investment returns | Pension360

UK’s Largest Pension Fund Foresees “Difficult” Year

The UK’s Universities Superannuation Scheme (USS), the country’s largest pension fund, is preparing for the possibility that its unfunded liabilities could be larger than reported, and its financial condition more serious than its 85 percent funding ratio might suggest. From Financial News:

USS pays out £100 million worth of pensions a month, and its team of fund managers and traders in London undertake £1 billion worth of transactions every day. The team beat its targets last year, producing a 7.9% return against benchmark performance of 6.5%, according to its annual report to March 31, 2014, published late Wednesday.

Despite all this, the pension fund is struggling financially. It is currently undertaking a full formal valuation of its assets and liabilities as of 31 March 2014, a lengthy and complex process which it is expected to complete by the end of the year.

The pension scheme has provided an interim estimate of its funding level at the same date – 85%, implying a deficit of around £7 billion. This is a fall from the deficit reported at 31 March 2013 – £11.5 billion – reflecting a recovery in markets in the meantime.

However, USS’s trustees cautioned that the final figure might be “materially” different to £7 billion, and could be larger.

Administrators of the fund, along with labor groups and other parties, are already planning various cutbacks and cost-saving measures to head off the potential news of higher-than-believed liabilities. Reported by Financial News:

The main proposals are to close the old final-salary section of the scheme to its existing members – it was closed to new joiners in 2011 – and to introduce a new cap on the pensions that can be built up under the new career-average benefits section.

At the same time a new defined-contribution section, offering pensions that aren’t guaranteed, would be opened so that any members earning more than the cap can put their extra savings into it.

According to Universities UK’s July proposal: “This threshold has not yet been set but, depending on affordability, Universities UK’s aim is to maximise the number of scheme members who will fall below the salary threshold.”

The Universities Superannuation Scheme became the largest pension fund in the country this year after its assets grew to £41.6 billion.

Judge Gives New Orleans Another Month To Cover Pension Debts

New Orleans now has until October 3^rd to come up with a plan to cover the funding shortfalls facing the city’s firefighter pension fund after a judge today extended the city’s deadline.

A judge ruled last year that New Orleans had to pay back the firefighters’ pension fund for the annual payments the city had skipped between 2009 and 2013. That dollar amount could total up to $52 million. From The Times-Picayune:

The standoff between Mayor Mitch Landrieu and New Orleans firefighters showed small signs of a thaw Wednesday (Sept. 3) as Civil Court Judge Robin Giarrusso gave the city another month to produce a plan to cover its massive debts to the firefighters’ pension fund.

Tommy Meagher, secretary and treasurer of the pension fund’s governing board, said the firefighters are willing to refinance the city’s obligations in creative ways to help lower the monthly payments going forward.

“The pension board has gone above and beyond everything we can do,” he said.

Part of New Orleans plan will likely involve several accounting tactics, including pension smoothing. From The Times-Picayune:

He explained that the board had agreed to stretch the city’s future pension obligations over 30 years rather than 14.5 years — a tactic that he compared to refinancing a home mortgage. He also said the board is willing to extend “pension smoothing,” an accounting strategy that lets the fund’s actuary predict higher interest rates when calculating the fund’s future investment returns. Essentially, if the fund can show it will earn more on its investments down the road, the city can pay less to the fund each month.

The board was willing to extend its use of smoothing from three years to seven, Meagher said.

Andy Kopplin, Landrieu’s chief administrative officer, said he had been asking for such breaks since 2011 and expressed appreciation for the board’s willingness to bend.

“We commend the board for doing that,” he said.

When a judge originally ruled in 2013 that New Orleans had to recoup the payments it shorted the pension fund, the city tried to appeal the ruling to the Supreme Court. But the Supreme Court refused to hear the case.

Group Calls For Transparency In Canadian Pensions As Investment Expenses Rise

The Canada Pension Plan Investment Board (CPPIB) has been an active investor in private equity, real estate and infrastructure around the world. Pension360 has covered Board’s endeavors into infrastructure and real estate in India and warehouses in California.

But those kinds of investments carry fees and expenses, and one Canadian think tank is calling on the CPPIB to make those expenses clearer. From CBC News:

The report, by former Statistics Canada chief economic analyst Philip Cross and Fraser Institute fellow Joel Emes, says the Canada Pension Plan Investment Board should more clearly explain the added costs of its new approach to investing.

