Brexit Won’t Scare Off Pension Funds

Institutional investors will still be hunting for deals in Britain, even as its exit from the EU begins in earnest.

The Ontario Teachers’ Pension Plan is one such investor scouring the country for deals. The pension fund previously managed to shelter itself against Brexit by significantly hedging its exposure to the British Pound in the weeks before the vote.

Now, the fact that the exit is truly underway isn’t distracting the pension fund from its long-term focus. From the Financial Post:

“We’re not heading for the hills by any stretch of the imagination,” chief executive Ron Mock said at a media briefing Wednesday, shortly after news broke that Britain sent a letter to the European Union that marks a significant step in its move to exit the economic partnership.

The historic breakup has not led to any bargains so far, according to chief investment officer Bjarne Graven Larsen, who noted that while currency fluctuations can sometimes make assets look cheaper, “the pricing of assets in the UK continues to go up.”

Mock said there is likely to be a period of uncertainty, but added that the pension managers are hopeful about the longterm prospects for Britain and the European Union.

Ontario Teachers manages $176 billion (CAD) in assets.

Lawmakers Target Auto-IRAs; California Will Push Back

Republican lawmakers in Washington have set their sights on dismantling state-level auto-IRA programs, such as California’s Secure Choice and similar programs in five states.

Under the Obama administration, the Department of Labor passed rules solidifying states and cities’ authority to create such programs.

In a party-line vote last month, House Republicans voted to roll back the rules. Now the Senate, and then President Trump, will weigh in.

California is already vocally defiant of the idea of dismantling Secure Choice.

From Bloomberg:

California says it’s ready to defy Congress. “We’re pressing forward with the program,” said Marc Lifsher, a spokesman for the Treasurer’s Office, aiming to launch Secure Choice by early 2019. “If there’s litigation, we’ll litigate.”

Other states are speaking more softly, at least for now. If the Obama administration rules are rescinded, “we in Illinois will have to evaluate next steps,” said Greg Rivara, press secretary for the Illinois State Treasurer. State of Oregon spokesman James Sinks said OregonSaves is “planning to move forward” to launch a pilot program in July of this year. “But it will be moving forward under a new cloud of legal uncertainty [that] creates headaches we don’t want to have,” Sinks said.


Without the federal government’s blessing, it’s harder to surmise how courts might rule on state auto-IRA programs. The issue has never been squarely addressed by a judge, said Michael Kreps, an Erisa expert who’s a principal at the Groom Law Group in Washington, D.C. “You can make arguments either way, and it’s going to be up to a court to decide,” he said.

Even if the states ultimately win, the controversy could discourage other states and cities from starting their own retirement programs. Meanwhile, more than 100 million U.S. workers continue to go without a workplace retirement account.

“I’m Torn”: Supreme Court Grapples With Hospital Pension Protections, Or Lack Thereof

The Supreme Court is struggling with the question of whether faith-affiliated hospitals should be exempt from federal rules protecting pension benefits for workers.

The ruling could affect up to a million workers’ retirement security.

Three church-affiliated hospitals are being sued for underfunding their respective pension systems; federal law requires most private organizations to keep their pension plans fully funded and insured with the PBGC.

But faith-based organizations are an exception to that rule.

But should they be? After three lower courts ruled against the hospitals, the interpretation of the law is now in the hands of the Supreme Court.

From the New York Times:

The hospitals — Advocate Health Care Network, Dignity Health and Saint Peter’s Healthcare System — say their pensions are “church plans” exempt from the law and have been treated as such for decades by the government agencies in charge. They want to overturn three lower court rulings against them.

Workers suing the health systems argue that Congress never meant to exempt them and say the hospitals are shirking legal safeguards that could jeopardize retirement benefits.

“I’m torn,” Justices Sonia Sotomayor said at one point during the hour-long argument. “This could be read either way in my mind.”


Hospital lawyer Lisa Blatt told the justices that Congress wanted to exempt plans associated with or controlled by a church, whether or not a church itself created the plan. She said federal agencies including the IRS and the Labor Department have assured them for decades that they are exempt.

Justice Elena Kagan said if Congress wanted a broader exemption, it used “very odd language” instead of being more straightforward.

Arguing for the workers, lawyer James Feldman said Congress was very zealous about creating exceptions to pension laws and did not intend to exempt these hospitals. He said the IRS letters wrongly interpreted the law and can’t be relied on.

“These plans have zero involvement with any church,” Feldman said.

A ruling might not come until summer.

