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New York City Pension Hires Risk and Compliance Officers As Part of Ethics Reform

New York City’s pension system has made a series of hires recently as part of an ethics package proposed by City Comptroller Scott Stringer in 2014.

The system has hired an internal auditor, a chief risk officer and a chief compliance officer.

Study: Pensions Put Pressure on Private Equity to Formulate Environmental, Social Investment Policies

Research from the London Business School shows that the vast majority of large private equity firms – 85 percent – are feeling increased pressure from Europe’s institutional investors to incorporate environmental, social and governance (ESG) considerations into their investment policies and processes.

Details from Investments & Pensions Europe:

The study was based on responses from 42 private equity firms with collective assets under management of more than $640bn.

“Issues such as climate change, sustainability, consumer protection, social responsibility and employee engagement are no longer viewed solely as components of risk management, but have also gained recognition in recent years as important drivers of firm value, particularly in the long term,” the study said.

[…]

But even though ESG policies were being adopted more and more, there were still some big obstacles to these being implemented, the study showed.

The most notable barrier was the difficulty in collecting the necessary data, it said.

Also, some respondents cited the attitude of internal managers as a barrier to implementation.

“It appears that, while ESG integration has become common, there remain pockets of internal managerial resistance to the whole idea of considering such issues as relevant for investment decisions,” the study said.

[…]

Ioannis Ioannou, assistant professor of strategy and entrepreneurship at the London Business School, said: “The private equity industry is increasingly placing greater importance to ESG, moving it from a purely compliance and risk mitigating strategy to a key long-term strategy through which private equity firms pursue value creation.”

Read the research report here.

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Netherlands Regulator: Some Pension Funds Not Doing Enough to Manage Conflicts of Interest

The Nederlandsche Bank (DNB), the entity that regulates the Netherlands’ pension funds, is concerned that some pension funds have not implemented adequate policies protecting against conflicts of interest.

From Investments and Pensions Europe:

Most pension funds’ boards pay insufficient attention to potential conflicts of interest of policy makers, pensions regulator De Nederlandsche Bank (DNB) has suggested.

It indicated it was not satisfied with the outcome of a sector-wide survey, during which it checked whether schemes had conducted a risk analysis or had formulated a policy on conflicts of interest.

DNB concluded that a large number of pension funds had not conducted an analysis, and had at best a policy that was not based on such a risk assessment.

Additionally, it found that many schemes did not declare and register the main functions and jobs on the site of board members and other decision makers, and did not have a view on their private interests either.

However, almost all pension funds had rules in place for how to deal with gifts, according to DNB.

In its opinion, merely a handful of pension funds fully managed the risks posed by conflicts of interest.

The watchdog commented that conflicts of interest could lead to “impure decision-making, which could harm pension funds”. Therefore, trustees must actively fight conflicts of interest, it said.

DNB added that, during discussions with trustees, it had noted that the subject is charged, and that the sector needed clear examples as to what constituted a conflict of interest.

DNB now says it will come up with a list of “good practices” for combating conflicts of interest.

Canada Pension Funding Declined in 2014

The collective funding ratio of Canada’s defined-benefit pension plans declined by 2.7 percentage points in 2014, according to Aon Hewitt.

From Benefits Canada:

The median solvency ratio of 449 Aon Hewitt administered pension plans from the public, semi-public and private sectors stood at 90.6% at Dec. 31, 2014.

That represents a decline of 0.5 percentage points over the previous quarter ended Sept. 30, 2014, and a 2.7 percentage-point drop from plan solvency at Dec. 31, 2013.

Since peaking at 96.6% in April 2014, overall plan solvency has declined by 5.9 percentage points, continuing the trend towards worsening plan solvency that began in the third quarter of 2014 (when the solvency ratio dropped to 91.1% from 96.2% in the previous quarter).

About 18.5% of plans were more than fully funded at the end of the year, compared with 23% in the previous quarter and 26% at the end of 2013. Plan sponsors that must file valuations as at Dec. 31, 2014 could see the amount of their deficiency contributions double in 2015 as a result of the lower solvency ratio, says Aon Hewitt.

“Plans that stayed exposed to interest rates really took a beating in 2014,” says William da Silva, senior partner, retirement practice with Aon Hewitt. “Those plan sponsors who have implemented or fine-tuned their risk management strategies performed much better than traditional plans amid interest rate declines.”

Aon Hewitt also said that new mortality tables from the Canadian Institute of Actuaries could lead to a further funding decline in the future.

Report: Japan Pension Set to Benefit From Reforms

Japan’s Government Pension Investment Fund (GPIF) – the largest pension fund in the world – implemented numerous changes in 2014, including an asset allocation shake-up and the hiring of its first chief investment officer.

A new report says the reforms will benefit the fund going forward. From Chief Investment Officer magazine:

A report jointly published by Cerulli Associates and the Nomura Research Institute (NRI) stated that the reforms to the ¥130.9 trillion ($1.1 trillion) pension, announced by its management team earlier this year, would help it become “more dynamic.”

