely to Attempt Federal Pension Reform

The New Congress has already proved it has its eye on retirement benefits.

But even with lawmakers’ eyes locked on Social Security, there may be federal pension changes coming down the pipeline.

Many lawmakers are weighing changes to the federal pension system, and new legislation on that front could surface this year, according to two key committee chairmen.

The two lawmakers leading the push for federal pension reform are:

* Rep. Jason Chaffetz, R-Utah, the new chairman of the House Oversight and Government Reform Committee

* Rep. Mark Meadows R-N.C., chairman of a subcommittee of the Committee on Oversight and Government Reform that focuses on the federal workforce.

More on their plans from the Federal Times:

As the new Congress kicks into gear, lawmakers want to take another crack at reforming the civil service.

Rep. Jason Chaffetz, R-Utah, the new chairman of the House Oversight and Government Reform Committee, said he will look at reforming all aspects of the federal workforce, from hiring and firing authorities to pensions and pay.

“We have jurisdiction on the federal workforce and there is no doubt we are going to bring that up,” Chaffetz. “From soup to nuts: Everything from how we hire them on the back end to how we pay them out in the retirement system.”

[…]

As Congress kicks into gear, Meadows believes the committee will be working on legislation for at least some parts of civil service reform.

“I would be very surprised if there were not a number of legislative initiatives and certainly, as a subcommittee chairman, I am prepared to be very proactive,” Meadows said.

What might the reforms look like? A likely bet is legislation that would shift new federal hires into a 401(k)-type plan, as opposed to the current defined-benefit system.

The reforms might be rolled out slowly at first, and could be focused on a particular government agency to study the effects before implementing the reforms across all agencies.

The outgoing Postmaster General has even suggested that any pension reforms be “tested” out on the Post Office first.

The Postmaster said:

Outgoing Postmaster General Patrick Donahoe has called for an end to the defined-benefit pension system and instead shift to a 401(k)-style retirement policy. He said Postal Service reform could also serve as a precursor to governmentwide civil service reform.

“I would encourage Congress to view the Postal Service as a test bed or laboratory of change that might be applied to the rest of the federal government,” Donahoe said.

He said agencies need to be be able to control costs and plan for the future while getting the flexibility to experiment without rigid workforce rules and he said the Postal Service could be at the forefront of that change.

“In today’s world, does it really make sense to offer the promise of a government pension to a 22-year-old who is just entering the workforce? And how reliable is that promise?” Donahoe asked. “I’d like to see the Congress encourage much more experimentation at the federal level. “

No legislation has yet been proposed.

Photo by Bob Jagendorf via FLickr CC License

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