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Kansas Seeks to Study Pension Privatization

Kansas Gov. Sam Brownback’s team is reportedly exploring options to improve the long-term sustainability of the state’s pension systems.

One option on the table: privatization.

From the Associated Press:

Two top aides to Republican Gov. Sam Brownback proposed Friday that Kansas study privatizing the pension system for teachers and government workers.

Budget Director Shawn Sullivan and Secretary of Administration Jim Clark told a joint legislative committee on pensions that “reform options” for bolstering the public pension system’s long-term health should be examined. Their list included converting pension benefits into annuities managed by a private insurer.

“It’s an idea worth pursuing,” Sullivan said after presenting the proposal to lawmakers.

The committee urged Brownback’s aides to gather more information about private companies’ experiences with such moves and present it once legislators open their next annual session Jan. 12.

[…]

Clark said with converting pension obligations into annuities, a private company assumes the long-term financial risks for a fee, while the state can provide competitive benefits at a lower cost.

At least one lawmaker and one union leader weighed in on the idea. Reported by AP:

Rep. Steve Johnson, an Assaria Republican, said the idea has merit, but, “I am not optimistic that there would be a buyer of that liability at a lower cost.”

And Rebecca Proctor, interim executive director of the largest union for Kansas government employees, said private companies’ need for profits would compete with the pension system’s drive “to generate benefits for employees.”

“Any time you put a profit motive in a state service, it’s a problem,” she said.

Last week, Gov. Brownback proposed cutting the state’s pension payment by $41 million to plug budget holes elsewhere.

Photo credit: “Seal of Kansas” by [[User:Sagredo|. Licensed under Public Domain via Wikimedia Commons

Kansas Treasurer Considers Pension Obligation Bonds Amidst State Plans to Cut Annual Pension Payment

Kansas Gov. Sam Brownback announced plans this week to cut nearly $60 million from the state’s annual pension contribution and use the money to plug budget holes elsewhere.

In light of that news, Kansas Treasurer Ron Estes is considering issuing bonds to help fund the state’s pension system.

From Bloomberg:

Brownback, a Republican who starts his second term in January, last week proposed shortchanging the state’s pension contributions by $58 million to close a $280 million budget hole caused in part by tax cuts the governor championed. Kansas, with the fifth-weakest pension system among U.S. states, had its issuer ratings downgraded by Standard & Poor’s and Moody’s Investors Service this year.

To close a $7.35 billion funding shortfall, the state needs to keep commitments that were part of a 2012 pension overhaul, said Estes, a Republican who also won re-election last month. The plan called for more funding from the state, including revenue from casinos it owns, and raised the amount employees pay.

“We need to keep working on our pension reforms passed two years ago or we’ll fall further behind,” Estes said in an interview from Topeka.

Kansas can take advantage of interest rates close to five-decade lows to raise cash, increase the funding level and create fixed payments, Estes said. The state issued $500 million of pension bonds in 2004; a proposal to sell another round stalled in the legislature last year.

[…]

The [Kansas PERS] system supports issuing bonds or any measure that boosts its funding, said Kristen Basso, a spokeswoman.

“Pension bonds would reduce our unfunded liability and improve our funded ratio,” she said in an e-mail.

But the bonds aren’t a problem-free solution. From Bloomberg:

The debt, which is typically taxable, carries risk. The strategy is to invest the proceeds, usually in stocks, and earn more than it costs to repay bond investors. The approach can backfire if issuers borrow when equities are at historic highs, said Jean-Pierre Aubry, assistant director of state and local research at the Center for Retirement Research at Boston College. The S&P 500 Index this week posted its best two-day gain in more than three years.

“There are instances where they can work, but they can be risky financial tools for cash-strapped borrowers,” Aubry said in a phone interview. “They’re gambling on the market and should be undertaken by those with the appetite for the risk and the ability to absorb the risk.”

Kansas’ state pension systems were collectively 56.4 percent funded as of 2013.

Photo credit: “Seal of Kansas” by [[User:Sagredo|. Licensed under Public Domain via Wikimedia Commons

Outcry From Pensions Over Delaware Court Ruling On Legal Fees

A recent ruling by the Delaware Supreme Court lets corporations shift their legal tab to investors.

Now, public pension and trade groups are speaking out against the ruling. Two trade groups representing public pension funds have contacted Delaware lawmakers over the last two weeks to lambast the ruling.

From Pensions & Investments:

A letter sent Wednesday to Delaware Gov. Jack Markell by the National Conference on Public Employee Retirement Systems and eight unions representing public- and private-sector workers warns that the decision “eviscerates investor rights” beyond the state’s borders.

