CPPIB Can Invest Like “An 18-Year-Old”, Says CEO As Fund Looks to Cut Bond Allocation


Canada Pension Plan Investment Board (CPPIB) CEO Mark Wiseman told Bloomberg this week that his fund can invest like “an 18-year old” as he looks to cut the fund’s bond allocation and move more money into riskier assets.

CPPIB allocates 28 percent of assets to fixed income. That’s down from 95 percent 15 years ago.

More from the Bloomberg interview:

With years of income and investing ahead, the Canada Pension Plan Investment Board can afford to own more risky assets such as real estate and stocks, according to Chief Executive Officer Mark Wiseman. Pension contributions will continue to grow through 2022, allowing the fund to reduce its 28 percent holdings in fixed income, he said.

“We’re an 18-year-old investor,” Wiseman, who’s 44, said during an interview Tuesday at Bloomberg’s Toronto office. “The portfolio can afford to have less bonds than it has today.”

With yields on fixed-income securities at or close to record lows, Wiseman is joining Canada’s second largest pension plan, the Caisse de Depot et Placement du Quebec, in saying he’s looking to reduce the amount of money invested in debt to seek higher returns elsewhere.

“The low interest environment is a big challenge for institutional investors,” Wiseman said. “We can get higher risk-adjusted returns than we can in the bond market.”

The yield on Canada’s benchmark 10-year bond fell to a record 1.294 percent Friday after government data showed gross domestic product contracted in November. The central bank unexpectedly cut its key interest rate Jan. 21.

CPPIB manages $183 billion in assets.


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Jacksonville Pension Reform Hits Another Snag As JEA Says: “Take It Or Leave It”

palm tree

Jacksonville’s pension reform proposal – if and when it passes – would require the city and public utility company JEA to borrow a combined $240 million.

But that aspect of the plan has hit a road bump, and now JEA is telling the city to accept the plan as-is or count JEA out entirely.

From the Florida Times-Union:

JEA finance and audit committee members learned Tuesday that city officials have been trying to claw back a key concession that enticed the utility to become a partner in financing Mayor Alvin Brown’s major pension-reform legislation.

That concession — which in essence would amount to a reduction in JEA’s annual contribution to the city’s general fund over 20 years — is non-negotiable for JEA and could be a tricky sticking point for city officials going forward.

“It is a take it or leave it,” committee Chairman Peter Bower said.


JEA’s annual general fund contribution currently increases by $2.5 million each year, maxing out at a total $114.2 million in 2016. That contribution formula — which expires next year — means that even as JEA’s revenues have declined in recent years, its contribution to the city has ballooned. That gulf has become a concern for JEA officials.

In exchange for borrowing $120 million for pension reform, however, the city had agreed to, in broad terms, reduce those contributions by $2.5 million for the next several years and ultimately revert to a formula linked to JEA revenues.

Those changes were to be locked down for 20 years beginning next year.

But JEA CEO Paul McElroy told audit and finance committee members Tuesday the city now wants to be able to revisit, and potentially change, the new contribution formula in as soon as five years.

That didn’t sit well with JEA board members, who said they conceptually agreed to help the city pay its pension debt only on specific terms, including the new 20-year contribution formula.

The committee will meet again in 10 days to see if staff has been able to address the issue.

The city’s pension reform measure aims to improve the funding and sustainability of the city’s Police and Fire system. JEA is a key part of that plan, because the city cannot afford by itself to shoulder the cost of the proposal.


Photo by  pshab via Flickr CC License

U.S. Public Pension Asset Growth Stalls in 3rd Quarter

Graph With Stacks Of Coins

The performance of corporate stocks hurt the growth of U.S. public pension assets in the third quarter of 2014, according to U.S. Census data.

After reaching a record high in the second quarter, public pension assets declined in the third quarter from $3.37 trillion to $3.31 trillion.

More from Reuters:

The breakneck growth of U.S. public pension assets paused in the third quarter of the year, due to falling earnings, U.S. Census data released on Wednesday showed.

The $3.31 trillion in cash and security holdings was slightly less than the record $3.37 trillion of the second quarter. That was still above $3.06 trillion in the third quarter of 2013.

