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Pension Asset Growth Outpaced GDP Over Last 10 Years

The value of U.S. pension assets has outpaced GDP growth over the last decade, according to data from Towers Watson.

In that time frame, pension assets have grown at a rate twice that of the country’s GDP.

Pension investments in stocks, bonds, cash and alternative assets such as real estate have surged relative to the country’s gross domestic product over the last decade. The value of U.S. pension assets jumped over 89% while GDP rose roughly 42%, according to data from consulting firm Towers Watson & Co.

Those investments were worth an estimated $22.1 trillion last year, 127% of the country’s $17.4 trillion gross domestic product. That’s the highest percentage on record, and up nearly 32 percentage points from a decade earlier.

[…]

U.S. pension investments accounted for more than 61% of the $36.1 trillion global total. That total is 84% of global GDP. Global pension assets relative to global GDP are up roughly 15 percentage points from the decade earlier.

The dollar is strong relative to foreign currencies, and U.S. companies have more money available, which widens the disparity, Mr. Ruloff said. U.S. pension plans last year made 67% of their equity investments in U.S. stocks, according to Towers Watson.

Towers Watson reported last month that global pension asset values reached all-time highs in 2014.

Kentucky Pension Bond Proposal Clears House

A bill aimed at easing Kentucky’s pension shortfall passed the House on Monday, less than two weeks after the bill came out of committee.

The bill would allow the issuance of $3.3 billion in bonds to help ease the funding shortfall of the Kentucky Teachers’ Retirement system (KTRS).

The proposal comes with risk: the success of the plan depends on the system’s investment returns exceeding the interest on the issued bonds.

If that happens, KTRS can pocket the difference and funding will improve. But if investment returns lag, KTRS could end up losing money.

New Orleans Pension Considers Index Investing After 2014 Performance Lags

The New Orleans Municipal Employees Retirement System returned less than 5 percent in 2014, a number that is pushing some board members – including the city’s finance director – to consider a more passive investment strategy.

Trustee and city finance director Norman Foster argued this week that the fund should be investing in funds that passively follow indices like the S&P 500, which saw double digit returns in 2014.

From NOLA.com:

Several board members expressed some frustration with the fund’s investment performance, none more than Norman Foster, the city’s finance director.

Foster argued that the city would have been better served by investing in index funds, passive investment vehicles that track the market and eliminate costly management fees. “I’ve made the case for passive investment, and I’ll be making it more and more,” he said.

[…]

Some of the performance lag can be attributed to the fund’s asset mix. Like many pension systems, the retirement system invests heavily in bonds, a strategy that minimizes risk but also limits returns during market booms.

Foster pointed out, however, that even when the asset mix is taken into account, the fund’s performance fell short of index benchmarks by nearly 3 percent, which means the managers failed to beat the market, despite collecting handsome fees.

Ian Jones, who advises the retirement system on investment issues, warned against dumping its asset managers based on one year’s worth of data.

The fund assumes a 7.5 percent annual return.

Over the past seven years, the fund’s returns have averaged 4.21 percent annually.

Photo by www.SeniorLiving.Org

Kentucky Teachers’ Pension Bond Proposal Clears House Committee; Vote Could Come Next Week

Legislation is moving forward that would let the Kentucky Teachers Retirement System (KTRS) issue $3.3 billion in bonds to help ease the system’s funding shortfall.

On Tuesday, the bill cleared Kentucky’s House Budget Committee without any opposition.

The bill’s sponsor, House Speaker Greg Stumbo, said a House vote could be coming as soon as next week.

If passed, the plan’s success hinges on KTRS investment returns exceeding the interest on the issued bonds.

Chicago Could See Credit Downgrade If Pension Changes Are Suspended Pending Lawsuit

Unions and retirees are currently challenging Chicago’s 2014 pension changes, and they are asking a judge to stop the implementation of the changes – which took effect Jan. 1 – until the lawsuit is resolved.

