New Jersey Bill, Now on Christie’s Desk, Would Expand Pay-to-Play Rules for Pension Investments

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With all the drama surrounding New Jersey Gov. Chris Christie’s latest round of pension changes, one big pension-related development has been overlooked: on Monday, state lawmakers approved a bill that would expand pay-to-play rules as they relate to pension investments.

The bill, which would increase transparency around fees paid to private investment managers, was sent to Christie’s desk on Monday.

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[The bill] would expand restrictions on investments of state pension funds with outside money managers who donate to national political committees.

The legislation also would require the state Treasury Department to regularly publish reports disclosing fees paid to private managers who invest state pension funds.

Pay-to-play rules already prohibit the Division of Investment from awarding contracts to firms or investment managers who have donated to New Jersey political parties or campaigns in the preceding two years.

A 2010 federal law imposed a similar ban. Under that law, the Securities and Exchange Commission in June ordered Wayne-based TL Ventures Inc. to repay $250,000 in pension fees collected from Philadelphia and Pennsylvania after learning the firm’s founder had donated to Mayor Nutter and then-Gov. Tom Corbett.

But managers can still donate to national committees such as the Republican Governors Association or Democratic National Committee, which can spend money on and influence state politics. Legislation passed Monday by the Assembly on a 53-15 vote would close that loophole by extending the State Investment Council’s pay-to-play regulations to cover investors’ donations to national political committees.

The bill passed the Senate in October on a 25-8 vote, with seven abstentions.

Lawmakers believe the SEC pay-to-play rules are too lenient.

State pension officials, however, say the rules could harm the fund’s alternative investment portfolio; the fee disclosure requirement runs the risk of dissuading some investment managers from doing business with the fund.

Alternatives account for 28 percent of New Jersey’s pension investments.


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Pension Asset Growth Outpaced GDP Over Last 10 Years

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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.

From the Wall Street Journal:

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.

Study: Pension Funds Can Work Harder To Be Long-Term Investors


A new paper by Keith Ambachtsheer and John McLaughlin dives into the question: Do pension funds invest for the long term?

Nearly all pension funds would identify themselves long-term investors if asked. But the paper reveals that there is a gap between that sentiment and the funds’ actual investment strategies.


The authors […] reported a significant gap between the long-term investment aspirations of asset owners and the reality of their strategies’ implementation.


On long-term investment, the authors said there was “broad consensus” among respondents to the survey that a longer investment timescale was “a valuable activity for both society, and for their own fund.”

“However, there is a significant gap between aspiration and reality to be bridged,” Ambachtsheer and McLaughlin added.

“Here too a concerted effort—both inside pension organizations and among them—will be required to break down these barriers.”

The authors listed the barriers to long-termism: some areas of regulation, a “short-term, peer-sensitive environment”, a lack of clear investment processes and performance metrics, and difficulties in aligning interests with outsourcing providers.

The paper, which also covers governance issues, can be read here.


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UK To Debate Ban on Secret Pension Fees


The UK government will consider a ban on secret pension fees in light of a proposition from Lord Mike German to improve the transparency of pension investments.

More from the Financial Times:

The UK government is to debate a ban on non-disclosure agreements that conceal fees between pension funds and asset managers, in a bid to provide individuals with more information about how their pensions are managed.

A proposed amendment to the Pension Schemes Bill put forward by Lord Mike German, former leader of the Welsh Liberal Democrats, would put an end to pension schemes signing non-disclosure agreements with fund companies over fees.

Lord German’s proposal, which has the backing of investor rights charity ShareAction, would also require pension funds to inform savers on request about how they voted at company meetings on issues such as executive pay, and explain how they select and monitor fund managers.

Lord German said: “The purpose of this amendment is to try and establish whether the government is prepared to give people the rights that they need. [Savers] are not disinterested in their pensions.”


Lord German’s amendment was submitted to parliament in mid-December and will need approval from DWP ministers, the Treasury and the Department for Business, Innovation and Skills. If the amendment is adopted it could enter law by the end of March, according to Lord German.

Currently, pension schemes are only required to disclose information about investment policy and performance in annual reports. ShareAction said that in practice “savers are often sent information that is technical [and] inaccessible”.

