Tag: featured

The Teamsters’ Central States Pension Fund sent out a letter to its members this week, warning them that their benefits are going to be cut as the fund looks to remain solvent.

Such cuts were made legal in late 2014, when Congress passed a bill that allows trustees of some multiemployer pension plans to submit proposals for benefit reductions.

More on the letter and the cuts, from CNBC:

A prominent Teamsters pension fund, one of the largest, has filed for reorganization under a new federal law and has sent letters to more than 400,000 members warning that their benefits must be cut.

[…]

The executive director of the Central States fund, Thomas Nyhan, said that reducing payouts to make the money last longer was the only realistic way of avoiding a devastating collapse in the next few years.

“What we’re asking is to let us tap the brakes a little now, and let us avoid insolvency,” he said. “The longer we wait to act, the larger the benefit reductions will have to be.”

He said the Central States fund had been hit by powerful outside forces — the deregulation of the trucking industry, declining union membership, two big stock crashes and the aging of the population — and it was currently paying out $3.46 in pension benefits to retirees for every dollar it received in employer contributions.

“That math will never work,” Mr. Nyhan said. He said the fund was projected to run out of money in 10 to 15 years, an almost unthinkable outcome for a pension fund that became a political and financial powerhouse in the 1960s, when trucking boomed with the construction of the interstate highway system. Central States became famous back then for financing the construction of hotels and casinos in Las Vegas.

Congress has to approve any benefit cuts to members of multiemployer plans, and they have until May to do so for this particular round of reductions.

If the cuts are approved, members will then need to vote on the changes – although even if they vote down the cuts, the Treasury can still implement them if it decides to do so.

 

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Pension360 has covered the months-long debate over how to overhaul the U.S. military retirement system.

Now, Congress has unveiled a bill to act on Pentagon-endorsed recommendations made last year that include shifting new service members into a 401(k)-style plan and restructuring the retirement system so that more soldiers receive benefits.

Details from Government Executive:

Under the proposal, modeled after recommendations made by the Military Compensation and Retirement Modernization Commission earlier this year, new troops would automatically be enrolled in the Thrift Savings Plan and receive a matching contribution from the government. Service members who stay in the military for 20 years, and are thereby entitled to a retirement pension, would receive a less generous calculation for their annuity.

The bill attempts to move away from the 20-year, all-or-nothing pension system currently in place for military members. Only about 17 percent of troops serve for 20 years and become eligible for the benefit. To encourage members to stay in the military, they would receive “continuation pay” after 12 years of service.

The new blended retirement system would only affect new service members. Current service members are grandfathered into the current system, but could opt into the new one. The legislation also calls for a program to educate troops about the modified retirement system.

The overhaul still needs to pass both chambers of Congress and be approved by the President.

 

Photo by Brian Schlumbohm/Fort Wainwright PAO via Flickr CC License

Allan Sloan is a seven-time winner of the Loeb Award, business journalism’s highest honor. This story originally appeared on ProPublica.

The scary stock market that we’ve seen since mid-August is a classic example of how reality keeps intruding on theory. And it shows how there really is no such thing as free money on Wall Street, no matter how beguiling the sales pitch.

The case in point: pension obligation bonds, a supposedly magic solution to the problem of underfunded government pensions. The idea is that governments with badly underfunded plans can borrow money at historically low rates, invest the borrowed cash in the stock market, and earn much more on stocks than the bonds cost in interest.

I wrote a skeptical article about these bonds in July, with Cezary Podkul as co-author. “Governments can borrow cheaply these days but the risks of investing pension bond proceeds are unusually high,” we said. Recent weeks have proved us right.

We warned that potential pension bond issuers such as Colorado and Pennsylvania would be taking a huge chance by selling billions of dollars of bonds at seemingly low rates and investing the cash in the then-stable stock market.

The idea, as presented by investment banks (which get fees for doing deals), is that pension bonds can be a magic elixir.

For two groups in particular, they profess, it’s just the thing: employee unions worried that underfunded pension plans could lead to benefit cuts, and public officials who want to improve pension-funding ratios without raising taxes or cutting benefits.

After all, the argument goes, you can’t go wrong selling bonds at about 5 percent interest to raise money to buy stocks, which have historically produced returns exceeding 10 percent.

