interest rates | Pension360

Moody’s: New Jersey Pension Ruling A “Credit Negative” For State

A New Jersey Superior Court judge ruled this week that Chris Christie acted outside the law when he cut the state’s pension contributions $2.4 billion over two years.

That means, pending appeal, the state will be making its full contribution in 2015 – a development that hasn’t yet been budgeted for.

So while the ruling was good news for the state’s underfunded pension system, the decision is a “credit negative” for the state itself, according to Moody’s.

From NJ.com:

The flexibility of the state’s pension payment has been “a tool essential” to balancing the budget, Moody’s Investors Service said. Putting limitations on that amounts to a “credit negative.”

“Going forward, making the full pension contribution would incrementally improve the pension funding position, but would significantly increase budget pressure by reducing the state’s ability to fund other programs and potentially challenge the state’s liquidity,” Moody’s said.

[…]

“While it remains unclear whether the payment will be increased in fiscal 2015, a $1.6 billion obligation would comprise nearly 15 percent of the unspent budget,” Moody’s said.

A credit negative assessment doesn’t suggest a rating or outlook change — which could affect New Jersey’s interest rates — is imminent, but rather assesses the impact of a single event, Moody’s said.

Since the full pension payment isn’t budgeted for, lawmakers are worried that “devastating” cuts will have to be made in the current budget.

The situation might have been avoided had the state taken the same approach as Illinois in 2013.

When Illinois passed it’s pension overhaul it didn’t count the savings in the budget — because it knew a legal challenge was imminent.

Photo By Walter Burns [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

Former NY Lieutenant Gov: Kansas’ Pension Bond Plan a “Dreadful Idea”

Kansas Gov. Sam Brownback last month proposed issuing $1.5 billion in bonds to help cover the state’s pension funding shortfall.

The bonds would allow Brownback to go through with another proposal – lowering state payments to the pension system by $39 million in fiscal year 2015-16 and by $92 million in fiscal year 2016-17.

But pension bonds don’t come without risks. Over the weekend, a former New York lieutenant governor called Brownback’s plan “a dreadful idea”. From the Wall Street Journal:

Richard Ravitch, the former New York lieutenant governor who helped save New York from bankruptcy in the 1970s and now sits on the board of The Volcker Alliance, called Kansas’ plan “a dreadful idea.”

“If you cover current obligations by borrowing money, you’re on an unstable course,” said Mr. Ravitch.

There are other criticisms of pension obligation bonds, as well. The states and municipalities that issue them, for example, are frequently in ill-equipped to deal with the fallout if pension investment returns don’t exceed bond interest rates.

From the Wall Street Journal:

The state would make a decades-long bet that pension-fund returns will exceed current interest rates for taxable municipal bonds. Kansas officials said interest rates near historic lows make the bonds an attractive way to help manage retirement obligations.

If examined from the stock market highs at the end of 2007, such deals returned an average of 0.8%, the Center [For Retirement Research] said in a report last year. By 2009, however, most pension bonds were a net drain of -2.6%. Thanks to stock market gains following the recession, however, most of the deals were back in positive territory by 2014, returning an average of 1.5%.

Pension-bond deals made at the end of the market run-up in the 1990s, or right before the crash in 2007, have produced negative returns, the report said. Many of the bonds have a 30-year lifespan, meaning the final results won’t be known for years.

“This should be a tool in a well-functioning governments arsenal,” said Alicia Munnell, the Center’s director. “Unfortunately, those that use them tend to be cash-strapped and desperate.”

Read the Center for Retirement Research report on pension obligation bonds here.

Photo credit: Lendingmemo

Chicago Could See Credit Downgrade If Pension Changes Are Suspended Pending Lawsuit

Unions and retirees are currently challenging Chicago’s 2014 pension changes, and they are asking a judge to stop the implementation of the changes – which took effect Jan. 1 – until the lawsuit is resolved.

But a Chicago official said on Thursday that such an injunction could spur a credit rating downgrade from all three major rating agencies.

