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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

CalPERS, CalSTRS See Results From Initiative To Add Women To All-Male Boards

Earlier this summer, CalPERS and CalSTRS teamed up to try to improve the diversity of all-male corporate boards in California. The funds’ research had shown that 131 California-based companies had no women on their boards, so the pension giants sent letters to those companies to gauge their interest in improving the male to female ratio of their boards.

Early returns are in, and the initiative is already producing results. From IR Magazine:

At least 15 companies based in California have added a female director to their all-male boards and 35 have indicated a willingness to do so after a board gender diversity campaign launched by state pension giants CalSTRS and CalPERS targeting 131 companies in the state.

CalSTRS, the largest educator-only pension fund in the world with $187 bn in assets under management, along with CalPERS, which manages some $301 bn, began the campaign four months ago to target companies in its home state with all-male boards.

As part of the campaign, the two pension funds sent a letter to the companies offering their expertise to help them appoint women to their boards. Along with the letter, the campaigners included a copy of the National Association of Corporate Directors report ‘The Diverse Board: Moving from Interest to Action’ to illustrate the potential advantages of appointing women to a board.

CalPERS and CalSTRS started the campaign after learning that nearly 25 percent of the 400 largest publicly traded companies in California had no women on their boards. Only two of those 400 companies had boards where a majority of members were female.

Does Knowledge Of Pension Reforms Affect Retirement Decisions?

If you knew your pension fund was in great shape, would it alter when you chose to retire? Conversely, if you knew your fund was in dire straits, would it increase the probably of working part-time during retirement?

Two Norwegian researchers set out to answer those questions. As published in the Journal of Pension Economics and Finance:

We present the results of a survey experiment where the treatment group was provided with an information brochure regarding recently implemented changes in the Norwegian pension system, whereas a control group was not. We find that those who received the information are more likely to respond correctly to questions regarding the new pension system. The information effect is larger for those with high education, but only for the most complex aspect of the reform. Despite greater knowledge of the reform in the treatment group, we find no differences between the treatment and control group in their preferences regarding when to retire or whether to combine work and pension uptake.

Read the entire paper here.

Photo by winnifredxoxo

Chicago Fund Staff Racked Up Travel Bills With Trips to Las Vegas, Hawaii, San Diego

Staff members at the Chicago Transit Authority (CTA) pension fund have been hitting all the best vacation spots lately. But an investigation by the Better Government Association (BGA) raises questions about whether those trips—which were billed to the pension fund—were necessary.

The visits were work related—but they were also expensive, according to the BGA:

The newly released records show the agency’s expenses include more than $20,000 on a six-night trip to Hawaii for five people in 2010, $4,400 on a three-night trip to New Orleans for two people in 2011, $7,500 on a four-night, four-person trip to San Diego in 2012 and about $12,000 on a four-night trip to Las Vegas for six people in 2013.

The fund’s executive director, John Kallianis, was among those who went to Las Vegas and San Diego. He defended the trips, saying the conferences were “rigorous” and “very well worth the expense.”

Executive staff members at the CTA fund said that the trips were valuable because such conferences are educational for staff and trustees, and the distance travelled was necessary because the conferences don’t often come to Midwest locales.

But CTA pension officials did seem to know the travel information wouldn’t be received well if released to the public. Those officials initially refused to comply with Freedom of Information Act requests asking for the travel receipts and documents.

Eventually the BGA sued for access to the data, and CTA officials complied.

This isn’t the first time there have been questions around the governance of the CTA fund. From the BGA:

The fund’s governance came into question several times over the last year when we reported that its now-former investment adviser was under a U.S. Securities and Exchange Commission investigation and that one of the CTA pension trustees was soliciting donations for a union charity from pension advisers.

It would be helpful to see the travel expense totals for other pension funds of comparable size—it’s certainly not uncommon for staff to travel to conferences, but without seeing other data it’s hard to say whether the CTA staff’s travel expenses were excessive relative to their peers.

The CTA pension fund was 59.4 percent funded as of January 2013.

Photo by David Wilson

Argentina Default Devastates Pensions of Brazilian Mailmen

Argentina’s failure to pay interest on its debt—resulting in the country’s second default in 13 years—was always going to have an economic ripple effect.

