investment performance

Pennsylvania Pension Officials Defend Investment Strategy After Governor Calls for Overhaul

Last week, Pennsylvania Gov. Tom Wolf released his first budget proposal.

Wolf has said many times that he doesn’t support a full overhaul of the state’s pension system. But his budget did contain some pension-related changes.

Wolf is calling for the state’s pension funds to take a more passive approach to investing and to cut down the fees it pays to managers. The proposal was short on specifics but called for the funds to “prudently maximize future investment returns through cost effective investment strategies.”

PhillyDeals columnist Joseph N. DiStefano talked to spokesman for the state’s two pension funds – SERS and PSERS – and got their official reactions to the budget proposal.

SERS reaction:

“We are working to gather details on the Governor’s plan, so I can’t speak to it specifically,” SERS spokeswoman Pamela Hile told me. “What I can tell you is that last year, a little more than 0.5% of the total fund value went to management fees. This, in the view of the Board, does not represent an excessive amount.”

“Looking at the issue from a long-term perspective, over the past decade, SERS paid $2.4 billion in fees, while earning $19.7 billion net of fees and expenses AND paying out $23.2 billion in retirement benefits.

“Compare that performance to an industry standard 60% equity/40% bond index fund, SERS’ performance added $4.9 billion of value to the fund with 0.5% less volatility.

“To further illustrate this value, our alternative investment program, built with top-tier investment managers, outperformed the U.S. public market equities return by 5% net of all fees over the decade ended 2013… Over the past five years, we reduced fees 30%. We get good value for the fees we pay…

“In 2013, SERS earned $3.7 billion, after all investment management fees and expenses of $175 million were paid. From a basic dollar perspective, that’s like paying $175 over the year to net $3,700 in your pocket at the end of the year.”

The PSERS spokesperson told DiStefano:

“We are not aware of the details of the Governor’s proposal on investment management fees. We have not met with him,” and won’t comment on details of the proposal until they are available.

“Our investment management fees are not excessive relative to the incremental value generated. PSERS paid $482 million in investment expenses for the fiscal year ended June 30, 2014. This amounts to 0.93% of our fund.

“By spending those fees, we earned an additional $1.27 billion (net of fees) ABOVE the index return,” Williams added in an email. “We would not have that additional $1.27 billion or 2.8% in additional investment performance if we did not use active managers.

“Looking longer term for the past 15 fiscal years (2000-2014), PSERS incurred $4.96 billion in investment management fees. In exchange for those fees, the Fund received the index returns plus an additional $16.42 billion in excess performance gross of the fees incurred. So, net of fees, PSERS generated $11.46 billion of incremental performance above the applicable index returns.

Read more of their remarks, including reaction to Wolf’s pension bond proposal, here.

Photo by c_ambler via Flickr CC License

Institutional Investors Cite Regulatory Risk, Transparency as Obstacles to Infrastructure Investment

The Organization for Economic Cooperation and Development (OECD) recently surveyed 71 pension funds on their interest in alternative investments.

[The full survey can be found here.]

The findings when it came to infrastructure investing were among the most interesting.

The survey found that the funds had increased their alternative investments across all categories between 2010 and 2013.

But when it comes to allocation, infrastructure still occupies the lowest rung on the totem poll.

The OECD sat down with institutional investors recently to ask why they might be hesitant to invest in infrastructure. From Investments and Pensions Europe:

At the recent OECD roundtable on long-term investment policy, institutional investors in attendance cited two main obstacles to infrastructure investment. First was the lack of a transparent and stable policy framework and regulatory risk was a top concern. Second was a lack of bankable investment opportunities.

Other important issues raised included clear and predictable accounting standards, long-term metrics for performance valuations and compensations, standardisation in project documentation, and transferability of loans and portability of guarantees. The expansion of financial instruments available for long-term investment (eg, bonds, equity, basic securitisation of loans), and the need for a clear risk allocation matrix to assign to the potential risk owner (government, investor or both) were also raised.

Ultimately, the primary concern for investors is investment performance in the context of specific objectives, such as paying pensions and annuities. Infrastructure can become an alternative asset class for private investors provided investors can access bankable projects and an acceptable risk/return profile is offered.

The study and roundtable were conducted as part of the OECD Long-term Investment Project.

Maryland Officials Warn Against Plan to Cut State Pension Payments

Maryland lawmakers are considering cutting the state’s payments into its pension system, citing strong investment performance.

The cuts would total $2 billion over the next 10 years, according to the Maryland Reporter.

But several key government officials are wary of the plan, including the state’s Budget Secretary and Comptroller.