Beginning in 2006, the CPPIB broadened its holdings beyond traditional stocks and bonds to invest in areas such as international real estate and infrastructure projects.

That new approach resulted in an additional $782 million for external management fees and $177 million on transaction fees, the authors say.

The CPPIB, which manages the funds not needed in the near term to pay Canada Pension Plan benefits, has moved away from traditional holdings because of low interest rates that keep bond returns low, according to CEO Mark Wiseman. In the past year, it has also invested selectively in stocks because of their high valuations.

Wiseman says the “active investment” approach is needed to create value “over an exceedingly long investment horizon” and to diversify the CPPIB portfolio.

The CPPIB has invested in infrastructure projects in countries such as Brazil and India and real estate portfolios in the U.S. and Australia.

The strategy led to returns of around 16 percent in 2013. But investment expenses have spiked as a result of the active management. From CBC:

The Fraser Institute argues the CPP has faced a big hike in the cost of its investments as a result of its new strategy — from $600 million or 0.54% of assets in 2006 to $2 billion or 1.15 per cent of its assets in 2013.

That figure includes the cost of collecting the CPP from Canadian paycheques and sending benefits to pensioners.

It is being less than transparent in failing to report its external management fees and transaction costs as part of CPPIB accounts, the report says. Instead those costs appear in federal government public accounts and overall accounts for CPP.

“The CPPIB needs to be more transparent about the expense of designing and implementing its investment strategy; every dollar spent on behalf of the CPP is one less dollar available to beneficiaries,” the Fraser Institute says.

External management fees might include investment banking fees, consulting fees, legal and tax advice and taxes on transfer of real estate, which would apply to the new style of investing, but might not be as high in stock and bond investing.

The Fraser Institute, the think tank that produced the report, advocates for smaller government and greater personal responsibility.

The Accounting Implications of Job-Hopping and the Shift to 401(k)s

Two trends have been building in recent years, and now they are set to collide: on one hand, employers are increasingly shifting workers into defined-contribution plans. On the other, workers are becoming more likely to move between companies numerous times over the course of their working lives. Those trends together are bound to butt heads. Canover Watson writes:

As with many other major Western economies, the US in recent decades has seen its pensions landscape shift away from “defined benefit” (DB) to “defined contribution” (DC) plans […] The move from the former to the latter is unmistakable. […] DB plans tend to favour long-tenured employees, are not transferred so easily between employers, and so are less suited to a highly mobile workforce.

The effective result of this transition is that individual savings accounts, originally intended to supplement DB plans, have ended up supplanting them. This has rendered the question of optimizing returns from investments a cornerstone of the pension debate, as these returns now directly dictate the employees’ eventual retirement income.

Present and future retirees’ exclusive dependence on 401(k)s has upped the ante for all stakeholders–these funds need to achieve consistent returns required to provide liveable, income during retirement. But different funds and managers operate in different ways, and those differences are amplified when a worker switched employers numerous times. From Canover Watson:

What is required is the consistent application of a single accounting approach to underpin accurate portfolio valuations. The answer to achieving this, as with many things in our modern world, lies partly with technology and automation-namely the adoption of a master accounting system at the level of the pension fund.

The shift to DC plans and the multimanager model, both represent a step forward: the creation of a more sustainable, efficient system for ensuring that citizens are able to generate sufficient income for their retirement years. Yet, unless these changes are met with a more sophisticated, automated approach to accounting, pension returns ultimately will be short-changed by the march of progress.

To read the rest of this journal article, click here.

The article was published in the Journal of Pension Planning and Compliance.

Photo by TaxCredits.net

Pension Funds Stay Silent on Corporate Tax Avoidance

Pension funds are no strangers to using their clout to push for changes within the companies they invest in—in the last few years, dozens of funds have called for more sustainable business practices from fossil fuel-oriented companies and advocated new safety guidelines for gun manufacturers.

But on one issue, public pension funds are remaining silent. The issue: corporate tax avoidance. As reported by the New York Times:

In the outcry about the recent merger mania to take advantage of the tax avoidance transactions known as inversions, certain key players have been notably silent: public pension funds.

Many of the nation’s largest public pension funds — managing trillions of dollars on behalf of police and fire departments, teachers and others — have major stakes in American companies that are seeking to renounce their corporate citizenship in order to lower their tax bill.

