pension bonuses | Pension360

Philadelphia’s pension system is only 47 percent funded – but due to a unique policy, it will be handing out bonus checks to many retirees in 2015 to the tune of $62.4 million.

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.

But city Mayor Michael Nutter is now criticizing the bonus payments, saying they “jeopardize…the future health of the pension fund in a significant way.”

More on Nutter’s comments, from Philly.com:

Current Mayor Nutter said Tuesday that the law is financially irresponsible and raises questions about Kenney’s judgment as a mayoral candidate.

“We cannot always do everything we want, even if those things are to make people feel better,” Nutter said. “To run a big city, you have to not only deal with the issues of the present, but you need to be able to see the long-term impact of your actions.”

[…]

“Purely for political reasons, from my perspective, in an election year, City Council removed the minimum threshold,” said Nutter, who was not in office at that time. “In doing so, from my perspective, they jeopardized the future health of the pension fund in a significant way.”

Finance Director Rob Dubow said the pension fund crisis has taken an increasingly larger bite of the city’s revenue over time. About 7 percent of the budget went to the pension fund a decade ago, he said, a figure that is now up to 15 percent.

“Those are dollars we would otherwise spend on city services for everybody, retirees and the rest of our citizens,” Nutter said.

Before 2007, the bonuses could only be paid out if the pension fund was 76 percent funded or more.

But then-Councilman James F. Kenney lifted the funding limit on the bonus payments.

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Everyone appreciates a pat on the back for a job well done.

But auditors are raising concerns about whether the Wisconsin State Investment Board, the entity that handles investments for the state’s pension funds, went a little overboard by handing out $13.3 million worth of bonuses in 2013—the most ever handed out by the Board.

The Legislative Audit Bureau, the agency set up by Wisconsin to evaluate and audit other state agencies, is asking the Investment Board to review its compensation policy in light of the bonuses.

Bonuses included, the overall compensation the Board paid employees was 14 percent higher than the median among its peers, according to the Twin Cities Pioneer Press.

More from TC-PP:

Michael Williams, executive director of the Wisconsin Investment Board, says in a written response to the audit that “experience shows that paying for performance has been a success.”

The bonuses are based on investment performance. The board ended 2013 beating one-, three- and five-year benchmarks.

The bolded is important: the bonuses are performance based, and the Board raked in strong returns in 2013.

But the Board’s own data may raise doubts that the performance was strong enough to justify the amount of the bonuses.

Courtesy of Wisconsin State Investment Board

(The Board operates two pension funds—the Core Fund and the Variable Fund. The Core Fund invests entirely in equities, while the Variable fund follows a more traditional asset allocation.)

As of April 30, the both funds’ calendar YTD returns have come in below their respective benchmarks.

But the bonuses in question were handed out based on 2013 performance. In fact, both funds were beating their benchmarks for one-year, five-year and 10-year returns as of March 31.

Still, those returns still fall short of what the Russell 3000 returned over the same periods.

The Russell 3000 index is considered a benchmark for the entire U.S. stock market, as the index encompasses the 3000 largest U.S.-traded stocks.

So, the Investment Board beat their benchmarks but not the broader index. Does that performance merit a big bonus?

That’s the $13.3 million dollar question.

Photo by Miran Rijavec aka Stan Dalone via Flickr CC License

Tag: pension bonuses

Philadelphia Mayor Comes Out Against Pension Bonus Payments

Auditors Asking Questions on Record-Setting Bonuses Given to Wisconsin Investment Board