Oops. Timing is everything. Had a government sold pension bonds on July 10, the day our article appeared, it would have suffered a double whammy. The Standard & Poor’s 500-stock index has dropped 6 percent since then, and interest rates on the kind of municipal bonds that make up a large piece of pension issues have fallen.

Had Colorado sold its proposed maximum of $12 billion in pension bonds on July 10 and put the proceeds into the S&P 500 that day, its portfolio would be about $700 million underwater. What’s more, its bonds would probably be carrying a somewhat-higher-than-current-market interest rate.

That’s because the rate on 30-year AA-rated taxable muni bonds, a major component of pension bond issues, was 4.74 percent Thursday, according to Bloomberg, down from 5 percent on July 10. Rates on the 20-year version of the bond, another major pension bond component, were down slightly, to 4.46 percent from 4.49 percent.

So Colorado, which fortunately for its taxpayers deferred the pension bond issue after state legislators got nervous 2014 would have had a large paper loss and would be paying what at least for now is an above-market rate on much of the borrowing.

“Recent market behavior has reminded us that markets have volatility and uncertainty and may not provide the returns we want, no matter how badly we need them,” said Ben Valore-Caplan, a Denver-based adviser to institutional investors who quit as vice chairman of the Colorado Public Employees’ Retirement Association board rather than be involved in a pension bond issue.

“Markets don’t care that a pension is underfunded,” he told me. “Pensions don’t get secret access to higher returns or lower risk. When they forget their place, the markets sooner or later will remind them.”

The S&P 500 has produced an average of 10.6 percent in price increases and reinvested dividends over the past 45 years. But that doesn’t mean you are guaranteed a double-digit return if you invest on a particular day. It’s about statistics: You can drown in a pond that’s an average of one foot deep if you happen to step into a 10-feet-deep part.

It’s one thing to invest in stocks over the long term. But investing gradually, over time, is a lot different than hocking yourself to the eyeballs and putting the borrowings into the market in one shot.

No, I’m not saying that stocks won’t recover and go on to new highs. What I am saying is that any government 2014 or any retail investor borrowing a ton of money and putting it all in the stock market at once is taking an enormous risk. It’s not a risk I would take myself. As recent months have shown, it’s not a risk that governments should take, either.

Allan Sloan can be reached at allan.sloan@washpost.com.

Cezary Podkul contributed research for this column.

 

Photo by TaxRebate.org.uk

A 2010 law requires Chicago to shell out a $550 million contribution to its underfunded police and fire pension systems in 2016.

With that payment coming due – and with the city’s budget already tight – Mayor Rahm Emanuel on Tuesday unveiled a proposal for the biggest property tax hike in modern Chicago history.

But even if the tax hike is approved, the city could still be over $200 million short of raising the money to pay the 2016 pension payment.

Details from the Chicago Tribune:

Under the mayor’s budget proposal, property taxes would be increased $543 million over the next four years — $318 million of it next year alone — to pay for police and fire pensions.

[…]

Emanuel finds himself poised to sharply raise property taxes to cover a major increase in police and fire pension contributions following a December 2010 measure approved by lawmakers and then-Gov. Pat Quinn.

The mayor has known the pension hit was coming since before he took office. This year, Emanuel got the Democrat-controlled House and Senate to approve a bill that reset the pension payment schedule to give him more breathing room. The city would still have to come up with hundreds of millions of dollars, just not quite as much as quickly as the 2010 law required.

That bill, however, has yet to be sent to Gov. Bruce Rauner, who could sign it, veto it or allow it to become law without acting.

If the bill does not become law, Emanuel’s record property tax increase for next year would still be $219 million short of what’s needed to make the required pension payments. Asked if he had a Plan B, Emanuel said, “First of all, if I had a Plan B, the worst thing to tell the legislature is that you have a Plan B.”

Emanuel said that the historic tax hike was necessary to avoid service cuts.

The city projects it will pay $1.1 billion in pension contributions in 2016, roughly half of which will go to the police and fire funds.

 

Photo by bitsorf via Flickr CC License

In 2014, the majority of states (33) saw their pension funding levels rise – and median funding levels for all 50 states is on an upward trajectory, according to a report provided to Pension360 by Loop Capital Markets.

On the other end of the spectrum, 16 states saw their funding levels decline, with Michigan seeing the largest drop.