From the Maryland Reporter:

Comptroller Peter Franchot and Gov. Larry Hogan’s budget secretary are both raising objections to a proposal reducing state pension payments, saving money that may be used to increase education aid and state employee salaries.

“It is a bait and switch on rank-and-file teachers and state employees,” said Franchot, as well as “bait-and-switch” on the state’s rating agencies and taxpayers.

“It is gaming the system to constantly switch from one system to another,” Franchot said, with the state constantly seeking ways to set aside less money for the retirement system.

“If we perform exceptionally well [on investments], this will be a good decision,” Budget Secretary David Brinkley told the House Appropriations Committee Friday. “If we don’t perform as we have been or hope to … it will be a disastrous decision.”

Both men sit on the Board of Trustees of the State Retirement and Pension System.

The system is currently 68 percent funded.

If the state doesn’t cut pension payments, the system is on track for 80 percent funding by 2021.

Photo by TaxRebate.org.uk via Flickr CC License

New Orleans Pension Considers Index Investing After 2014 Performance Lags

The New Orleans Municipal Employees Retirement System returned less than 5 percent in 2014, a number that is pushing some board members – including the city’s finance director – to consider a more passive investment strategy.

Trustee and city finance director Norman Foster argued this week that the fund should be investing in funds that passively follow indices like the S&P 500, which saw double digit returns in 2014.

From NOLA.com:

Several board members expressed some frustration with the fund’s investment performance, none more than Norman Foster, the city’s finance director.

Foster argued that the city would have been better served by investing in index funds, passive investment vehicles that track the market and eliminate costly management fees. “I’ve made the case for passive investment, and I’ll be making it more and more,” he said.

[…]

Some of the performance lag can be attributed to the fund’s asset mix. Like many pension systems, the retirement system invests heavily in bonds, a strategy that minimizes risk but also limits returns during market booms.

Foster pointed out, however, that even when the asset mix is taken into account, the fund’s performance fell short of index benchmarks by nearly 3 percent, which means the managers failed to beat the market, despite collecting handsome fees.

Ian Jones, who advises the retirement system on investment issues, warned against dumping its asset managers based on one year’s worth of data.

The fund assumes a 7.5 percent annual return.

Over the past seven years, the fund’s returns have averaged 4.21 percent annually.

Photo by www.SeniorLiving.Org

Canada Pension CEO Has Eyes Peeled For Opportunities Amidst Volatility

Canada Pension Plan Investment Board (CPPIB) Chief Executive Mark Wiseman sat down with Reuters for an interview last Friday, and made some interesting comments on how his fund deals with market volatility.

Wiseman said his fund would likely be particularly active in the coming months as fluctuations in commodities and currency markets open up investment opportunities.

Wiseman’s comments, from Reuters:

CPPIB, which manages Canada’s public pension fund, said that while investment deals have been slower in recent months because assets are fully valued, recent sharp movements in commodity and currency markets should help it find acquisitions.

“We are seeing more volatility in markets and that should generate more opportunities for CPPIB,” Chief Executive Mark Wiseman said in an interview.

“If you look at increased volatility, not just in equity markets but in currency markets, in commodity markets, the long-term view and those comparative advantages that we have, in these types of market conditions … our comparative advantages are more valuable,” he said, pointing to CPPIB’s scale, long investment horizon and certainty of assets.

[…]

Wiseman said that while CPPIB did not see deflation as a particularly large risk to the global economy, the world appeared to be moving to a two-speed model, with China and the United States showing growth and Europe and Japan needing “substantial long-term structural reforms” to improve.

“Let’s talk about Europe. It’s a very difficult situation. The economy has continued to underperform since the global financial crisis, and in terms of structural reforms, they have been reasonably slow in coming, for a myriad of reasons,” Wiseman said.

The CPPIB manages $191.3 billion in pension assets.

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

U.S. Pension Funds Return 6.7 Percent; Sixth Straight Year of Gains

U.S. public pension funds saw median returns of 6.76 percent in 2014, according to Wilshire Associates. It marks the sixth consecutive year of positive investment performance for public funds in the U.S.

The country’s corporate pension plans returned 6.92 percent.

More from Bloomberg, via the Salt Lake Tribune:

U.S. public pensions reported median returns of 6.8 percent last year, the sixth year in a row of gains after the financial crisis, according to Wilshire Associates.

The gains, though, are less than the annual investment returns of 7.5 percent to 8 percent that many state and local governments count on to pay benefits for teachers, police and other employees. In the 10 years through Dec. 31, public pensions had a median return of 6.6 percent.

“A lot of the plans can’t be satisfied with a return of less than 7 percent,” said Bob Waid, a managing director at Santa Monica, California-based Wilshire, adding that a portfolio containing 60 percent U.S. stocks and 40 percent U.S. bonds returned 10 percent. “I’m a huge advocate of diversification, but you have to wonder sometimes when you see that the guy who did 60/40 beat you.”