The letter joins an earlier call Nov. 24 by the Council of Institutional Investors for Delaware lawmakers to restore investors’ legal rights that are now threatened by the decision in ATP Tour Inc. et al. vs. Deutscher Tennis Bund. While the court allowed a private corporation to amend its bylaws to make litigants personally liable for legal expenses, public company boards of directors have embraced the May 8 ruling. More than three dozen companies have unilaterally adopted similar or even more restrictive fee-shifting provisions, said CII, whose members represent $2 trillion in assets, including the $187.1 billion California State Teachers’ Retirement System, West Sacramento; New York City Police Pension Fund, New York City Fire Department Pension Fund and other funds in the $160 billion New York City Retirement Systems; and North Carolina Department of State Treasurer’s Office, which oversees the $88.4 billion North Carolina Retirement Systems, Raleigh.

Both groups are calling for the governor to take immediate action, including legislation to restrict or overturn the court’s decision and curb the adoption of fee-shifting bylaws by companies, many of which are incorporated in Delaware. Calls to the governor’s office were not returned by press time.

“Pension plans are among the largest and most active institutional investors. Approximately 70% of the typical public pension plan’s funding comes from investment returns. As shareholders, pension plans must ensure the integrity of their investments. But as fiduciaries, pension plans cannot expose their capital — and their beneficiaries — to unreasonable financial risk,” said the letter from NCPERS, which represents $3 trillion in pension assets. “No reasonable investor … would be willing to risk facing this type of uncontrollable financial exposure.”

More on the case – ATP Tour Inc. et al. vs. Deutscher Tennis Bund – can be read here.

Photo by Joe Gratz via Flickr CC License

Norway’s Largest Pension Divests From Coal, But Sees Risks in Exiting Other Fossil Fuels

KLP, Norway’s largest pension asset manager, said it plans to divest from coal companies and increase investments in renewable energy.

The divestment from coal comes even as KLP remains heavily involved in oil and gas investments. That’s because an internal study suggested that divesting from all fossil fuel companies would pose big risks for KLP and harm future returns.

From IPE Real Estate:

It said it was doing this to contribute to the “urgently needed” switch from fossil fuel to renewable energy.

KLP defines coal companies as coal mining companies and coal-fired power companies that derive a large proportion of their revenues from coal.

At the very least, KLP will exclude those with 50% of revenues from coal-based business activities.

The names of the companies to be excluded will be published in an updated KLP list on 1 December.

KLP’s divestment from coal companies also applies to the KLP funds.

The public service pensions provider said preliminary estimates showed the divestment would lead to the sale of shares and bonds worth just under NOK500m.

[…]

The KLP Group, with total assets of NOK470bn, is already a major investor in renewable energy, with NOK19bn invested in Norway alone.

Last year, it also established a partnership with Norfund for direct investment in renewable energy and finance.

The additional NOK500m will be used for direct investments in increased renewable energy capacity in emerging economies, where KLP considers the need to be greatest.

The pension manager will not be divesting from oil and gas companies after a study suggested that doing so would diminish future returns. Details on the study from IPE Real Estate:

At present, the divestment does not apply to oil and gas companies.

KLP said this was because coal companies were considered to have the largest negative impact, both in terms of carbon emissions per unit of energy produced and local pollution in the vicinity of the coal-based facilities, even though there are significant variations between the different types of oil, gas and coal.

But KLP also said a withdrawal of investments in oil and gas companies would probably have a material impact on future returns, unlike the retreat from coal company stocks.

At the request of the Norwegian municipality of Eide, one of its customers, KLP carried out an assessment on the feasibility of pulling its investments out of oil, gas and coal companies without affecting future returns, in order to contribute to a better environment.

The report found no support for the “stranded assets” hypothesis, which posits that investments in companies with major fossil fuel reserves represent a greater financial risk than is normal for this type of undertaking.

It said: “On the contrary, a divestment from all fossil fuel companies would significantly increase KLP’s risk, particularly with respect to Norwegian shares.

“However, depending on the definition applied, divestment from coal companies alone would not represent any significant financial risk for KLP.”

KLP manages about $45 billion in pension assets.

CalSTRS: Financial Risk of Climate Change “Very Real” For Institutional Investors

CalSTRS has been one of the most active (and vocal) pension funds in the world this year when it comes to exploring the financial risk of climate change.

The fund announced last month it was joining forces with Mercer and a handful of other pension funds to study the market impact of climate change.

Now, CalSTRS has commented on a new report showing the “profound lack of preparedness” for climate change among the nation’s insurance companies.

The pension fund calls for institutional investors to be “more mindful of market exposures to environmental risks.”