The key findings, summarized by Ai-Cio:

The median funded level for the 50 states and District of Columbia grew to 71.5%, up from 69% in 2013. The mean funded level in 2014 was 73.1%, compared with 71.9% the year prior.

Despite the increases, only Washington, DC, South Dakota, and Wisconsin were found to be fully funded, with five states recording funded levels above 90%. A total of 18 states had funded levels greater than or equal to 80%, an increase from 14 in 2013.

However, while a total of 33 states increased funding in 2014, 16 states continued to fall further into pension debt. These states declined enough to bring the overall national funded level down from 73.1% in 2013 to 72.6%.

Worst off is Illinois, which remained stable over the year at 39% funded.

Over five years, 30 states have lower funded levels, with Michigan declining the most from 79% in 2010 to 61% in 2014. Funding for Kentucky, New York, and Pennsylvania dipped 14% over the same time period.

Meanwhile, Maine and Oklahoma had the largest five-year gains, with each seeing their funded level increase by 15%.

The report analyzed the funding data of 247 state-level plans and 141 municipal plans.

Japan’s Government Pension Investment Fund (GPIF) is preparing to dive into private equity for the first time: the fund says it is committing $500 million to the International Finance Corp., for investing in private equity in developing nations.

A pension fund of GPIF’s size would normally be interested in pursuing direct investments and avoiding middlemen altogether. But regulations prohibit the fund from doing so – and given that GPIF has only recently become interested in PE, the fund is unlikely to have the staff to execute those deals. So if the GPIF wants private equity exposure, it must go through an outside manager.

More from the Wall Street Journal:

No investments have been made yet under the partnership with IFC, which was made final in June. A spokesman for the GPIF declined to comment on the deal. A spokesman for IFC couldn’t immediately be reached for comment.

[…]

The negotiations behind the deal show how the GPIF is becoming a savvier investor under its chief investment officer, Hiromichi Mizuno, who joined the fund in January after working for a private-equity firm in London. Mr. Mizuno was appointed as Prime Minister Shinzo Abe’s administration tries to strengthen management at the fund and ensure long-term returns.

IFC had courted the GPIF for several years, and a deal was finally near completion when Mr. Mizuno arrived, according to people familiar with the talks. To the surprise of people on both sides, Mr. Mizuno insisted on renegotiating the terms, including by cutting the fees paid by the GPIF by nearly half, they said. Also, the GPIF decided that the deal shouldn’t include the acquisition of private-equity assets on the secondary market, known as secondaries.

The partnership is a way for the GPIF to gain exposure to developing countries with a growing middle class where publicly traded stock markets don’t necessarily provide enough ways to invest in companies that profit from consumer demand.

As a result, the investments will exclude companies such as banks and oil companies that are often overrepresented on stock markets in developing countries, said people familiar with the deal.

The GPIF manages $1.2 trillion in assets.

 

Photo by Ville Miettinen via Flickr CC License

Illinois Attorney General Lisa Madigan won’t be appealing May’s pension ruling by the state Supreme Court, in which Illinois’ 2013 pension overhaul was declared unconstitutional.

A spokesperson for Madigan announced the news on Wednesday.

More from Reuters:

“In the pension case, we asked the U.S. Supreme Court for a routine extension of time to allow us to consider whether to seek review of the case by that court,” said spokeswoman Eileen Boyce. “After completing our analysis, we have decided not to ask the court to review the case.”

In July, Illinois Attorney General Lisa Madigan was granted an extension until Sept. 10 to appeal the ruling, which rejected the state’s argument that it needed to invoke police powers and cut pension benefits to deal with a fiscal emergency.

The unanimous ruling by the Illinois justices was based on a provision in the state constitution that prohibits the impairment or diminishment of public worker retirement benefits.

There is still at least one major pension ruling still to come in Illinois.

In November, the state Supreme Court will hear arguments over the legality of Chicago’s major pension reform law.

California lawmakers on Wednesday passed a climate bill that will force the nation’s two largest pension funds, CalPERS and CalSTRS, to exit coal investments.

The bill, SB-185, gives the funds until mid-2017 to divest. It also prohibits the funds from making new investments in thermal coal companies.

The bill now heads to state Gov. Jerry Brown, who is likely to sign it.