“In terms of hiring, the GPIF will not be shackled by low salaries and will be better positioned to recruit top-notch talent,” said Yoon Ng, Asia research director at Cerulli Associates. “This will add more quality to its external manager selection processes.”

[…]

“With public pension fund reforms in place, the GPIF… may show a stronger tendency to hire managers with highly distinctive investment strategies that are differentiated from and relatively uncorrelated with other companies’ strategies,” the report offered.

Atsuo Urakabe, a senior researcher at NRI, said the new asset allocation would push the GPIF to hire managers with “highly distinctive investment strategies” that can offer uncorrelated performance, as it seeks to achieve a higher annual return.

Cerulli’s report said Japanese pension funds had been “bogged down by ultra-conservative investment policy requirements” but pointed to the GPIF’s reforms as an indication that other pensions in the country could revise their asset allocations, diversify, upgrade risk management, and reform governance.

As well as identifying external managers, Cerulli’s research paper predicted that Japanese public pension funds outside of GPIF may seek to build up their in-house expertise.

“In the long run, this will help to bring their costs down and lead to some insourcing of assets that had previously been farmed out to be managed,” the report said.

The GPIF manages $1.1 trillion in assets.

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CalPERS, CalSTRS Responds To Push For Coal Divestment

California Senate President Kevin de León said on Monday he would introduce a bill in 2015 that would require CalPERS and CalSTRS to divest from coal-related investments.

CalPERS was the first of the funds to publicly respond to the bill. Summarized by Chief Investment Officer magazine:

CalPERS responded strongly to the proposal, stating that “we firmly believe engagement is the first call of action, and results show that it is the most effective form of communicating concerns with the companies we own”.

The statement also detailed CalPERS’ “proven track record” of engaging and dealing with climate change risks within its portfolio. This included CalPERS’ work as a founder member of the Investor Network on Climate Change, and its efforts to persuade governments and policy makers to support a low-carbon future.

“We are also working aggressively with a coalition of 75 international investors worth over $3 trillion in assets to engage with the 45 largest fossil fuel companies to ensure they are taking appropriate action to manage the physical and capital risks associated with climate change,” CalPERS said.

CalSTRS released its own response as well, according to ai-cio.com:

CalSTRS highlighted its review of “sustainable investing and risk management” as well as its plan to triple the value of its investments in clean energy and technology in the next five years. CIO Chris Ailman said at the time the pension could raise its allocation as high as $9.5 billion—5% of the current value of its portfolio.

CalSTRS said climate change was “a material risk assessed across the entire portfolio that could impact current and future investment value”.

“CalSTRS believes our investment decisions must carefully weigh our duty to perform profitably with consideration of environmental, social and governance impact of those investments,” it added. “CalSTRS is a patient, long-term investor, and the ultimate impact of our investment in coal is something that we will be assessing in the coming year.”

CalPERS’ full statement, released on Facebook, can be seen here.

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Institutional Investors Bullish on Stocks, Alternatives in 2015

Institutional investors around the globe believe equities will be the best-performing asset class in 2015, according to a survey released Monday.

Investors are also bullish on alternatives, but not as thrilled when it comes to bonds, according to the survey.

The results summarized by Natixis Global Asset Management:

Forty-six percent of institutional investors surveyed say stocks will be the strongest asset category next year, with U.S. equities standing above those from other regions. Another 28 percent identify alternative assets as top performers, with private equity leading the way in that category. Only 13% predict bonds will be best, followed by real estate (7%), energy (3%) and cash (2%).

Natixis solicited the market outlook opinions of 642 investors at institutions that manage a collective $31 trillion. The survey found:

– Realistic expectations of returns: On average, institutions believe they can realistically earn yearly returns of 6.9 percent after inflation. In separate surveys by Natixis earlier this year, financial advisors globally said their clients could anticipate earning 5.6 percent after inflation1 and individuals said they had to earn returns of 9 percent after inflation to meet their needs.2

– Geopolitics leads potential threats: The top four potential threats to investment performance in the next year are geopolitical events (named by 17% of institutional investors), European economic problems (13%), slower growth in China (12%) and rising interest rates (11%).

– Focus on non-correlated assets: Just under three-quarters of respondents (73%) say they will maintain or increase allocations to illiquid investments, and 87% say they will maintain or increase allocations to real estate. Nearly half (49%) believe it is essential for institutions to invest in alternatives in order to outperform the broad markets.

– Words of advice for retail investors: Among the top investment guidance institutions have for individuals in the next 12 months: avoid emotional decisions.