Asset managers have already voiced their displeasure with the proposition. BlackRock told the Financial Times: it is “neither in the interest of institutional investors nor of investment managers to ban non-disclosure agreements”.

Lowenstein: Do Pension Fund Make Investing Too Complex?


Former New York Times financial writer Roger Lowenstein wonders in his new Fortune column whether pension investments have become too complex.

Lowenstein’s thesis:

Pricey consultants have convinced many pension funds to pile into private equity, real estate and hedge funds, which don’t necessarily promise higher returns or long-term investing.


[Pension funds] have assembled portfolios that are way too complex, way too dependent on supposedly sophisticated (and high fee) investment vehicles. They have chased what is fashionable, they have overly diversified, and they have abandoned what should be their true calling: patient long-term investing in American corporations.


It’s true that the stock market doesn’t always go up. But a long-term investor shouldn’t be wary of volatility. Over the long term, American stocks do go up. And state pension systems should be the ultimate long-term investors; their horizon is effectively forever.

Lower volatility helps fund managers; they don’t like having to explain what happened in a bad year. But it is not good for their constituents. The Iowa system has trailed the Wilshire stock index over 10 years—also over five years, three years, and one year. Over time, that translates to higher expenses for employees or for Iowa taxpayers. And Iowa is typical of public funds generally.


Many hedge funds trumpet their ability to dampen volatility. Pension funds should not be in them. From 2009 to 2013, a weighted index of hedge funds earned 8% a year, according to Mark Williams of Boston University. The return on the S&P 500 was more than twice as much, and a blended 60/40 S&P and bond fund earned 14%. Granted, a small minority of hedge funds consistently beat the index. But most public pensions will not be in such superlative funds.

Lowenstein on private equity:

Private equity remains the rage. However, private equity is hugely problematic. Those confidential fees are often excessive—with firms exacting multiple layers of fees on the same investment.

Moreover, there is no reliable gauge of returns. Private equity firms report “internal rates of return.” These do not take into account money that investors commit and yet is not invested. “The returns are misleading,” says Frederick Rowe, vice chairman of the Employee Retirement System of Texas. “The professionals I talk to consider the use of IRRs deceptive. What they want to know is, ‘How much did I commit and how much did I get back?’”

Since no public market for private equity stakes exists, annual performance is simply an estimate. Not surprisingly, estimates are not as volatile as stock market prices. But the underlying assets are equivalent. A cable system or a supermarket chain does not become more volatile by virtue of its form of ownership.

The fact that reported private equity results are less volatile pleases fund managers. But the juice in private equity comes from its enormous leverage. Pension managers would be more honest if they simply borrowed money and bet on the S&P—and they would avoid the fees. And if high leverage is inappropriate for a public fund, it is no less inappropriate just because KKR is doing it.

Lowenstein ends the column with a call for pension funds to renew their focus on “long-term goals”:

With their close ties to Wall Street, pension managers tend to be steeped in the arcane culture of the market. The web site for the Teacher Retirement System of Texas refers to its “headlight system” of “portfolio alerts” and the outlook for the U.S. Federal Reserve and China.

Managers who think in such episodic terms tend to be traders, not investors. This subverts the long-term goals of retirees.

The focus on the short and medium term squanders what a pension fund’s true advantage is. You may not have thought that public funds had an advantage, but they wield more than $3 trillion and have the freedom to invest for the very long term.

Better than chase the latest “alternative,” pensions could become meaningful stewards of corporate governance—active monitors of America’s public companies. A few fund managers, including Scott Stringer, the New York City comptroller, who oversees five big funds, are moving in this direction, seeking board roles for their funds. More should do so, but that will require an ongoing commitment. It will require, in other words, that pension funds stop acting like turnstile traders and fad followers, and that they start behaving like investors.

Read the entire column here.


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New Mexico Pension Reaches Settlement With Ex-Chairman Marred By Scandal

board room chair

Bruce Malott, the ex-chairman of the $11 billion New Mexico Educational Retirement Board, is currently the defendant in five separate lawsuits stemming his handling of pension investments, which were allegedly marred by conflicts of interest.

Mallot resigned from the pension fund as a result of the controversy. But he claimed that the Retirement Board should pay his attorney fees accrued during those lawsuits. The Board initially refused, but Mallot sued the board over the fees, and today the Board has agreed to pay $125,000 worth of his attorney costs.