But a Chicago official said on Thursday that such an injunction could spur a credit rating downgrade from all three major rating agencies.

From Reuters:

Chief Financial Officer Lois Scott testified in Cook County Circuit Court that all three major credit ratings agencies have negative outlooks on Chicago’s ratings, largely due to a big unfunded pension liability that a 2014 Illinois law aims to ease for the city’s municipal and laborers’ funds.

Labor unions and retirees who are challenging the law, which took effect Jan. 1, have asked Associate Judge Rita Novak to temporarily stop it.

“I think that anything that arrests progress significantly increases our risk of downgrades,” Scott testified.

Scott said Chicago’s ratings are already lower than most big U.S. cities and that further downgrades would pump up interest rates on new fixed-rate bonds and thin the ranks of potential bond buyers and credit providers. She added the termination of interest-rate hedges and letters of credit on existing variable-rate bonds could be triggered, costing Chicago hundreds of millions of dollars.

The 2014 pension changes require city employees to contribute more to the system. The city’s contribution rate was increased, as well. Lastly, the calculation of COLAs is now linked to inflation; previously, the COLA was set at 3 percent annually.

Photo by bitsorf via Flickr CC LIcense

More European Pensions To Move Into Real Assets, Says Study

The coming years will find European institutional investors increasingly turning to real assets, according to new research from alternative asset manager Aquila Capital.

The new paper, titled Real Assets – The New Mainstream, predicts that investors will turn to real assets and equities and bonds will become less attractive.

Details from a press release:

The research predicts that the Dow Jones Index will deliver average total returns of 4% per annum over the next 10 years, while real returns on German 10-year government bonds are set to be negative, even if interest rates were to reach 4% by 2024.

Alongside these estimates, 60% of institutional investors in Europe expect institutional allocations to real assets to increase over the next three years.

Oldrik Verloop, co-head of hydropower at Aquila Capital, says: “This unique investment landscape, for which there is no precedent in history, is giving rise to considerable challenges for pension fund managers struggling to fund deficits.

“Among these challenges is the need to assess the impact of today’s loose monetary policies on global interest rates and inflation tomorrow.”

He says that institutional investors seeking to future-proof their portfolios will be searching for new investment solutions, leading them to shift allocations towards real assets.

“Real assets are uniquely positioned to provide value and enhance overall risk-adjusted returns in a broad range of market environments. The powerful combination of market-independent stability and growth make them an attractive core holding for institutional investors,” he adds.

As part of the research, 50 institutional investors across Europe were surveyed.

Photo by Santiago Medem via Flickr CC

Kansas Treasurer Voices Support For Governor’s Pension Bond Plan

Kansas Treasurer Ron Estes is backing Gov. Sam Brownback’s plan to issue $1.5 billion in bonds to go towards funding the state’s Public Employees Retirement System.

Pension officials told Kansas lawmakers last week that such a decision, coupled with Brownback’s plan to delay pension payments, could end up costing the state almost $4 billion.

From the Topeka Capital-Journal:

The gambit put forward by Gov. Sam Brownback carries risk, the state’s treasurer said in an interview, but the state government’s general budget needs infusion of $137 million that would be available over the next two years by adjusting the Kansas Public Employees Retirement System. Kansas’ general operating deficit over the next 18 months has been estimated to be $700 million.

“The changes the governor suggests will help address the state’s budget shortfall while keeping KPERS in line with the pension reform plan passed by the 2012 Legislature,” Estes said.

Three years ago, legislators and Brownback committed the state to higher contributions to KPERS and other system reforms to chip away at a $9.8 billion funding gap on scheduled payouts to retirees through 2033.

Under the governor’s latest plan, the break-even point for the pension system would be pushed to 2043. The cost of delaying resolution of the deficit in KPERS could cost the state as much as $9 billion — nearly double the existing unfunded liability — when carried forward over three decades.