From a CalSTRS release:

The Insurer Climate Risk Disclosure Survey Report & Scorecard: 2014 Findings & Recommendations was released today by Ceres, a nonprofit sustainability organization mobilizing business and investor leadership on climate change and other sustainability challenges, ranks property & casualty, health, and life & annuity insurers that represent about 87 percent of the total U.S. insurance market. Ceres found strong leadership on the issue in fewer than a dozen companies nationwide.

“Environmental, social and governance risks and issues such as climate change are very real for CalSTRS. This new report enables large institutional investors to be more mindful of market exposure to environmental risks through our insurance investments,” said CalSTRS Chief Executive Officer Jack Ehnes. “More importantly, the report gives us better perspective on how well, or not, insurance companies are responding to climate change risk.”

The report states, “… insurers are on the veritable ‘front line’ of climate change risks, and there is compelling evidence that those risks are growing. Rising sea levels and more pronounced extreme weather events will mean increasingly damaging storm surges and flooding. Hurricane Sandy alone resulted in over $29 billion in insured losses.”

“Meaningful change in the recognition of climate risk to the investment portfolio will come from an alignment of interests, and who better to take leadership this effort than the insurance industry,” added Ehnes. “The foundation of the insurance model is based on risk analysis, so ignoring the risk of climate changes seems most imprudent. Clearly, more action on the part of the insurance sector is needed.”

Last month, CalSTRS announced plans to double down on its clean energy investments.

Swedish Pension Divests From 20 Fossil Fuel Companies

One of Sweden’s largest pension funds has announced it plans to divest from $116 million worth of fossil fuel-related holdings.

In an effort to ward off the “financial risk” of climate change, Sweden’s AP2 will cut 20 gas, oil and coal companies from its portfolio. From Chief Investment Officer:

[AP2] is cutting 12 coal companies and eight oil and gas production firms, with a total market value of SEK 840 million, or roughly 0.3% of the portfolio.

“Our starting point for this analysis has been to determine the financial risks associated with the energy sector,” said Eva Halvarsson, CEO of AP2. “By not investing in a number of companies, we are reducing our exposure to risk constituted by fossil fuel based energy. This decision will help to protect the fund’s long-term return on investment.”

In a statement released today, AP2 said its team had reviewed all holdings in fossil fuel companies and assessed the financial risk posed to each one by climate change.

The fund said the coal companies it would sell “face considerable climate-related financial risk, due to the negative environmental and health impacts of coal”. AP2 also cited competition from gas and renewable energy sources as affecting demand for coal.

AP2 also identified “serious climate-related financial risks” for a number of oil producers, particularly involving “high-cost projects” such as extracting oil from oil sands. AP2 said it believed it was “highly likely that these projects may either be stranded or unprofitable”.

The Swedish fund is the latest institutional investor to reduce or completely scrap their investments in fossil fuel producers. Stanford University’s $18.7 billion endowment said in May that it would sell out of fossil fuel-related companies, while the $860 million Rockefeller Brothers fund in September announced its intention to divest from coal and oil. A group of US charities representing $1.8 billion in assets also took similar steps at the start of this year.

AP2 manages $36.7 billion of assets.

Photo by Penagate via Flickr CC

San Francisco Pension Backs Off Hedge Funds After Conflicts of Interest Surface

San Francisco Employees’ Retirement System (SFERS) was set to vote yesterday on whether the fund should allocate up to 15 percent of assets, or $3 billion, to hedge funds.

But the vote never happened, in part because of the objections of union members and retirees who showed up to the meeting. Recent reports of conflicts of interest surrounding the hedge fund investments probably didn’t help, either.

From the International Business Times:

San Francisco officials on Wednesday tabled a proposal to move up to 15 percent of the city’s $20 billion pension portfolio into hedge funds. The move came a day after International Business Times reported that the consultants advising the city on whether to invest in hedge funds currently operate a hedge fund based in the Cayman Islands.

The hedge fund proposal, spearheaded by the chief investment officer of the San Francisco Employees’ Retirement System, or SFERS, had been scheduled for action this week. If ultimately enacted, it could move up to $3 billion of retiree money from traditional stocks and bonds into hedge funds, potentially costing taxpayers $100 million a year in additional fees.

Pension beneficiaries who oppose the proposal spoke at Wednesday’s meeting of the SFERS board. They cited financial risks and the appearance of possible conflicts of interest in objecting to the hedge fund investments.

Prior to the meeting, the Service Employees International Union, which represents roughly 12,000 members who are eligible for SFERS benefits, asked city officials to have the hedge fund proposal evaluated by a consultant who has worked with boards that have opted against hedge funds.

