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Dutch Pension Funding Ratios Drop By 5 Percent in January

The funding ratios of Dutch pension funds have fallen on average by 5 percentage points in January on the back of low interest rates, according to Mercer and Aon Hewitt.

Average funding, according to estimates by Aon Hewitt and Mercer, fell by 5 percentage points over the period, due to persistently low interest rates, the criterion for discounting liabilities.

[…]

The consultancies also attributed the sudden drop in funding to a new accounting method for calculating coverage ratios.

Since 1 January, when the Netherlands introduced its new financial assessment framework (FTK), schemes’ funding has been based on actual interest rates while applying the ultimate forward rate (UFR), rather than the three-month average of interest rates plus UFR.

In addition, the new FTK came with a ‘policy funding ratio’ – meant as a criterion for rights cuts and indexation – consisting of the average coverage of the previous 12 months.

According to Aon Hewitt, policy funding stood at 109% at January-end, while Mercer placed the figure at 109.6%.

[…]

[Aon Hewitt chief commercial officer for retirement and financial management Frank] Driessen said the ECB’s recently announced quantitative-easing programme had led to a further slide of interest rates and predicted that rates would remain low for “a long time”.

The average funding ratio of Dutch pensions stood at 103 percent at the end of January, according to Aon Hewitt.

Top Kentucky Lawmaker Introduces Teacher Pension Funding Bill; Seeks $3 Billion in Bonds

Kentucky House Speaker Greg Stumbo has taken up the Teachers Retirement System on one of their funding proposals.

Stumbo on Friday filed a bill calling for the issuing of $3.3 billion in bonds that will be used to fund the teachers system.

More details from the Courier-Journal:

Stumbo, D-Prestonsburg, said Friday that the retirement system could capitalize on current low interest rates of around 5 percent and use the bonds to supplement the state’s pension contribution for the next eight years.

“This window is going to close pretty soon,” Stumbo said. “I think the feds, this year, will allow those rates to rise some because the economy is getting better and because the banks aren’t making any money on deposits.”

KTRS estimates that a $3.3 billion bond issue would save the state around half a billion dollars annually by 2026. But the plan only works if investments yield a higher rate of return than the interest on the bonds.

Supporters compare the idea to refinancing a home mortgage at a lower rate. But skeptics view it more like using credit cards to pay off debt, and the measure would need support from a supermajority of lawmakers to pass in an odd year of the legislature.

But lawmakers haven’t forgotten about the transparency issues present at both state pension systems. Lawmakers may still attach strings to the funding that forces the teachers system to make some changes to their opacity. From the Courier-Journal:

Stumbo said he is comfortable allowing bonds for teacher pensions because KTRS appears prudent in its investment strategy. But he said lawmakers might consider additional measures to improve oversight of the system as part of the debate.

Stumbo added that lawmakers are not interested in providing bonds to Kentucky Retirement Systems — the pension system for state and local workers — because of lingering questions over investments and transparency.

The Kentucky Teachers Retirement System is one of the worst funded educator’s pension funds in the U.S.

Likewise, the Kentucky Employees Retirement System is one of the worst funded plans in the country.

Canada Pension Buys Big Stake in San Francisco Office Tower

The Canada Pension Plan Investment Board (CPPIB) is buying a major stake in a popular San Francisco office tower, the fund announced on Thursday.

The rest of the property is owned by Hudson Pacific Properties, Inc.

From Bloomberg:

Canada Pension Plan Investment Board agreed to pay about $219.2 million for part of a San Francisco office building where ride-sharing company Uber Technologies Inc. and mobile-payment provider Square Inc. have their headquarters.

The pension fund plans to buy the 45 percent stake in 1455 Market St. from Hudson Pacific Properties Inc., the companies said today in a statement. Los Angeles-based Hudson Pacific has owned the 22-story tower since December 2010 and will continue to oversee management and leasing.

The purchase is the Canadian pension’s first direct investment in San Francisco, where office rents have soared 88 percent in almost five years, according to Jones Lang LaSalle Inc. (JLL) Demand for office space has been buoyed by annual job growth of 3.6 percent in the city, outpacing the U.S. by one percentage point, the brokerage said in a report this week.

San Francisco is “one of the best-performing U.S. office markets and a key strategic market for CPPIB in that country,” Peter Ballon, head of real estate investments in the Americas for the pension, said in today’s statement.

The 1.03 million-square-foot (95,300-square-meter) property, formerly a Bank of America Corp. data center, was built in 1976 and has ground-floor retail.

Read the press release here.

Photo by ilirjan rrumbullaku via Flickr CC License

Report: CalPERS’ Strong Real Estate Returns Unlikely To Last

CalPERS has seen strong real estate returns since 2011. But a consultant for the pension fund warns in a new report that the consistent double-digit returns are unlikely to continue.

[The report, from Pension Consulting Alliance, can be read here, or at the bottom of this post.]

More details from Randy Diamond of Pensions & Investments:

The PCA report, which is contained in agenda materials for CalPERS’ Nov. 17 investment committee meeting, said sustaining those returns is unlikely because of a challenging and highly competitive investment market.

The report cites increased competition from sovereign wealth funds, high-net-worth investors and other large direct investors in real estate as among the reasons for the potentially declining results. It says persistently low interest rates are fueling the demand for income-producing assets.

In 2011, CalPERS changed the focus of its real estate program to focus on investing in income-producing properties — and away from opportunistic real estate — after suffering massive losses following the crash of the real estate market.

CalPERS spokesman Brad Pacheco said in an e-mail: “We recognize that recent high returns will be difficult to achieve in the current real estate market. Our goals now are to diversify portfolio risk and generate steady, modest gains.”

CalPERS manages $25.6 billion in real estate assets, and is planning to expand its real estate portfolio by 27 percent by 2016.

The report:

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Growth Slower, But Still Steady For World’s Largest Funds in 2013

The annual pension fund survey from Pensions & Investments and Towers Watson contains news for both optimists and pessimists.

Glass half-empty: The world’s largest pension funds saw less growth in 2013 than they did in 2012.

Glass half-full: 2013 still marks the 5^th consecutive year of positive growth for those funds.

All the details from Pensions & Investments:

Assets of the world’s largest 300 retirement funds increased 6.2% in 2013, growing at a slower pace compared with 2012’s 9.8% rate, according to an annual survey conducted by Pensions & Investment sand Towers Watson & Co.

That is the fifth year in a row of positive growth for the top 300 funds across the globe, with aggregate assets in defined benefit and defined contribution plans at $14.86 trillion. These funds represent 46.5% of global pension assets, according to Towers Watson’s most recent Global Pension Asset Study, declining slightly from 47% in 2012.

“Some funds are experiencing strong net inflows, some are experiencing increasing returns due to buoyant stock markets — that is true of Australia, Canada, the U.S. and the U.K.,” said Gordon Clark, professor and director of the Smith School of Enterprise and the Environment at the University of Oxford, Oxford, England.

“Indeed, we are in the midst of what some people think is maybe a nascent bubble in the stock markets, promoted by, in part, quantitative easing.”

Amid stubbornly low interest rates and a poor year for emerging markets strategies, developed markets equities followed up a strong 2012 with an even stronger 2013.

The Russell 3000 index returned 33.55% over the year, compared with 16.4% in 2012, while the MSCI All-Country World ex-U.S. index gained 15.97% vs. 16.5% in 2012.

Read the full breakdown of the survey here.

Photo by Horia Varlan via Flickr CC