From Reuters:

Chief Financial Officer Lois Scott testified in Cook County Circuit Court that all three major credit ratings agencies have negative outlooks on Chicago’s ratings, largely due to a big unfunded pension liability that a 2014 Illinois law aims to ease for the city’s municipal and laborers’ funds.

Labor unions and retirees who are challenging the law, which took effect Jan. 1, have asked Associate Judge Rita Novak to temporarily stop it.

“I think that anything that arrests progress significantly increases our risk of downgrades,” Scott testified.

Scott said Chicago’s ratings are already lower than most big U.S. cities and that further downgrades would pump up interest rates on new fixed-rate bonds and thin the ranks of potential bond buyers and credit providers. She added the termination of interest-rate hedges and letters of credit on existing variable-rate bonds could be triggered, costing Chicago hundreds of millions of dollars.

The 2014 pension changes require city employees to contribute more to the system. The city’s contribution rate was increased, as well. Lastly, the calculation of COLAs is now linked to inflation; previously, the COLA was set at 3 percent annually.

Photo by bitsorf via Flickr CC LIcense

Kolivakis: 5 Reasons Behind Canada Pensions’ Real Estate Binge

Canadian companies and pension funds collectively invested $2.75 billion in commercial U.S. real estate in the first month of 2015.

In 2014, that number was a hefty $9.7 billion. What’s behind the binge? Leo Kolivakis of Pension Pulse gives 5 reasons why Canada’s pensions are snapping up real estate in the U.S., and elsewhere.

_______________________________

By Leo Kolivakis, Pension Pulse

Why are they doing this? There are a few reasons. First, real estate has long been heralded as the best asset class among Canada’s large public pension funds which are increasingly shifting assets away from volatile public markets into private markets, especially real estate and infrastructure which offer more predictable yields over the long-run.

Second, Canada’s large pension funds aren’t dumb. They read this blog and many other market sources and I’m sure the most savvy of them agree with me, Canada’s crisis is just beginning. This is why they’re scrambling to snap up as much U.S. and European real estate even though the loonie keeps declining. They know it will fall further but they also know there are better opportunities outside of Canada at this time given their long investment horizon.

Third, some of Canada’s large public pension funds, like bcIMC, are much more exposed to Canada’s commercial real estate market than others. bcIMC recently announced it agreed to sell Delta Hotels and Resorts to Marriott International for $168 million, but it has a lot more work to properly diversify its real estate holdings outside of Canada.

Fourth, in my opinion the Caisse’s real estate division, Ivanhoé Cambridge, is by far the best real estate investment management outfit in Canada. There are excellent teams elsewhere too, like PSP Investments, but Ivanhoe has done a tremendous job investing directly in real estate and they have been very selective, even in the United States where they really scrutinize their deals carefully and aren’t shy of walking away if the deal is too pricey.

Fifth, I don’t see interest rates rising anytime soon. In fact, I see central banks pumping a lot more liquidity into the global financial system. And as I recently explained, I’m not in the camp that the Fed will raise rates in 2015 and risk making a monumental mistake.

Having said all this, the rush into real estate and other illiquid alternatives worries me. Why? Because I’m increasingly worried about global deflation and the long-term effects it will have on all investments, especially illiquid private markets.

Don’t get me wrong, done properly, real estate, infrastructure and private equity are great asset classes. But as global pension funds and sovereign wealth funds topple over each other to find deals, they are significantly bidding up prices, lowering prospective returns on all private market investments, and this will really hurt them if a prolonged period of deflation sets in.

A long time ago I wrote a comment asking whether pensions are taking too much illiquidity risk. I think you should all read that comment again and keep it mind as you plow into U.S. and global real estate. Sure, pensions should take the long, long view, but they also need to be acutely aware of price entry and how a prolonged period of debt deflation impacts all their investments, especially private market investments.