Since the third quarter of 2012, public pension assets had steadily increased, setting record highs every three months.

But earnings on the funds’ investments, which provide the lion’s share of their revenue, fell $43.03 billion in the third quarter. It was the first loss for the investments since the second quarter of 2012, when earnings fell $18.51 billion.

The contraction came from the pensions’ largest asset holding, corporate stocks. Pension funds’ corporate stocks fell 0.7 percent from the previous quarter to $1.17 trillion. Still, that was 10.3 percent more than the third quarter of 2013.

International securities also fell from the previous quarter, by 4.9 percent to $624.5 billion. They decreased 2.1 percent from the year before, as well.

Treasuries, meanwhile, rose to $308.1 billion, which was up 0.1 percent from the second quarter and 15.8 percent from the third quarter of 2013. Corporate bonds were up 2.7 percent from the previous quarter to $381.3 billion, which was also 18.4 percent higher than the third quarter of 2013.

The data also showed that governments paid more towards pension funds in the third quarter of 2014 than they did over the same period in 2013. Likewise, employees paid more into their pensions, as well.


Photo by www.SeniorLiving.Org

Is Illinois America’s Greece?

Illinois flagA recent piece in The Economist wonders whether Illinois’ pension debt might lead the state down the same path as Greece.

From the Economist, and re-published by Business Insider:

Illinois is like Greece in one obvious way: It overpromised and underdelivered on pensions and has little appetite for dealing with the problem, says Hal Weitzman of the University of Chicago Booth School of Business.

This large Midwestern state, with a population of 13 million (Greece has 11 million, though a far smaller GDP than Illinois), has the most underfunded retirement system of any state and the largest pension burden relative to state revenue. It also has the highest number of public-pension funds close to insolvency, such as the one looking after Chicago’s police and firemen.


The state devotes one in four of its tax dollars to pensions, which is more than it spends on primary and secondary education.

Mainly as a result of this gargantuan pension debt, Illinois’s bond rating is the lowest of all the states, which means dramatically higher borrowing costs.

When the state government failed to address pension underfunding in its budget for 2014, two credit-rating agencies, Fitch and Moody’s, cut the state’s bond rating, which in Moody’s case put Illinois on a par with Botswana. (An incensed editorial in the Chicago Tribune asked what Botswana had done to be so insulted.)

The main reason for the pension debacle is decades of underfunding. “Everything was always done with a short-term view,” says Laurence Msall, head of the Civic Federation. “Unique to Illinois is the idea that you don’t have to pay for pensions and you don’t have to follow actuarial recommendations.”

Whereas most other states follow the rules set by the Governmental Accounting Standards Board (GASB), which, however imperfect, require some budget discipline, Illinois has mostly ignored them.

Read the entire piece here.

China to Overhaul Pension System; Government Employees to Contribute More


China is planning a major overhaul of its pension system after complaints of unfair wealth distribution and favoritism towards government employees.

Reported by Bloomberg:

China will abolish a dual-track pension system that favors government employees and discriminates against others to create a fairer retirement-savings system.

Under existing rules, about 37 million employees with government agencies, communist organs and public institutions don’t have to contribute anything to their pension savings, with the government paying pensions of about 90 percent of their pre-retirement salaries. Those employed by businesses from banks to bakeries must contribute 8 percent of their salary to pension accounts, on top of 20 percent of their wages that’s paid by employers to a pooled pension fund. On average, private retirees end up with 40 percent of their working pay.

As the system has increasingly become a source of resentment among the public, Vice Premier Ma Kai said yesterday that the State Council and the ruling Politburo have agreed to implement a “unified” pension system, and government employees will have to contribute to their own pension accounts, the official Xinhua News Agency reported.

The report didn’t provide a timetable for the reforms.

Approximately 338 million people are covered by China’s pension system.


Photo by  Jonathan Kos-Read via Flickr CC License

CalPERS Encourages Employers to Make Extra Contributions Now For Long-Term Savings

Flag of California

CalPERS is asking municipalities and other government employers to use any extra money available to boost their contributions to the pension system — a move that is tricky in the present moment for cash-strapped cities but that would yield long-term savings.