From the Sacramento Bee:

The California Public Employees’ Retirement System and California State Teachers’ Retirement System oversee portfolios worth about $301 billion and $191 billion, respectively. A spokesman for CalPERS said the fund currently invests in between 20 and 30 of the type of thermal coal mining companies covered by Senate Bill 185, with a cumulative value of between $100 million and $200 million. A spokesman for CalSTRS said the fund’s investment portfolio holds approximately $40 million in thermal coal.

Policies combating climate change are preoccupying lawmakers this year. Advocates of SB 185, carried by Senate leader Kevin de León, D-Los Angeles, and passed on a 43-27 vote, argue California should not be lending financial support to the coal industry at a time when the state tries to expand the use of renewable energy.

The bill “aligns our investment policies with our values,” said Assemblyman Rob Bonta, D-Alameda, adding that the bill would not violate pension funds’ fiduciary obligations because “coal is a bad investment.”

[…]

“We need to be concerned about the long-term sustainability of CalPERS and our pension programs,” said Assemblyman James Gallagher, R-Yuba City. “We need to make (investment) decisions based on good, sound financial decisions, not based on emotions.”

Neither CalPERS nor CalSTRS have taken official positions on the bill.

 

Photo by  Paul Falardeau via Flickr CC License

A group consisting of over 300 institutional investors – including many of the U.S.’ largest public pension funds – on Thursday announced the launch of a project called the Fee Transparency Initiative.

The Fee Transparency Initiative, created by the Institutional Limited Partners Association (ILPA), aims to implement “best practices” for the reporting and transparency of fees — including carried interest — paid to outside money managers. Additionally, it will attempt to create a framework to improve the alignment of interests between pension funds and managers.

The Initiative will build on the Private Equity Guidelines already maintained by the group.

From a press release:

The Institutional Limited Partners Association (ILPA) is leading efforts to encourage broader adoption of more uniform reporting practices in the private equity industry. ILPA has launched the Fee Transparency Initiative, a broad-based effort that aims to establish more robust and consistent standards for fee and expense reporting and compliance disclosures among investors, fund managers and their advisers.

The Fee Transparency Initiative, comprised of senior investment and reporting professionals from a cross-section of investor institutions and advisers, will produce industry guidance as it relates to reporting and transparency over both the near and long term.

[…]

The first deliverable of the Initiative will be a reporting template that details, at the level of an individual Limited Partner investor, all monies paid to the fund manager (General Partner or “GP”) and its affiliates, including fees, expenses and incentive compensation, i.e., GP profit share (also known as carried interest). Under the updated guidelines, individual LPs would be provided detailed, periodic balances for their share of paid and accrued fees and GP incentive compensation. LPs would also receive a clearer picture of manager compensation received from other sources, such as portfolio companies and affiliated entities.

The group includes CalPERS, the Florida SBA, the New York Teachers Retirement System, the State Teachers Retirement System of Ohio, the Teacher Retirement System of Texas, the Washington State Investment Board, and many more funds.

 

Photo by TaxRebate.org.uk via Flickr CC License

CalPERS, the largest public pension fund in the U.S., has reportedly spent the past few months working on a plan to invest a higher percentage of its assets into conservative investments such as bonds.

Additionally, the plan – which would be implemented gradually over many years – would require higher contributions from public employees hired after 2013.

The LA Times reports:

Under the proposal, CalPERS would begin slowly moving more money into safer investments such as bonds, which aren’t usually subject to the severe losses that stocks face.

Because the more conservative investments are expected to reduce CalPERS’ future financial returns, taxpayers would have to pick up even more of the cost of workers’ pensions.

Most public workers would be exempt from paying any more. Only those workers hired in 2013 or later would have to contribute more to their retirements under the plan.

The changes would begin moving CalPERS — which provides benefits to 1.7 million employees and retirees of the state, cities and other local governments — toward a strategy used by many corporate pension plans. For years, corporate plans have been reducing their risk by trimming the amount of stocks they hold.

The plan is the result of CalPERS’ recognition that — even with significantly more contributions from taxpayers — an aggressive investment strategy can’t sustain the level of pensions promised to public workers. Instead, it could make the bill significantly worse.

At an Aug. 18 meeting, CalPERS staff members laid out their plan for the fund’s board, saying the changes would be made slowly and incrementally over the next several decades.

CalPERS manages over $300 billion in assets for its 1.7 million members.

 

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