Photo credit: “Canada blank map” by Lokal_Profil image cut to remove USA by Paul Robinson – Vector map BlankMap-USA-states-Canada-provinces.svg.Modified by Lokal_Profil. Licensed under CC BY-SA 2.5 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Canada_blank_map.svg#mediaviewer/File:Canada_blank_map.svg

More European Pensions To Move Into Real Assets, Says Study

The coming years will find European institutional investors increasingly turning to real assets, according to new research from alternative asset manager Aquila Capital.

The new paper, titled Real Assets – The New Mainstream, predicts that investors will turn to real assets and equities and bonds will become less attractive.

Details from a press release:

The research predicts that the Dow Jones Index will deliver average total returns of 4% per annum over the next 10 years, while real returns on German 10-year government bonds are set to be negative, even if interest rates were to reach 4% by 2024.

Alongside these estimates, 60% of institutional investors in Europe expect institutional allocations to real assets to increase over the next three years.

Oldrik Verloop, co-head of hydropower at Aquila Capital, says: “This unique investment landscape, for which there is no precedent in history, is giving rise to considerable challenges for pension fund managers struggling to fund deficits.

“Among these challenges is the need to assess the impact of today’s loose monetary policies on global interest rates and inflation tomorrow.”

He says that institutional investors seeking to future-proof their portfolios will be searching for new investment solutions, leading them to shift allocations towards real assets.

“Real assets are uniquely positioned to provide value and enhance overall risk-adjusted returns in a broad range of market environments. The powerful combination of market-independent stability and growth make them an attractive core holding for institutional investors,” he adds.

As part of the research, 50 institutional investors across Europe were surveyed.

Photo by Santiago Medem via Flickr CC

Jacksonville Mayor Submits New, Updated Reform Bill

Jacksonville Mayor Alvin Brown has submitted a reworked version of the city’s pension reform proposal, which was previously passed by City Council but wasn’t approved by the city’s Police and Fire Pension Fund.

The bill needs to be approved by both entities before it passes into law. The City Council may vote on the new bill next month, according to the Jacksonville Business Journal.

More details from the Jacksonville Business Journal:

Brown’s bill comes in the wake of a City Council version of pension reform legislation, which was approved by a 16-3 margin in December, being sent back by the Police and Fire Pension Fund.

City Council worked with Brown to come up with changes that will, hopefully, appease the board. City Council still expects to make some changes, though, President Clay Yarborough told the Florida Times-Union.

Some of the sticking points of the council-approved bill were the interest rate that firefighters and police officers get on Deferred Retirement Option Program accounts, cost-of-living adjustments and City Council’s power to change benefits.

The council’s agreement with the Police and Fire Pension Fund will go until 2030. After 2030, the city and unions will have to settle all disputes through collective bargaining.

Additionally, City Council will be able to make changes to benefits if the groups are not able to reach an agreement.

The city’s Police and Fire Pension Fund was 43 percent funded at the end of 2013.

Photo by pshab via Flickr CC License

Canada Pension Funding Declined in 2014

The collective funding ratio of Canada’s defined-benefit pension plans declined by 2.7 percentage points in 2014, according to Aon Hewitt.

From Benefits Canada:

The median solvency ratio of 449 Aon Hewitt administered pension plans from the public, semi-public and private sectors stood at 90.6% at Dec. 31, 2014.

That represents a decline of 0.5 percentage points over the previous quarter ended Sept. 30, 2014, and a 2.7 percentage-point drop from plan solvency at Dec. 31, 2013.

Since peaking at 96.6% in April 2014, overall plan solvency has declined by 5.9 percentage points, continuing the trend towards worsening plan solvency that began in the third quarter of 2014 (when the solvency ratio dropped to 91.1% from 96.2% in the previous quarter).

About 18.5% of plans were more than fully funded at the end of the year, compared with 23% in the previous quarter and 26% at the end of 2013. Plan sponsors that must file valuations as at Dec. 31, 2014 could see the amount of their deficiency contributions double in 2015 as a result of the lower solvency ratio, says Aon Hewitt.

