investment returns | Pension360

Massachusetts Treasurer Pushes For Lower Pension Fund Return Assumption

Massachusetts Treasurer Deborah Goldberg told board members of the state’s pension system this week that they should consider lowering the fund’s assumed rate of return on investments.

The assumed rate currently sits at 8 percent. Goldberg suggested 7.75 as a starting point for changing the rate.

From WWLP:

With some instability in the global economy, Treasurer Deborah Goldberg suggested the fund might lower its expectation.

“People are trying to work their way down to 7.5, and I felt we should start looking at 7 and 3 quarters,” Goldberg told members of the Pension Reserves Investment Management (PRIM) board’s investment committee on Tuesday.

[…]

A majority of the Pension Reserves Investment Trust (PRIT) fund is invested in equity, or ownership interests such as stocks that carry significant risks compared to other investments, such as fixed income.

As of the end of November, PRIT had 43 percent of its assets allocated in global equity and another 11 percent in private equity, tying the fund to economic growth.

[…]

In calendar year 2014 PRIT had an 8.2 percent return and in fiscal year 2014 the fund had a 17.6 percent return, both of which beat investing benchmarks, according to PRIM.

PRIM last lowered its assumed ROR two years ago. At that time, it stood at 8.25 percent.

Photo by www.SeniorLiving.Org

New Jersey Pension Investment Return Falls Short of Assumed Rate in 2014

New Jersey’s pension system earned a 7.27 percent return on its investments in 2014 – down from a 16.9 percent return in fiscal year 2013-14.

The growth fell short of the system’s assumed rate of return.

From NJ.com:

New Jersey’s pension fund earned 7.3 percent on its investments last year, which state officials said beat market expectations.

But those gains didn’t live up to the 7.9 percent annual rate experts say is needed to keep troubled pension fund from adding to its liabilities.

The investments returned 7.27 percent, but were hurt largely because of market volatility in the second half of the calendar year, said Tom Byrne, acting chairman of the State Investment Council.

“For that period of time we were ahead of our benchmark by just a tiny bit but behind the 7.9 percent bogey,” Byrne said. “One period of time only tells you so much.”

[…]

Byrne noted that the investment council’s role is only half the battle. While it manages the state’s investments, it doesn’t have any say in setting or making pension contributions.

“The pension is still underfunded, and we can only do what we can do,” Byrne said.

Governors from both parties have underfunded the pension system since 1996, shortchanging the annual payments or skipping them altogether.

Pension officials defended the system’s recent dive into alternative assets; officials said those investments have earned the system an additional $2.8 billion in returns since 2010.

Photo credit: “New Jersey State House” by Marion Touvel – http://en.wikipedia.org/wiki/Image:New_Jersey_State_House.jpg. Licensed under Public domain via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:New_Jersey_State_House.jpg#mediaviewer/File:New_Jersey_State_House.jpg

Pennsylvania Teachers’ Pension Commits $150 Million to Industrial Real Estate

The Pennsylvania Public School Employees’ Retirement System (PSERS) has invested $150 million in the Cabot Core Industrial Fund.

From IPE Real Estate:

Pennsylvania Public School made the commitment based on strong operating fundamentals for industrial properties, with the sector enjoying its lowest vacancy rates since 2001 and rents rising 4% year on year.

The fund is Cabot’s first core vehicle, having previously invested in industrial properties through value-add funds.

Pennsylvania Public School participated in the funds with a $100m commitment to Cabot’s Industrial Value Fund III in 2008 and $75m to the Industrial Value IV in 2013.

Cabot has been active in Atlanta, Chicago, Dallas, Florida, Los Angeles, New Jersey and Pennsylvania.

Courtland Partners, which advises Pennsylvania Public School, said the fund would target net returns of 8-10%, with an initial current yield of 5-6%.

Around 70-80% of returns are expected to come from current income, with the balance from appreciation.

PSERS managed $51.9 billion in assets as of September 30, 2014.

Photo credit: “Flag-map of Pennsylvania” by Niagara – Own work from File:Flag of Pennsylvania.svg and File:USA Pennsylvania location map.svgThis vector image was created with Inkscape. Licensed under CC BY-SA 3.0 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Flag-map_of_Pennsylvania.svg#mediaviewer/File:Flag-map_of_Pennsylvania.svg

Chart: Institutional Investors Rank the Biggest Risks of 2015

Here’s a graphic that shows what institutional investors believe to be the biggest potential risks to investment returns in 2015.