But Brazilian mailmen probably didn’t realize they’d be near the top the list of negatively affected parties. In light of Argentina’s default, they’ve seen their pensions zapped.

That’s because Postalis, the pension manager to which about 130,000 active and retired Brazilian postal workers belong, is feeling the pain of the default.

Postalis was invested in the fund Brasil Sovereign II Fundo de Investimento de Divida Externa, a Brazil-based investment fund of Bank of New York Mellon, that this week wrote down its assets by 51 percent, according to Bloomberg:

Bank of New York Mellon Corp. said one of its Brazil-based investment funds wrote down more than half the value of its assets after recording losses on investments linked to Argentine government debt.

The Brasil Sovereign II Fundo de Investimento de Divida Externa FIDEX took a loss of 197.9 million reais ($87.2 million) on Aug. 1 after booking a provision on credit-linked notes tied to Argentine bonds, according to a regulatory filing yesterday by BNY Mellon DTVM, the bank’s Brazilian fund manager. The fund has just one investor and the identity is not public information, according to securities regulators.

Argentina last week failed to make a $539 million interest payment on its bonds, prompting Standard & Poor’s and Fitch Ratings to declare the country in default for the second time since 2001. The country has about $29 billion of overseas foreign-currency notes outstanding, and the International Swaps & Derivatives Association ruled last week that the failure to pay interest will trigger $1 billion of credit-default swaps.

“Due to the suspension of payment on foreign debt notes issued by Argentina backing the referred notes, and to the necessity to change its evaluation methodology of some credit-linked notes, provisions for losses have been made in its portfolio,” BNY Mellon DTVM said.

The fund that held the notes had 384.4 million reais worth of assets as of July 31, according to data available at the website of the Brazilian securities regulator. The value dropped about 52 percent to 185.5 million reais as of Aug. 1.

You’ll notice in the excerpt above that the fund has only one investor, the identity of which isn’t public information. But it’s widely believed that investor is Postalis. From Businessweek:

While the statement didn’t identify the entity that is the fund’s sole investor, all signs point to Postalis, the pension manager serving about 130,000 current and former postal workers in Brazil.

Postalis, which had 8 billion reais ($3.5 billion) in assets according to the latest data available, said in statements as early as 2011 and as recently as May that it had invested in the fund. Postalis’s press office declined to comment.

Postalis is Brazil’s 14th-biggest pension group by investments under management, according to June 2013 data available from the Brazilian pension association Abrapp.

Brazil’s pension regulator was asked by multiple media outlets to comment on the situation, but has so far declined all requests.

Photo: “Argentina Logo” by Guillermo Brea. Licensed under Creative Commons

Ontario Teachers’ Fund Sets Sight On Airport As It Looks To Increase Infrastructure Holdings

The Ontario Teachers’ Pension Plan is looking to expand its infrastructure holdings by up to $6 billion, or 33 percent, and the fund’s first move will likely be to buy an airport. From Reuters:

Canada’s Ontario Teachers’ Pension Plan is seeking to buy the rest of Britain’s Bristol Airport in a deal worth up to 250 million pounds ($424.6 million), a source closely monitoring the situation said on Monday.

The pension fund, which already owns 49 percent of the regional airport, has the right of first offer for the 50 percent owned by Australian asset manager Macquarie Group.

Macquarie, the world’s largest infrastructure asset manager, was sounding out buyers for its holding, British newspaper The Sunday Times reported.

Ontario Teachers’ Pension Plan is eyeing the stake as it seeks to expand its infrastructure holdings from $12 billion to around $18 billion. The deal could take place this year, the source said.

“Given the right of first offer, Ontario Teachers is likely to purchase the stake, but this will of course be based on an appropriate valuation,” the source said, adding that discussions have not commenced but are expected to start “very soon”.

European airport deals typically attract a valuation of 15-17 times core earnings (EBITDA).

The Teachers’ Plan originally invested in the airport in 2002, and it increased its stake in to 49 percent in 2009.

Bristol Airport is the ninth-busiest airport in Britain.