“You can lower your payments now, but if you add 10 years of payments, you’re going to pay more,” said Alan Conroy, executive director of KPERS.

“There are pros and cons to it,” said Estes, who is on the KPERS board of directors. “It’s a reasonable burden.”

Brownback also urged legislators to authorize issuance of $1.5 billion in bonds to infuse the pension system with capital that would be invested in the markets. The bonds might cost the state less than 5 percent, Estes said, while the average rate of return in the KPERS’ portfolio is about 8 percent.

“The bonding is a great idea,” he said. “We can take that $1.5 billion and invest it with other KPERS’ assets and start making money.”

Brownback is planning on delaying state payments to the pension system by $39 million in fiscal year 2015-16 and by $92 million in fiscal year 2016-17.

Photo credit: “Seal of Kansas” by [[User:Sagredo|Sagredo]][[User talk:Sagredo|⊙☿♀♁♂♃♄]] – http://www.governor.ks.gov/Facts/kansasseal.htm. Licensed under Public Domain via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Seal_of_Kansas.svg#mediaviewer/File:Seal_of_Kansas.svg

Pennsylvania Gov. Wolf Open to Issuing Pension Obligation Bonds

New Pennsylvania Gov. Tom Wolf has already said he’ll be taking a hands-off, wait-and-see approach to pension reform.

He acknowledges that the system needs to improve its funding, but said he doesn’t think a switch to a 401(k)-type system is the correct way to approach reform.

A Wolf spokesperson, however, revealed this week that the Governor may be open to issuing pension obligation bonds to help pay down the state’s pension debt.

From the Daily Item:

As Gov.-elect Tom Wolf gets ready to wrestle a $2 billion budget deficit, some at the Capitol say the state should borrow money to relieve one of its biggest financial burdens — cash-strapped pensions.

Lawmakers on both sides of aisle have proposed using bonds to shore up the state’s retirement plans. Wolf is open to the idea, as well, said spokesman Jeff Sheridan, but is also willing to listen to alternatives.

It’s a concept that comes with risks — and controversy. Even advocates for the idea seem to embrace it only because no one has come up with a better one.

Annual costs tied to the state’s public employee pensions are expected to increase by more than $500 million in the coming fiscal year.

At least one lawmaker – Republican Rep. Glen Grell has proposed a plan for issuing bonds to fund the pension system.

But many other Republican lawmakers likely won’t be on board with the bond idea. A switch to a 401(k)-type system is still on the mind of many of those legislators.

Photo credit: “Flag-map of Pennsylvania” by Niagara – Own work from File:Flag of Pennsylvania.svg and File:USA Pennsylvania location map.svgThis vector image was created with Inkscape. Licensed under CC BY-SA 3.0 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Flag-map_of_Pennsylvania.svg#mediaviewer/File:Flag-map_of_Pennsylvania.svg

Kansas Gov. Proposes Issuing $1.5 Billion in Bonds for Pension Funding

Kansas Gov. Sam Brownback, looking for ways to improve state pension funding after he cut $60 million from Kansas’ annual contribution, is now proposing issuing $1.5 billion of bonds to help cover the pension shortfall.

From Chron.com:

Gov. Sam Brownback is proposing that Kansas issue $1.5 billion in bonds and lengthen its schedule for closing a long-term funding gap to lower annual costs tied to pensions for teachers and government workers.

The Republican governor outlined the measures Friday. Brownback described escalating annual public pension costs as a long-term concern.

The state has committed to additional spending to bolster the long-term financial health of the Kansas Public Employees Retirement System. Benefits are only 60 percent funded through 2033, but the commitments would help close the $9.8 billion shortfall by then.

Brownback proposed extending the payoff period to 2043.

The bond funding would go to the Kansas Public Employees Retirement System (PERS).

The success of the plan depends on pension investment returns exceeding annual bond payments.

The state’s Budget Director, Shawn Sullivan, says he’s confident that will happen.

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.

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