Iowa Pension Cuts Investment Target

The Iowa Public Employees’ Retirement System law week slashed its assumed rate of return from 7.5 percent to 7 percent, following in the footsteps of CalPERS’ similar move from December.

The assumption was reduced in order to achieve a “more accurate valuation of future liabilities”, according to the system’s Board.

From the Des Moines Register:

IPERS’ Chief Executive Officer Donna Mueller said in a statement that the IPERS’ Investment Board approved a set of changes after receiving an economic assumption study from Cavanaugh Macdonald, an actuarial consultant from Bellevue, Neb. Other new assumptions anticipate that inflation will be reduced, interest on members’ accounts will decline, and wage growth and payroll growth will decrease

Using the new assumptions with the 2016 data, IPERS’ funded ratio has dropped from 84 percent to 80 percent, Mueller said. IPERS has about $28 billion in assets and an actuarial report issued in December said the pension system had unfunded liabilities of nearly $5.6 billion.

“Even though these changes will have a negative impact on IPERS’ funded ratio, the Investment Board believes that these modifications will provide a more accurate valuation of future liabilities,” Mueller said. “Each year an investment return is less than the assumed return adds to the liability and increases the needed return in future years which can lead to even higher contribution rates.”

Meanwhile, the state is studying the idea of switching to a 401(k) or hybrid system. From the Register:

Gov. Terry Branstad said in January that commitments already made to state and local government workers will be honored, but a state task force will review possible long-term changes to Iowa public employees’ pension programs. Among key changes that will be studied will be whether to offer a 401(k)-style defined contribution retirement plan, which doesn’t promise a monthly check like the traditional defined benefit pension program now offered by IPERS, the governor said. Many Iowa businesses have switched to 401(k) plans.

Chicago Pension Bill Vetoed By Illinois Gov. Rauner

Illinois Gov. Bruce Rauner vetoed a bill last week that would have raised contribution rates and lowered the retirement age for members of Chicago’s Municipal and Laborer’s pension funds.

Chicago Mayor Rahm Emanuel had been pushing hard for the bill.

More from CBS:

The Illinois Governor vetoed help for Chicago’s Municipal and Laborer’s pension funds. He thinks the bill would create an unsustainable funding schedule and lead to tax increases without solving the real problem. Mayor Emanuel urged Rauner to approve the measure last week.

“The first step on the road to ensuring and securing our pensions and our financial and fiscal stability would be to sign that bill,” Emanuel said.


Rauner is instead touting legislation to give Chicago schools a year of pension relief. His measure would also change the pension system in Illinois. Emanuel said it’s not right that his reform is permanent, while the $215 million for the schools is a one-time action.


Class Action Suits Led By Pensions Rise For 3rd Straight Year: Report

Credit: Cornerstone report
Credit: Cornerstone report

The percentage of class action lawsuits with pension funds as lead plaintiffs has risen for the third consecutive year, according to Cornerstone Research.

The report analyzed trends in class action lawsuits in 2016; a few tidbits on institutional investors:

Screen Shot 2017-03-24 at 10.18.40 AM

View the full report here.

NJ Poised To Spin Off Investment Management for Public Safety Pension

New Jersey currently places the assets of all its pension systems in a $71 billion pool, which is managed by the State Investment Council.

But that could change this week.

A bill in the state legislature, which has gained bi-partisan support thus far, would spin off the investment management of the assets of the Police and Firemen’s Retirement System.

Public safety unions have been pushing for the change, arguing they can make better investment decisions on their own. They’ve also argued that their system — which, at 70 percent funded, is in much better shape than the state’s other systems — shouldn’t be pooled in with the under-achievers.

The idea was first proposed by a commission created by Chris Christie in 2014.


Supporters say that by managing their own money, police and firefighter unions would be able to outperform the State Investment Council and avoid the pension “gimmicks” often seen in government.

“There is little question that the PFRS is New Jersey’s healthiest pension system,” Patrick Colligan, president of the state Policemen’s Benevolent Association, wrote in a letter to members Wednesday. “But no one should deny that nearly 20 years of pension gimmicks have reduced the value of PFRS from well over 100 percent funded in 2000 to just over 70 percent funded today. Who is to blame for that serious drop in value? The state of New Jersey and its municipal governments.”

But some are strongly opposed to the bill, because although it transfers the public safety System’s assets out of the pool, it leaves the liabilities. If the experiment fails, taxpayers would be on the hook.

From NorthJersey:

The bill, however, only transfers management, not liabilities, to the police and fire unions, leaving taxpayers on the hook if investments yield poor returns, said Michael Cerra, executive director of the New Jersey League of Municipalities.