While the Standard & Poor’s 500 Index of U.S. stocks returned 13.7 percent, public pensions were dragged down by international investments. Stagnation in Europe and a strong dollar led to losses of almost 4 percent on foreign stocks, according to Wilshire.

As Pension360 covered this week, the assets of U.S. public plans also rose to all-time highs.

Photo by Andreas Poike via Flickr CC License

Philadelphia Pension System to Pay $62 Million Bonus to Retirees in 2015

Philadelphia’s pension system is only 47 percent funded. But that won’t stop retirees from getting a collective bonus of $62.4 million in 2015.

That’s because the system pays out a bonus when it exceeds a set investment return target.

The target in 2014 was 8.85 percent. The fund returned over 11 percent.

So, retirees will receive a bonus for the first time since 2008.

Philadelphia’s isn’t the only pension system in the United States that pegs bonuses to investment return. But the practice is rare.

Kentucky Pension Investment Performance Lags Behind Peers, System Says

Kentucky Retirement Systems officials met with lawmakers on Monday as they presented the findings of an internal study to the Pension Oversight Board.

The study examined how KRS investment performance stacks up with other, similar funds.

Officials said the study indicated that the system’s investments were performing at rates that lagged behind their peers as well as the system’s own assumed rate of return.

More from the Northern Kentucky Tribune:

The 10 peer states–Indiana, Kentucky, Louisiana, Maryland, Massachusetts, New Jersey, Rhode Island, South Carolina, Virginia, and West Virginia–were chosen for the similarities in their investment mixes. But even through this seemingly narrow frame of reference, Kentucky still lingers at the bottom of the list: the state’s investments are returning at a 6.8 percent rate compared with list-topping Louisiana, whose investment spread is paying off at an 8.3 percent rate of return.

Though Kentucky legislators have set a target 10-year return rate of 7.75 percent for their investments, Cracraft cautioned the Board that none of Kentucky’s peer states have consistently met that target, nor have any of the 44 states with similar pension plans.

[…]

Measuring investment outlooks at one, three, five, and 10 year forecasts, KRS returns lagged behind other plans at nearly every turn.

KRS’ particular mix of investments has less investment in U.S. equities than the others, with 10.6 percent in hedge funds, 11.2 percent in private equity, 2.9 percent in real estate, and 9.8 percent real funds.

Cracraft said allocations to hedge funds is a trait shared by the six lowest performers.

“The takeaway here for me and the group of staff,” said Cracraft, “was that when compared to plans we feel are taking a similar approach, while KRS appears to be slightly below, it’s performing in line with the group.”

Pension officials also reported a piece of sobering news: if investment performance stays flat for the rest of the fiscal year, the system will lose $168 million in assets.

CalPERS Funding Ratio Jumps to 77 Percent On Back of Investment Gains

CalPERS revealed on Tuesday that its funding situation had improved in 2014; the system is now 77 percent funded, an increase of 7 percentage points from fiscal year 2012-13.

CalPERS attributed the funding increase to investment performance – the fund saw their investments return 18.4 percent last fiscal year.

“You’ll Hear A Lot About Pensions” in 2015, Says Kentucky Chamber of Commerce President Amidst Push for Transparency

Early this month, the Kentucky Chamber of Commerce called for an audit of the Kentucky Retirement Systems – specifically, a review of its investment performance and policies.

Now, the Chamber president and CEO is promising Kentucky residents that they’ll “hear a lot about pensions” in 2015 — the implication being that addressing the state’s pension issues will be on the top of the docket for the Chamber next year.

Chamber President and CEO David Adkisson sat down with the Lexington Herald Leader over the weekend, and this is what he had to say:

The big storm cloud hanging over Frankfort right now in terms of its impact on the budget and everything else the state of Kentucky wants to do, like operating our schools, is the pension issue. There are two basic pension systems; the Kentucky Retirement System and then the Kentucky Teachers Retirement System.

The Teachers Retirement System has been saying for a couple of years that they need more money from the legislature to get on sound footing. They’ve addressed some of their key issues and they’re not in as bad a shape as the Kentucky Retirement System. But, they need more money and a significant amount: they said 400 million. That’s huge.

On a $10 billion budget, that’s a 4 percent increase.

We’re very interested in seeing more transparency. We want to know more about the fees that are paid to placement agents, we want to know more about the administrative and health-care costs of the Kentucky Retirement System. So, you’ll hear a lot about pensions in the 2015 session.

State Auditor Adam Edelen hasn’t decided whether to heed the Chamber’s call for an audit.

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