“Plans that stayed exposed to interest rates really took a beating in 2014,” says William da Silva, senior partner, retirement practice with Aon Hewitt. “Those plan sponsors who have implemented or fine-tuned their risk management strategies performed much better than traditional plans amid interest rate declines.”

Aon Hewitt also said that new mortality tables from the Canadian Institute of Actuaries could lead to a further funding decline in the future.

Missouri Law Bans Pension Advances, Helps Retirees Recoup Losses

Pension360 covered last week the rising business of pension advances—businesses that apply the concept of a payday advance to retirement benefits by giving retirees an option to receive their pension as a lump sum.

But Missouri recently passed a bill that outlaws the practice and gives retirees a chance to take legal action against the business that gave them their pension advance.

Today, the State Treasurer announced that the law goes into effect immediately. Reported by KFVS:

Missouri State Treasurer Clint Zweifel announced House Bill 1217 goes into effect on Thursday – meaning public retirees in Missouri are now protected from the predatory lending practice known as pension advances.

Zweifel says retired public employees who are drawn into these misleading agreements can now take legal action against the businesses offering them.

“Pension advances prey on the financially vulnerable, offering an up-front lump sum in exchange for part or all of a public pension, and they are generally accompanied by exorbitant fees and interest rates,” Treasurer Zweifel said.

“Pension advances are essentially payday loans on steroids in that the individuals taking them are borrowing against a pension instead of a paycheck. They put the individual’s retirement in jeopardy and cost them more money in the long run. Today marks a big win for consumer protection in Missouri, and I am proud of the bipartisan coalition of lawmakers who helped me make our state the first in the nation to ban this practice.”

Missouri is so far the only state to pass a law addressing pension advances.

Photo by RambergMediaImages via Flickr CC License

Thousands of Early Retirements Coming In Indiana As New Law Takes Effect

A new law has pushed forward the retirement plans of thousands of Indiana workers, who may retire early to try and avoid lower interest rates on their monthly retirement benefits.

One state system, the Indiana Public Retirement System, said it expects 2,000 more retirements than last year, which amounts to a 25 percent increase. From the Lafayette Journal and Courier:

A law, passed by the General Assembly this spring, lowers the interest rate retirees will be paid if they choose to annuitize some of their retirement benefits, taking monthly payments for the rest of their lives rather than a lump sum.

For employees whose last day of work is before the end of August, the rate is 7.5 percent. It’ll drop to 5.75 percent thereafter and keep dropping until it’s tied to the market rate.

The change is supposed to prevent a changing world from bankrupting the system, according to INPRS documents. Concerns stem from longer life expectancies and the system’s return on investment, which is lower than the current interest rate.

While system administrators say the lower rates are necessary, the change has inspired government workers who were nearing retirement to move up their plans.

Of course, nobody knows for sure how many of those extra retirements were spurred specifically by the new law. From JC Online:

Local officials says it’s hard to judge the exact impact the new law has on retirees.

In the Lafayette School Corp. for example, 37 teachers retired this year, more than the typically 20 to 25 teachers, said assistant superintendent John Layton. But without asking each one point blank why they’re retiring, the reasons prompting that retirement aren’t always clear.

[…]

West Lafayette city human resources director Diane Foster said the change has had minimal impact on the city. The only retiree to cite that as a reason is soon-to-retire parks and recreation superintendent Joe Payne.

“Other than that I’m not aware of any other employees who have made that decision based on this,” Foster said. “It could be that if an employee is already considering retirement this may be just one more factor that could help them go ahead (and do it).”

It’s unclear how the change is impacting Lafayette. Human resources director Kim Meyer said retirement data wasn’t immediately available.

Rhondalyn Cornett, president of the Indianapolis Education Association, told the Lafayette Journal Courier that a retiree could see significantly less benefits under the new law—to the tune of $5,000 a year.

With that number in mind, it’d be surprising if the new law wasn’t at least a factor in most of these early retirements.

Photo by www.aag.com via Flickr CC License