While politicians have criticized these types of deals — President Obama has called them “wrong” and he is examining ways to end the practice — public pension funds don’t appear to be using their influence as major shareholders to encourage corporations to stay put.

Tax avoidance made headlines again last week when Burger King announced it was buying Tim Horton’s, a move which would make Burger King a “citizen” of Canada for tax purposes.

Pension funds didn’t speak up. But why? The NY Times speculates that investment performance has a lot to do with it:

Public pension funds may be so meek on the issue of inversions because they are conflicted. On one side, the funds say they care about the long term and the implications for their state. Calpers’s “Investment Beliefs” policy states that the pension system should “consider the impact of its actions on future generations of members and taxpayers,” yet most pension funds are underfunded and, frankly, desperate to show investment returns. Mergers for tax inversion can prop up share prices of the acquirers and clearly help pension funds, at least in the short term, show improved performance.

CalPERS is usually one of the first funds to use “activist investing” tactics to push for changes in the companies they invest in. But the fund has remained unusually quiet. The fund talked to the NY Times and gave an explanation:

The California Public Employees’ Retirement System, the nation’s largest public pension fund and typically one of the most vocal, has remained silent.

“We don’t have a view on this from an investor standpoint — we’re globally invested, as you know, and appreciate that tax reform is a government role,” Anne Simpson, Calpers’s senior portfolio manager and director of global governance, told me. “We do expect companies to act with integrity, whatever the issue at hand — that goes without saying. We also want to see a focus on the long term.”

When I pressed for more, her spokesman wrote to me, “We’re going to have to take a pass on this one.”

Mark Cuban recently stated that he would sell the stock of any company that moved out of the United States to avoid taxes.

Photo by TaxRebate.org.uk

Does Rhode Island’s Pension Fund Performance Justify Its Fees?

David Sirota is shining more light on the Rhode Island pension system’s investment returns—and fees—under Treasurer Gina Raimondo. According to his reporting, the combination of fees and “below-median” returns are costing the state’s taxpayers. From Sirota:

According to four years’ worth of state financial records, Rhode Island’s pension system has delivered an average 12 percent return during Raimondo’s tenure as general treasurer. That rate of return significantly trails the median rate of return for pension systems of similarly size across the country, based on data provided to the International Business Times by the Wilshire Trust Universe Comparison Service.

Meanwhile, the pension investment strategy that Raimondo began putting in place in 2011 has delivered big fees to Wall Street firms. The one-two punch of below-median returns and higher fees has cost Rhode Island taxpayers hundreds of millions of dollars, according to pension analysts.

Under Raimondo’s watch, the state’s pension fund has adopted an investment strategy that heavily utilizes private equity, hedge fund and venture capital investments. The New York Times reported that those alternative investments constitute almost a quarter of the fund’s assets. Sirota writes:

The high fees associated with those alternative investments — costing Rhode Island $70 million in the 2013 fiscal year alone, the Providence Journal reported — are supposed to buy above-average investment performance. However, according to pension consultant Chris Tobe, the gap between Rhode Island and the median, a gap to which the fees contributed, means the state effectively lost $372 million in unrealized returns.

By way of comparison, $372 million represents more than one-half of the entire annual budget of the state’s largest city, Providence. In all, had Rhode Island’s pension system merely performed at the median for pension systems of similar size, the state would have 5 percent more assets in its $7.5 billion retirement system.

Raimondo’s office defends the investment decisions. A spokesperson told Sirota that the strategy needs to be judged over a longer timeline to more accurately assess its effectiveness.

Retirees Blast Mass. City Retirement Board For “Criminal” Cutbacks

Retirees, labor group leaders and even a city councilman are upset at the Leominster, Massachusetts Retirement Board after the Board voted to eliminate a cost-of-living increase in pension payments for the fifth straight year. Reported by the Sentinel and Enterprise:

“We think it’s unconscionable that our local retirees haven’t received a (cost-of-living increase) which they need,” Shawn Duhamel, the legislative liaison for the Retired State, County and Municipal Employees Association of Massachusetts, said Wednesday. “They are largely reliant on their pension as their sole income, so not having a cost-of-living increase for five years really hurts retirees, and we think it’s unnecessary.”

Out of 105 retirement systems in the state, Leominster is the only community to deny a cost of living increase in recent years, according to the association’s monthly newsletter. Somerville is the only other community to miss a cost of living increase dating to 1998.

Mayor Dean Mazzarella defended the retirement board’s decision not to increase benefits while it works to reinvest and fully fund its post employment financial requirements.