[…]

“Institutional investors have an enormous fiduciary responsibility to fund current goals and meet future obligations,” said John Hailer, president and chief executive officer for Natixis Global Asset Management in the Americas and Asia. “The current market environment makes it difficult for institutions to earn the returns that are necessary to fulfill both short-term and future responsibilities. Building a durable portfolio with the proper risk management strategies can help investors strike a balance between pursuing long-term growth and minimizing losses from volatility.”

[…]

“Institutional investors have an unusually good perspective about markets and long-term prospects,” Hailer said. “Like ordinary investors, institutions have short-term worries. They also feel the pressure to take care of current needs, no matter what the markets are doing. Because of their longer-term time horizon, they offer valuable perspective.”

The full results of the survey can be read here.

Survey: Pension Funds Looking to Increase Internal Asset Management

Pension funds across the world are looking to bring asset management responsibilities in-house, according to a recent survey by State Street.

In addition, a majority of funds are thinking of turning to lower-cost investment strategies.

From ValueWalk:

Over the next three years, a whopping 81 percent of pension fund respondents said they are exploring bringing more asset management responsibilities in-house. A primary reason? Fees and costs were a major issue, with 29 percent saying it was a challenge for the pensions to justify the fees of their asset managers.

An unspoken issue is the relatively low returns, as many hedge funds are both highly correlated to the performance of the stock market as well as underperforming major stock market indices. This leads to the question: why not just primarily invest in an stock index ETF for the primary equity exposure?

As part of this shift to internal investing, 53 percent of the respondents are expecting to use more lower-cost strategies to achieve desired investment outcomes. This would likely include low cost ETFs designed to capture the beta of the stock market.

“Pension funds’ desire to deliver strong investment returns to their participants coupled with improved oversight and governance and is leading to a need for more in-house accountability for asset and risk management,” said Martin J. Sullivan, head of Asset Owner sector solutions for North America, State Street. “However, this undertaking requires pension funds to carefully evaluate how to achieve a balance of in-house and external talent, tools and technologies.”

The survey polled 134 pension executive from the Americas, Europe, the Middle East, Africa and Asia.

Video: The Promise of Defined-Ambition Plans, and Lessons for the United States

The above talk was given by Lans Bovenberg (Tilburg University) at the 2014 Pension Research Council Conference; Bovenberg spoke about his research into “defined-ambition plans”, and whether similar ideas could work in the United States.

Further explanation of defined-ambition plans, from the video description:

Firms no longer act as external risk sponsors but continue to provide a distributional platform for pensions, thereby addressing behavioral and agency issues as well as imperfections of insurance and financial markets. Pension entitlements are defined in terms of (deferred) annuities, and participants share the risks of assets and a joint liability pool on the basis of complete contracts. We investigate risk management and valuation of these plans, explore their strengths and weaknesses, and analyze whether such plans hold promise for the United States.

CalSTRS Stepped Up “Green” Bond-Buying By 300 Percent In 2014

CalSTRS released its Green Initiative Task Force report on Wednesday. The report highlights the pension fund’s “environmental-themed investments” and risk-management efforts related to climate change.

The report reveals that it increased its purchases of “green bonds” by 300 percent in 2014. Investopedia defines a “green bond”:

These bonds are created to encourage sustainability and the development of brownfield sites. The tax-exempt status makes purchasing a green bond a more attractive investment when compared to a comparable taxable bond. To qualify for green bond status the development must take the form of any of the following:

1) At least 75% of the building is registered for LEED certification;

2) The development project will receive at least $5 million from the municipality or State; and

3) The building is at least one million square feet in size, or 20 acres in size.

From a CalSTRS press release:

California State Teachers’ Retirement System’s (CalSTRS) eighth annual Green Initiative Task Force report shows an almost 300 percent increase in green bond purchases within the Fixed Income portfolio. This year, the Teachers’ Retirement Board identified sustainable investing as a key, strategic priority, which is reflected in the report and other initiatives.

The growth in green bonds aligns with a commitment that CalSTRS Chief Executive Officer Jack Ehnes made during his participation in the 2014 Climate Summit where he announced that CalSTRS will more than double the fund’s clean energy and technology investments of $1.4 billion to $3.7 billion over the next five years. The move is in response to United Nations Secretary-General Ban Ki-moon’s call for bold action to build resilience to the impacts of climate change.

“Targeting the clean energy and technology sector provides a good investment opportunity while positioning CalSTRS for a low-carbon future,” noted Ehnes. “But more importantly, we hope our actions will help catalyze incentives for comprehensive climate change policies that ultimately lead up to a global agreement in Paris in 2015.”

CalSTRS sees a growing number of investment opportunities in low-carbon solutions, especially as renewable technology costs come down and regional clean energy policies take hold.
“Our growth of green-related investments is a good example of successful engagement on environmental and climate risk issues,” said CalSTRS Chief Investment Officer Christopher J. Ailman. “Looking forward, we hope to bring more attention to the role large institutional investor’s play in financing green bonds, clean energy and climate change initiatives.”

The entire Green Initiative Task Force report can be read here.

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