From CalPensions:

CalPERS is encouraging government employers to make extra payments to reduce their pension debt or “unfunded liability” if budgets allow, saying millions can be saved in the long run.

Annual CalPERS reports to 1,581 local government agencies this fall began showing estimates of future savings when extra payments, going beyond the required amount, are made to the pension fund.

The Newport Beach city council approved a plan for extra payments to CalPERS last month that is expected to save $47 million over 30 years, compared to the standard payment plan.

Huntington Beach approved extra payments to CalPERS last fiscal year based on an analysis by an independent actuary, Bartel Associates, showing each additional $1 million contributed to CalPERS saves $5 million over 25 years.

CalPERS estimates that about 60 employers made 111 extra payments to CalPERS last fiscal year. The new “alternate amortization schedules” in the annual reports to local governments are a response to requests from employers.

“The message we want to get out to employers is that if they have the ability, the financial means, to pay off some of this unfunded liability, it’s a smart business move and can really benefit them over the long run,” Anne Stausboll, CalPERS chief executive officer, said last week.

Read the entire report from CalPensions here.

Jacksonville Will Vote On Pension Reform Measure This Week

palm tree

After months of debate, the Jacksonville City Council could approve this week a measure to reduce the city’s pension debt.

Observers say the measure, which would increase city pension contributions, change retiree COLAS and give the Council the right to change benefits, has the votes needed to pass through the Council.

From the Florida Times-Union:

The full council will meet Tuesday and could take a vote on the legislation.

Thirteen council members — more than a necessary majority for passage — voted last week in favor of the bill during two committee meetings after making several changes they said make the agreement a financially better deal for taxpayers.

After years of failed attempts to reform the police and fire pension and reduce the city’s $1.65 billion debt obligation to it, council members appear close to passing a bill that Brown’s administration says will save the city $1.2 billion over a 30-year period.

“I suspect there will be limited discussion on it, and I suspect the vote will be significantly in favor, maybe even an unanimous vote,” said Councilman John Crescimbeni.

If the Council passes the bill, it will still need to be approved by the Police and Fire Pension Fund Board. There’s no guarantee they will accept the deal. From the Florida Times-Union:

The pension fund board is composed of five members. The police and firefighters union each appoint one member, the City Council appoints two members and the fifth member is chosen by the four other members.

Whether the board members pass the bill remains a major question, because it includes some significant differences from Brown’s original legislation that they supported.

Council amendments include changes to guaranteed annual cost-of-living adjustments that current police and firefighters will receive to their pensions and interest rates earned in their Deferred Retirement Option Program accounts. The council would also retain the power to impose pension benefit changes in three years if future collective bargaining talks reach an impasse.

When Brown negotiated his deal with the pension fund earlier this year, pension board members nixed the concepts now included in the council’s changes.

Officials from the mayor office told the council last month that any changes made to the deal could effectively kill it.

The reform measure would increase city contributions to the pension system by $40 million per year for the next 10 years. It would also change the way COLAs are calculated and would give the Council the right to change worker benefits for the next three years.


Photo by  pshab via Flickr CC License

Kentucky Retirement System Lowers Return Assumption; More State Money On Way

CREDIT: The Center For Retirement Research
CREDIT: The Center For Retirement Research

The Kentucky Retirement System has lowered its assumed rate of return on investments from 7.75 percent to 7.5 percent.

The reduced assumption means the system will experience an uptick in unfunded liabilities, but it also ensures a higher annual payment from the state.

The action took place at a Board of Trustees meeting on Thursday. More details from CN 2:

The changes, presented to trustees earlier this year by actuaries with Cavanaugh Macdonald Consulting based on a five-year experience study, lower assumed returns on investments, price inflation, wage growth and wage inflation.

The new assumptions, KRS Executive Director Bill Thielen said, will cost the state roughly $95 million more per year in contributions for the Kentucky Employees Retirement System for state employees in non-hazardous positions during the next biennial budget, based on current plan valuations and payroll figures. They will not take effect until next year’s year-end plan valuations, he said.