Critics have lashed out, in part, because the COLA denial comes in the wake of the Board’s above-average investment returns and the recent decision to lower its assumed rate of return.

The Board’s investments returned 21 percent in 2013, and the assumed rate of return was lowered from 6.5 percent to 5.5 percent. From the Sentinel and Enterprise:

If the retirement board maintained projects of 6.5 percent rate of return based on 2013 earnings the city’s post employment benefits obligation would be fully funded, Duhamel said.

Leominster should be proud of its long success, which is outperforming almost all others in the state, but instead of sharing the wealth with retirees is taking a different approach, Duhamel said.

The retirement board’s projection of lower returns puts a bigger burden on taxpayers to fund the program, Duhamel said.

The board’s rate of return on investments should justify a cost-of-living increase, said at-large City Councilor Bob Salvatelli.

“With that kind of impressive return we’re making off this thing, and not giving retirees a 3 percent raise, is criminal,” Salvatelli said. “It’s not even funny; it’s criminal.”

According to city estimates, giving retirees a 3 percent cost-of-living increase would cost the city $145,000 up front and would cost $900,000 over the life of the retirees who received it.

Troubled Dallas Fund Returns 4.4 Percent For 2013

The Dallas Police and Fire Pension Fund (DPFPF) knew 2013 wasn’t going to be a great year for investment returns. They knew this because 2012 wasn’t a great year, and neither were the five years prior.

Even as numerous funds across the country have struggled with maintaining strong investment returns over that period, the DPFPF was performing worse than most.

Bad investment results are what led to the June firing of top administrator Richard Tettamant. Still, the fund had hoped a 13 percent return was in the cards for 2013—not an overly impressive number, given the S&P 500 had returned around 25 percent over the same period.

But that didn’t come to fruition. DPFPF’s return data was released this month, and the fund posted a grim 4.4 percent return for 2013, failing to meet its lofty 8.5 percent assumed rate of return.

What makes DPFPF different from other funds? For one, asset allocation.

According to the Center for Retirement Research, the average public pension fund allocates around 49 percent of its investments to equities, 7 percent to real estate and 27 percent to fixed-income strategies.

The DPFPF, on the other hand, invests significantly less in equities and bonds and significantly more in real estate. Its real estate investments did not do well.

Nor did its private equity investments. The fund says 45 percent of its private equity allocation is placed in two investments: Huff Energy and Red Consolidated Holdings.

Red Consolidated Holdings was flat on the year. But Huff Energy returned a negative 29.7 percent for 2013, which brought down the entire private equity portfolio.

This year isn’t an anomaly for the DPFPF. The fund has consistently under-performed its peers. From Dallas News:

Over the past five years, it has earned an annual return of 8.6 percent, according to preliminary figures from its consultant. That placed it 97th among about 100 similar-size funds, the consultant reported. The median annual return during that period was 12.2 percent.

In 2012, the fund earned 11.4 percent on its investments. The median annual return for similar funds was 12.2 percent.

The fund’s investment staff received big bonuses in 2013 nonetheless. That’s because the bonuses aren’t determined by how the fund performs relative to its peers. Instead, staff receive bonuses if investment performance beats the assumed rate of return.

Since the assumed rate of return for the DPFPF sits at 8.5 percent, the 2012 investment performance (11.4%) triggered the bonuses even though the fund under-performed relative to its peers.

Tettamant’s base salary in 2012 was $270,000, and he received over $100,000 in bonuses between 2012 and 2013.

Photo by Taylor Bennett via Flickr CC License

CalPERS Rescinds $700 Million Investment With Private Equity Fund Headed By Doctor With No Private Equity Experience

You probably trust your doctor with your life. But with your money? Many people might balk at the notion of their doctor making their investment decisions for them.

But back in 2007, CalPERS made a big bet: a $705 million investment in a private equity fund, Health Evolution Partners Inc., specializing in health care companies.

The CEO of the fund, David Brailer, is a nationally renowned physician who had previously been the “health czar” under George W. Bush. But this was his first foray into the investment space, and he had no experience running an investment fund or making private equity investments.

Still, he reportedly promised the CalPERS board healthy returns in excess of 20 percent.

But through seven years, the fund has never managed to exceed single-digit returns. And portions of CalPERS’ investment have actually experienced negative returns.