Seventeen percent of institutional investors are most worried about geopolitical risks. Meanwhile, 13 percent and 12 percent of investors, respectively, think slow growth in Europe and China pose the biggest risk to their 2015 returns.

Chart credit: Natixis “Under Pressure” report

Preqin: Hedge Funds Grew More Than Any Alternative in 2014

Hedge funds experienced the most asset growth of any alternative asset class in 2014, according to a Preqin report.

Despite scrutiny over low returns and high expenses, investors put more money into hedge funds in 2014 than private equity, infrastructure or venture capital.

Philadelphia Pension Debt “An Obstacle” to Long-Term Growth, Says City Oversight Board

The Pennsylvania Intergovernmental Cooperation Authority (PICA) has released a report stating that Philadelphia’s pension system will be “an obstacle” to the growth and prosperity of the city.

The report says that pension costs need to be lower and more predictable for the city to grow.

The recommendations provided in the report, as reported by Philly.com:

The report’s recommendations included:

Making all new employees join the city’s hybrid pension plan, called Plan 10, which is similar to a 401(k). Mayor Nutter tried doing this in the last round of negotiations with the municipal unions, but lost.

Abolishing the controversial Deferred Retirement Option Plan (DROP), which allows city employees to pick a retirement date up to four years in the future, then accumulate pension payments in an interest-bearing account while still earning their salary. They collect a lump sum upon retirement. Council would need to pass legislation to abolish DROP.

Increasing employee contributions to the pension fund. Civil employees contribute between 3.95 percent and 4.75 percent of their annual wages. The median employee contribution for the 10 largest American cities is 6 percent, according to the report.

Lowering expectations for the rate of future returns on investments from 7.85 percent to near 7 percent.

The city’s pension system is 47 percent funded.

Read the full report here.

Photo credit: “GardenStreetBridgeSchuylkillRiverSkylinePhiladelphiaPennsylvania” by Massimo Catarinella – Own work. Licensed under CC BY 3.0 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:GardenStreetBridgeSchuylkillRiverSkylinePhiladelphiaPennsylvania.jpg#mediaviewer/File:GardenStreetBridgeSchuylkillRiverSkylinePhiladelphiaPennsylvania.jpg

Former Canada Pension Exec Now Working on Restructuring University of California Fund

Brian Gibson, former investment executive at the Ontario Teachers’ Pension Plan, went into semi-retirement in 2012.

Now he’s brought his expertise to the United States, and is helping to restructure the endowment and pension fund of the University of California.

From the Financial Post:

Gibson was hired last May about one month after Jagdeep Singh Bachher, a former AIMCo colleague, was named chief investment officer.

Bachher, AIMCo’s former chief operating officer, turned to Gibson for help in restructuring the fund that had a healthy unfunded liability and was plagued by having too many external managers and being ill-equipped to deal with the new markets.

“The market returns over the coming decade aren’t going to be great. Big balanced portfolios might earn 6%, maybe 7% on average,” said Gibson on Monday prior to flying to California. “Those are pretty modest returns, which makes it challenging to fund pensions and endowments.”

Bachher and Gibson’s goal in restructuring the investment operation was “on generating better returns over and above the market and on reducing their costs. They needed a lot fewer investment managers. They had hundreds of them, way too many,” said Gibson, who has spent half his time since May on the assignment.

Gibson said higher costs result when too many managers are hired and when each manager is given a small allocation. “The benefit of having some very good managers was diluted by having a long tail of other managers who were just okay. They had too many median managers,” said Gibson, one of the three former AIMCo employees at the fund. Arthur Guimaraes, chief operating officer, is the other.

To do that, the fund “eliminated half to two-thirds of the existing managers and re-allocated the capital to the better managers,” said Gibson, it was a change aimed at generating “several hundreds of millions of dollars of improved returns effects and lower costs, because of the ability to negotiate lower fees.”

University of California’s pension and endowment fund manages contains $91 billion in assets.

Canadian Newspaper: Quebec Pension Infrastructure Plan in Novel, But Won’t Lead to “Optimal Returns”

Canada’s second largest pension fund struck a deal with Quebec this week to take over the province’s new public transit projects.

Under an agreement reached between the Caisse de dépôt et placement du Québec and the Quebec government, the pension fund will finance and own the province’s new public transit projects.