“The PFRS is a defined benefit system where the amount of retirement pay is calculated on a formula considering factors such as length of employment, salary history. It is not calculated on the return of the fund’s investments,” Cerra told a Senate budget panel this month. “As a result, if there’s a shortfall in that return, then the employers — in this case the municipalities and the counties — must make up the difference from their general funds.”

World’s Largest Pension Posts Record-Breaking Quarter

Japan’s Government Pension Investment Fund (GPIF) — the world’s largest pension fund — posted a $92 billion gain in the 4th quarter of 2016, fund officials said on Thursday.

The gain — 8 percent — is the largest quarterly return in the history of Japanese pension investing, in terms of dollar amount.

And it comes at a good time: in 2015 and 2016, the GPIF suffered several poor quarters and it retooled its portfolio and increased exposure to equities.

From Bloomberg:

The Government Pension Investment Fund returned 8 percent, or 10.5 trillion yen ($92 billion), in the three months ended Dec. 31, increasing assets to 144.8 trillion yen, it said in Tokyo on Friday. Domestic equities added 4.6 trillion yen after the benchmark Topix index recorded its best quarterly performance since 2013, outweighing a loss on Japanese bond holdings. Foreign stocks and debt jumped as the yen fell the most against the dollar in more than two decades.

The Japanese retirement fund’s second straight quarterly gain is a welcome respite after it posted losses that wiped out all investment returns since overhauling its strategy in 2014 by buying more shares and cutting debt. GPIF, which has more than 80 percent of its stock investments in strategies that track indexes, benefits when broader equity markets are rising.


The fund’s domestic bonds fell 1.1 percent for a second quarterly loss, bringing holdings to 33 percent of assets, as an index of Japanese government debt dropped 1.6 percent. Foreign bonds added 8.8 percent, accounting for 13 percent of GPIF’s investments at the end of last year.

Japanese stocks made up 24 percent of holdings, while overseas equities were 23 percent of assets. The target levels for GPIF’s portfolio are 35 percent for domestic debt, 15 percent for foreign bonds, and 25 percent each for domestic and overseas shares.

 Photo by Ville Miettinen via FLickr CC License 

Illinois Teachers’ Pension Commits $140m to Emerging Managers

The Illinois Teacher Retirement System this week said it will commit $140 million to two emerging managers, nearly doubling the amount of money the fund had previously committed to emerging manager real estate funds.

The funds are Oak Street Capital and Exeter Property Group — the latter of which is already oversubscribed. TRS will be jockeying with several other pension funds — including the Texas Permanent School Fund and the New York State Teachers fund — to have their commitment accepted.

More from IPE Real Estate:

The pension fund is committing $100m (€95.2m) to Oak Street Capital Real Estate Fund IV and $40m to Exeter Industrial Value Fund IV.

The commitments represent a significant expansion of the programme. The pension fund currently has $79.4m invested with emerging real estate managers.

Oak Street Capital invests in net-lease real estate, a part of the market that US pension funds rarely invest in, according to industry sources.


There is some uncertainty as to whether the commitment to Exeter Industrial Value Fund IV will be accepted, since it has been oversubscribed for its $1.15bn targeted capital raise.

Illinois Teachers considers Exeter to be an emerging manager. The pension fund told IPE Real Estate that the company “fits within the TRS definition of emerging manager”.

CalPERS, Other Investors Want Dakota Access Pipeline Rerouted

CaPERS and a consortium of other investors last week called on the banks financing the Dakota Access Pipeline to address local tribes’ concerns around the route and safety of the project.

Earlier in the week, protestors had camped in front of the CalPERS building, calling for the powerful investor to divest from the pipeline.

CalPERS’ stance was that it could wield more influence if it remained an investor in the project. Now, it is doing just that.

From the Sacramento Bee:

The California Public Employees’ Retirement System cited its concerns that construction would lead to an “escalation of conflict and unrest as well as possible contamination of the water supply” that could in turn tarnish the banks’ reputations and cause them to lose customers.

It’s asking the banks to ensure that the project addresses the concerns of the Standing Rock Sioux, which sought to block a leg of the pipeline that would pass under a reservoir that is critical to the tribe’s water supply.

“We call on the banks to address or support the tribe’s request for a reroute and utilize their influence as a project lender to reach a peaceful solution that is acceptable to all parties, including the tribe,” the letter reads.


CalPERS owns about 1 million shares of Energy Transfer Partners, the company behind the pipeline. It also has invested in the banks that are believed to be financing the 1,100-mile pipeline, according to a CalPERS report released earlier this month.

The fund’s board of administration requested options to engage with the company.