David Sirota reported on the possible conflicts of interest earlier this week:

[SFERS is] drawing on the counsel of a company called Angeles Investment Advisors, one of a crop of consulting firms that has emerged across the country in recent years to aid municipalities in navigating the murky waters of managing money.

For two decades, Angeles has been employed by the San Francisco pension system to champion the best interests of city taxpayers and employees — the cops, firefighters and other municipal workers who depend on pension payments after their retirement. But the firm is concurrently playing another role that complicates its image as a disinterested guide: An International Business Times review of U.S. Securities and Exchange Commission documents has found that since 2010, Angeles has run a hedge fund based in the Cayman Islands that invests in other hedge funds.

In other words, the consultants that are supposed to be providing unbiased advice about whether San Francisco would be wise to entrust its money to the hedge fund industry are themselves hedge fund players.

SFERS says that, although the vote is tabled for now, it could be brought back at a later time.

This isn’t the first time the pension fund has delayed voting on hedge fund investments. In fact, it’s the third time: the board first delayed the vote in June. Then it delayed the vote again in August.

CalPERS To Measure, Disclose Carbon Footprint of Portfolio

CalPERS and several other institutional investors signed the Montreal Carbon Pledge yesterday. The pledge mandates that the investors measure and publicly report the carbon footprint of their entire investment portfolio.

Washington Pension Board Declines to Divest From Fossil Fuels

The Washington State Investment Board (WSIB), the entity that handles investments for the state’s pension systems, at its latest board meeting weighed whether to divest from fossil fuel-based companies.

The Board ultimately decided against divestment. But the members said they would continue to evaluate whether climate change posed any risk to pension investment returns, and would use their power as major shareholders to push companies for transparency about financial risks posed by climate change.

The WSIB has major stakes in oil and coal investments.

Further details on the board’s decision, from the Olympian:

When evaluating a future investment, the SIB said it will consider whether climate change poses any financial risk to its expected returns.

It should not stop investing in lucrative but controversial energy projects. That would expose the board to potential legal action over its failure to produce as much value as possible.

Outgoing SIB Chair Jim McIntire, who is also the state Treasurer, proposed a more responsible strategy for showing sensitivity to environmental issues. He said the SIB should press companies for greater transparency about the risk from climate change, and how they are mitigating that risk.

A large institutional investor such as the state of Washington can use its leverage to change company policies. McIntire said that’s the SIB’s preferred approach.

[…]

The SIB’s legal mandate is to make money for the pension funds it manages. Its fiduciary duty is simply to get the best return possible for the individuals who will someday depend on those pensions.

But setting investment policy is more complex than that. The SIB members are responsible for examining the short- and long-term risks of its investments. And that requires assessing both internal and external factors that might influence an investment’s return.

The WSIB presents an argument many pension funds have made over the past few months: divestment isn’t as effective as lobbying for change as a major shareholder.

No public pension funds in the U.S. have yet divested from fossil fuel companies on the grounds of climate change.

Can Insurance Companies Save Public Pensions?

Last week, Pension360 covered a question asked by the Washington Post’s Wonkblog:

Does it make sense for local governments to turn over the assets of their employee pension plans to insurance companies, who would in turn make monthly payments to retirees?

This week, Mary Pat Campbell (who runs the STUMP blog) has given an in-depth answer to the above question:

Here is the problem: for all of my posts about alternative assets in public pensions (though those are troubling when they are a huge portion of the portfolio), it’s not the financial risks per se, or even the longevity risk, that has been killing public pensions, though those do contribute.

It’s that governments are great at promising, but not so great at putting money by to pay for those promises.

[…]

Insurers are willing to write group annuities to back pension promises — they did this with GM and Verizon pensions — but you have to give them all the assets they require to back that business. A “fair price” would be less than what is statutorily required, probably, because statutory requirements tend to be very conservative in valuing the liabilities, in order to protect policyholders/annuitants. This is called surplus strain.

But the thing is, even with the “fair price”, governments would have to pay amounts way beyond what they’re paying now, just to meet the pension promises made for past service, forget about any future service accruals.

The main problem is that not enough money has been put by. The risk is not so much that public pensions across the country have been investing too riskily or anything like that (but overly risky investing can make the bad situation worse.)

Now, not all pensions are underfunded as grossly as New Jersey or Illinois. But you don’t get to a 72% overall funded ratio just from those two states.

While insurers might be able to reduce the worry about longevity risk and financial risk for fully-funded plans, they cannot help politicians trying to lowball pension costs.

Her answer, in other words: “No”.

Photo by www.stockmonkeys.com