pension investment returns

Washington Pension Board Declines to Divest From Fossil Fuels

The Washington State Investment Board (WSIB), the entity that handles investments for the state’s pension systems, at its latest board meeting weighed whether to divest from fossil fuel-based companies.

The Board ultimately decided against divestment. But the members said they would continue to evaluate whether climate change posed any risk to pension investment returns, and would use their power as major shareholders to push companies for transparency about financial risks posed by climate change.

The WSIB has major stakes in oil and coal investments.

Further details on the board’s decision, from the Olympian:

When evaluating a future investment, the SIB said it will consider whether climate change poses any financial risk to its expected returns.

It should not stop investing in lucrative but controversial energy projects. That would expose the board to potential legal action over its failure to produce as much value as possible.

Outgoing SIB Chair Jim McIntire, who is also the state Treasurer, proposed a more responsible strategy for showing sensitivity to environmental issues. He said the SIB should press companies for greater transparency about the risk from climate change, and how they are mitigating that risk.

A large institutional investor such as the state of Washington can use its leverage to change company policies. McIntire said that’s the SIB’s preferred approach.

[…]

The SIB’s legal mandate is to make money for the pension funds it manages. Its fiduciary duty is simply to get the best return possible for the individuals who will someday depend on those pensions.

But setting investment policy is more complex than that. The SIB members are responsible for examining the short- and long-term risks of its investments. And that requires assessing both internal and external factors that might influence an investment’s return.

The WSIB presents an argument many pension funds have made over the past few months: divestment isn’t as effective as lobbying for change as a major shareholder.

No public pension funds in the U.S. have yet divested from fossil fuel companies on the grounds of climate change.

New Jersey Fund Rakes In Nearly 16 Percent Returns For Year

Amidst all the pension-related turmoil in New Jersey, a piece of bright(er) news: the state’s pension fund raked in double-digit returns for fiscal year 2013-14, which ended June 30. The fund returned more than double the actuarially assumed rate of return, although the S&P 500 returned about 25 percent over the same period.

From Bloomberg:

New Jersey’s pension fund return is expected to exceed 16 percent for fiscal 2014 on gains that include an unanticipated $6.1 billion, according to the state Treasury Department.

Data as of June 30, which exclude some investments reported on a delayed basis, showed returns of 15.9 percent, treasury officials said in a statement. The fund’s total value was $80.6 billion, up from $66.9 billion four years earlier. The state investment division will report the performance to its oversight council at a meeting tomorrow.

Interestingly, unions are now presenting the argument that the strong returns only further demonstrate the need for the state to make its full contributions into the system. From NorthJersey.com:

The impressive returns, however, highlight an argument from unions that New Jersey may have missed out on even bigger gains in recent years because state contributions into the pension fund have been reduced or cut altogether, including the payment Governor Christie slashed at the end of June. Christie said he cut that payment — from a planned $1.57 billion, to $697 million — to prevent tax hikes or funding cuts to schools, hospitals and other crucial services amid a $1 billion budget shortfall.

New Jersey’s actuarially assumed rate of return stands at 7.9 percent.

New York City Funds Lag Behind on Private Equity Performance

The private equity analytics firm Bison just came out with a list ranking the private equity performance of 50 public pension funds. New York City’s pension funds have been particularly active in PE funds, and are looking to invest even more in the area in coming years. So, how did the city fare?

You have to pay to see the full rankings, but the New York Post kindly outlined the results. And the news wasn’t good for New York City’s four largest pension funds. From the NY Post:

The worst performers — the New York City Employees’ Retirement System and the New York City Teachers’ Retirement System — tied for 45th place. The police pension fund, in 42nd place, and the firefighters fund, 37th, didn’t fare much better when it came to picking private equity firms, according to the analysis by Bison, a Boston analytics firm focused on the private markets.

“They have scores that put them closer to the bottom of that list than to the top,” Bison research manager Michael Roth said. “Fund selection could be better.”

New York funds’ reliance on private equity is part of a broader strategy to produce big returns. Across the city’s five funds, about 11.5 percent of assets ($18 billion) were committed to private equity fund.

Still, the strategy isn’t working as well for New York as it is for others. From the New York Post:

New York City Comptroller Scott Stringer has tasked his new chief investment officer, Scott Evans, who started this week, with figuring out how to boost the pension funds’ private equity portfolio.

“While we are concerned about long-term return in private equity, we have reason to be encouraged by the relative returns of our private equity portfolio in recent years,” a spokesman for the comptroller’s office said.

For the Massachusetts state pension, which ranks 6th, every $100 invested in private equity 10 years ago generated a 17.7 percent annual return and is now worth $512. The same investment in the five NYC pensions, which combined generated a 12.4 percent return, is worth $322.

Industry sources blame the city’s byzantine system under former New York City Comptroller Bill Thompson, who oversaw many of the pensions’ private equity investments from 2002 to 2009.

“The city was a hard place for private equity firms to navigate,” a placement agent said, adding that firms with the best records didn’t bother dealing with the city.

As of 2012, NYCERS was only 66 percent funded. The teacher’s fund was only 58 percent funded, the police fund was 64 percent funded, and the firefighters fund was a mere 52 percent funded.

Photo by Chris Chan via Flickr CC