The updated assumptions would push KRS’s unfunded liabilities to $19.5 billion, up from $17.8 billion currently, according to figures presented by Cavanaugh Macdonald Consulting.

At least one of the KRS trustees voiced concerns about approving the new guidelines at Thursday’s meeting. Personnel Cabinet Secretary Tim Longmeyer suggested delaying a vote until January so the board could meet with the governor’s office, legislators and others affected by the change.

“My concern is we don’t live in a bubble, so $95 million a year is a significant uptick,” said Longmeyer, who abstained from voting on the updated assumptions.

KRS Trustee Randy Overstreet, though, urged the board to move forward with the proposal. Nothing would change between now and January, he said.

“I’m thinking that we almost have the responsibility to follow the experts’ recommendations, and you’re right, it’s not a science, but it’s the best information we have to act on and move forward on since we have for the 20 years I’ve been on this board,” Overstreet said.

More context on KRS’ new assumed rate of return, from the Courier-Journal:

KRS has forecast a 7.75 investment return since 2007. But earnings in KERS non-hazardous averaged only 6.52 percent over the past decade, leading some critics — including lawmakers — to argue for a more cautious outlook.

The National Association of State Retirement Administrators reported that of 126 public retirement plans surveyed in October, 48 assumed a return of 7.5 percent or lower, while 78 assumed a higher rate.

The median rate was 7.75 percent, but more than half have cut their assumption since 2008, the group said.

KRS administers nearly a dozen defined-benefit plans for state workers, including the 21 percent funded KERS non-hazardous plan.

South Carolina Workers Lose Appeal of Provision of Pension Reform Law

South Carolina flag

Public workers in South Carolina have lost their appeal of a provision of the state’s 2005 pension reform law, a federal appeals court said Friday.

The employees were challenging a provision of the law that dealt with the pension contributions of workers who retire but later return to work for the state.

An explanation of the provision that was being challenged and what it means for workers, from Reuters:

A provision of the revised law requires retirees who later return to work to pay into the retirement system, making the same contributions as other employees but without accruing extra service credit for pension benefits, according to court documents.

Before the [pension] overhaul went into effect, retired public employees could return to work and earn up to $50,000 without giving up the right to receive retirement benefits and without having to make more contributions to the pension funds.

More on the lawsuit from Reuters:

Public employees filed the class action case in 2010, arguing that an element of the reform was unconstitutional because it essentially took their property.

Losing the case could have cost South Carolina at least $121 million, the amount of new contributions that working retirees had made under the revised law through June 2012, according to state financial filings last month.


In making its decision about sovereign immunity, a three-judge panel of the U.S. Court of Appeals for the Fourth Circuit said it considered that any money to pay a judgment against the retirement system would have to come out of the state treasury.

Quebec Passes Controversial Pension Reform Into Law

Canada mapDespite the legal threats of unions and the protests of public workers, Quebec’s controversial pension reform measure passed into law Thursday.

The law, Bill 3, mandate that workers contribute a higher percentage of their paychecks to their pensions. In short, they split the bill 50-50 with municipalities.

More details from CBC:

The bill was passed on Thursday morning at the National Assembly by a vote of 85-28.

The law will force municipal workers and retirees to contribute more to their pensions to offset a $4-billion pension fund deficit.


Liberal Premier Philippe Couillard defended the reforms during question period in the National Assembly.

“In Quebec, we don’t spend more than what we have,” he said.

“The reality of catching up — there are millions of dollars to get back. We’re doing it with courage, we’re doing what was supposed to be done before. And why are we doing it? We’re doing it for today’s Quebecers and the next generations to whom we want to pass on a Quebec in good financial health,” Couillard said.

Members of the opposition parties groaned when Couillard said the move was to overcome a $5.8-billion deficit.


Municipal Affairs Minister Pierre Moreau’s reforms passed with just two amendments to the bill.

One was to take some of the burden off retirees when it comes to paying off the deficit.

The second gives municipal workers’ unions and the province more flexibility in contract negotiations.

Bill 3 can be read here.

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