That has led CalPERS to cut ties with the fund, according to Pensions & Investments:

CalPERS is ending its unique experiment as the sole limited partner of Health Evolution Partners Inc., a private equity firm that focuses on health-care companies.

…

CalPERS data show the HEP Growth Fund had an internal rate of return of 6.5% from its inception in mid-2009 through Dec. 31, 2013. By contrast, the $5.3 billion growth fund portion of CalPERS’ private equity portfolio returned 12.72% for the five years ended Dec. 31, the closest comparison that could be made with the data the pension fund made available.

The HEP fund of funds has had more serious performance problems. Its IRR from inception in 2007 through Dec. 31, 2013 was -5.2%, show CalPERS statistics. CalPERS also wants out of that investment, but sources say a complicated fund-of-fund structure may make that difficult.

Mr. Desrochers would not comment on HEP, telling a Pensions & Investments reporter the matter was too sensitive to discuss.

CalPERS spokesman Joe DeAnda, in an e-mail, said, “We continue to evaluate all options relating to Health Evolution Partners.”

Mr. Brailer did not return several phone calls.

CalPERS paid the fund over $18 million in fees in the fiscal year 2011-12, according to the System’s financial report.

Meanwhile, CalPERS is gearing up for another large investment partnership, to the tune of $500 million, that will focus on infrastructure investments. FTSE Global Markets reports:

The California Public Employees’ Retirement System (CalPERS) today announced a new $500m global infrastructure partnership with UBS Global Asset Management.

CalPERS, the largest public pension fund in the US, will contribute $485m to the newly formed company, while UBS will contribute $15m and act as managing member.

The partnership will operate as Golden State Matterhorn, LLC and is set to pursue infrastructure investment opportunities in the US and global developed markets.

“UBS brings extensive experience and a proven track record in global infrastructure investing that makes them a great fit for this partnership,” says Ted Eliopoulos, CalPERS Interim Chief Investment Officer. “We’re excited to work with them as we identify and acquire core assets that will provide the best risk-adjusted returns for our portfolio.”

The CalPERS Infrastructure Program seeks to provide stable, risk-adjusted returns to the total fund by investing in public and private infrastructure, primarily within the transportation, power, energy, and water sectors.

Infrastructure investments returned 22.8% during the 2013-14 fiscal year and 23.3% over the past five years, outperforming the benchmark by 17.23 and 16.6 percentage points, respectively.

CalPERS holds about $1.8 billion in infrastructure assets.

Photo by hobvias sudoneighm via Flickr CC License

Value of New York City Funds Reach All-Time High After Big Returns

New York City’s pension funds together returned over 17 percent for fiscal year 2013-14, the City’s strongest return since fiscal year 2010-11. As a result, the value of the City’s pension system has reached an all-time high. From Reuters:

New York City’s pension system had a banner fiscal year in 2014, increasing its total value to a record $160.5 billion, Comptroller Scott Stringer is set to announce on Monday.

That is a nearly $19 billion increase from the fiscal year ending July 31, 2013, when the five pension funds had a combined value of $141.7 billion, according to records on Stringer’s website.

As a result of the funds’ performance, the city will save $17.8 billion over the next two decades, due to an above-average rate of return, according to a press release distributed to reporters on Sunday.

“Five years of positive returns are good news for the pension funds and for the city,” Stringer said in the release.

The five combined funds had a 17.4 percent rate of return on investments for FY2014, which ended on June 30. That tops the rates of 12.1 percent in FY2013 and 1.4 percent in FY2012, but falls short of the 23.2 percent rate in FY11. The rate in FY2010 was 14.2 percent.

The assumed rate of return, which is set by the city’s actuary, is 7 percent. That means that if the funds perform below that rate, the city must make up the difference with taxpayer money.

The $17.8 billion in savings will begin in FY2016 and will be phased in over a six-year period. Each year’s incremental savings will be repeated for 15 years thereafter.

New York City is now planning on decreasing its contributions into the System, as the required payments are tied to investment returns; the bigger the returns, the less money the state is legally required to pay into the system.

Over fiscal year 2013, the S&P 500 returned nearly 22 percent.

Pension360 had previously covered the lackluster private equity returns from New York City pension funds.

The New York City Employees’ Retirement System (NYCERS) was 65 percent funded as of 2013, while the New York State and Local Retirement System was 87 percent funded.

Photo: Manhattan amk by user AngMoKio. Licensed under Creative Commons

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