The editorial board of the National Post, a Canadian newspaper, weighed in on the arrangement on Thursday.

The Post thought that the idea was a novel one, and good for the province – but it may not produce optimal returns, and that might be bad news for pensioners.

The Post writes:

The structure of the deal is certainly novel.

But who is kidding whom? Handing off responsibility for funding and managing public infrastructure projects to a truly arms-length body, with genuine autonomy to decide which projects to accept and which to reject, would indeed be a promising development, with the potential to depoliticize public works, traditionally a cesspool of patronage and pork even outside Quebec. By the same token, were the Caisse truly an independent pension plan, focused solely on its beneficiaries’ welfare, there might well be projects in the government’s portfolio it might wish to invest in.

[…]

Uniquely among public pension plans, the Caisse labours under a dual mandate — to “achieve an optimal return” for pensioners while also “contributing to Québec’s economic development.” It has long been seen as an informal arm of the government, contributing to the “nation-building” aspirations of past administrations. Which is to say, the “optimal return” to pensioners has often taken a back seat to politicians’ grandiose fantasies.

[…]

This might be highly advantageous to the government. The advantage is not so clear for the pensioner. Actively managed investment funds tend to underperform the market average as it is, without being force-fed a diet of public works projects. Workers dragooned into financing the public plan might well earn more were they permitted to invest the funds themselves.

The details of the Ontario plan are still being finalized. Given the financial straits the Liberals find themselves in, its putative beneficiaries should keep a close watch on the process. Public pension plans are meant to benefit those who paid for them, not the governments that created them.

The Caisse de dépôt et placement du Québec manages $214 billion in assets and is Canada’s second largest pension fund.

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Wisconsin Pension To Hand Out “Modest” Benefit Boosts After Investments Outperform Benchmarks

The State of Wisconsin Investment Board announced Wednesday that the state’s retirees will receive a “modest” boost in pension benefits this year.

The benefit increase will kick in around May, said a board spokeswoman.

Meanwhile, employee contribution rates will likely decline.

The boost was triggered by double-digit returns on pension investments in 2014.

From the Wisconsin State Journal:

The trust funds for state employees and retirees saw returns in 2014 that will result in “modest” pension and interest rate increases, the State of Wisconsin Investment Board said Wednesday.

[…]

The changes in retirement checks will occur in May, [said Vicki Hearing, board spokesperson] and the final rate has not yet been set by Department of Employee Trust Funds.

The board has earned positive returns each year since 2009 for the Core Fund and in five of the last six years for the Variable Fund.

Robert Conlin, secretary of the Department of Employee Trust Funds, said in the statement that the returns “mean that the positive momentum will continue in 2015, as we’ll be able to provide retirees another increase in their annuities and contribution rates for active employees and employers should continue their trend lower.”

A breakdown of the investment returns that allowed the benefit increase to happen, from the Wisconsin State Journal:

The $88.7 billion Core Fund, with a diverse portfolio, yielded a preliminary return of 5.7 percent, putting its five-year return at 9.3 percent. The Variable Fund, a stock fund, ended the year with a preliminary return of 7.3 percent and a market value of $7.3 billion.

Both funds ended near the one-year benchmark returns set by the board. The Core Fund is 5.6 percent and the Variable fund is 7.5 percent. For the three-, five- and 10-year periods, both funds are ahead of their benchmarks, according to Vicki Hearing, board spokesperson.

The Core Fund returned 13.6 percent and 13.7 percent in 2013 and 2012, she said. The Variable Fund returned 29 percent and 16.9 percent in those years.

The State of Wisconsin Investment Board manages $96 billion in pension assets for the Wisconsin Retirement System.

Photo credit: “Flag map of Wisconsin” by LGBT_flag_map_of_Wisconsin.svg: *File:Map of Wisconsin highlighting Bayfield County.svg:Gay_flag.svg:derivative work: Fry1989 eh? 02:44, 12 January 2012 (UTC)Flag_of_Wisconsin.svg:derivative work: Fry1989 eh? 04:51, 14 January 2012 (UTC) – This file was derived from:LGBT_flag_map_of_Wisconsin.svgFlag_of_Wisconsin.svg. Licensed under Public Domain via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Flag_map_of_Wisconsin.svg#mediaviewer/File:Flag_map_of_Wisconsin.svg

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.