Reported by the Albuquerque Journal:

The Educational Retirement Board has paid its former chairman, Bruce Malott, $125,000 to settle a civil lawsuit he filed to recover money for legal representation in lawsuits arising from a state investment scandal.

Malott filed the lawsuit two years ago when the board refused to pay for his personal attorney fees based on an attorney general’s opinion and because he was also represented by lawyers hired by the state.

“The attorney general’s opinion stated clearly that I should not be reimbursed for my legal fees if I had done anything wrong, so this payment only demonstrates what I have said all along – that I have acted with integrity throughout my tenure at the ERB,” Malott said.

ERB Executive Director Jan Goodwin said in a statement, “Consistent with a ruling issued by U.S. District Court Judge Martha Vázquez earlier this year, the agency determined that a settlement was in the best interest of ERB members and beneficiaries. Continued litigation held the risk of escalating costs and an uncertain outcome.

“The settlement allows ERB to focus its attention on its mission of serving its members,” she said.

The ERB was represented by the Attorney General’s Office in the lawsuit.

More details on Malott’s conflicts of interest during his tenure at the pension fund, from the Albuquerque Journal:

Malott was named as a defendant in five separate civil lawsuits that claimed investments by the State Investment Council and the Educational Retirement Board were steered to investment firms by placement agents with close ties to then-Gov. Bill Richardson’s administration. The main placement agent, Marc Correra, shared in more than $22 million in fees for steering state investments from the SIC and the ERB to firms that paid him.

Correra’s father, Anthony Correra, was part of Richardson’s inner circle, and raised money for his campaigns for governor and president.

While serving on the ERB, Malott received a $340,000 loan from the elder Correra through a trust.

Malott resigned as chairman of the ERB following an interview with the Journal about the loan, which had not been disclosed to the ERB, the public or to Richardson, who had appointed Malott to the ERB.

The New Mexico Educational Retirement Board is the pension fund for 90,000 of the state’s teachers. It oversees $11 billion of assets.

Pension Funds, Asset Allocation and Bad Habits

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All too often, investors can fall victim to recency bias and return chasing.

Pension funds, it turns out, are no exception.

Three researchers – Andrew Ang, Amit Goyal and Antti Ilmanen – analyzed 978 pension funds’ target allocations over a 22-year period to determine whether the funds were chasing returns, and the cost of such chasing.

The paper was published in the most recent issue of Rotman International Journal of Pension Management. An excerpt where the researchers summarize their findings:

Many pension funds rebalance their asset-class allocations regularly to specific target weights, such as the conventional 60% stocks and 40% bonds. But there is anecdotal evidence that funds may let their allocations drift with relative asset-class performance. This may reflect passive buy-and-hold policies, a desire to maintain asset-class allocations near market-cap weights, or more proactive return chasing. We focus on the last possibility.


Our key findings are easily summarized: pension funds, in the aggregate, do not recognize the shift from momentum to reversal tendencies in asset returns beyond the one-year horizon, and instead the typical pension fund keeps chasing returns over multi-year horizons, to the detriment of the institution’s long-run wealth.

We hope that this evidence will help at least some pension funds to reconsider their asset allocation practices.

Chief Investment Officer magazine further summarizes the paper’s findings:

Corporate and public pension funds alike tended to increase exposure to asset classes with strong returns in both the short and longer term, the paper noted. Even performance three years prior influenced allocation patterns. While the study split out pension funds by size and plan sponsors, they found no statistically significant variance in behavior.

The researchers then turned to a data set provided by AQR, covering global equity, bond, and commodity markets since 1900. Based on more than a century of market activity, the study found momentum patterns on a one-year time horizon. Beyond that, the only statistically significant result showed that two years following a given return, performance was likely to have moved in the opposite direction.

The entire paper, titled Asset Allocation and Bad Habits, can be read here [subscription required].


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San Diego Fund To Consider Firing Risk-Keen CIO


The San Diego County Employees Retirement System (SDCERS) is by now notorious for its risky investment strategies, which include heavy use of leverage.

Pension360 has covered the pension fund’s board meetings this month, during which some trustees wondered aloud whether the fund should dial back risk.

Now, the board is considering another item: whether the fund’s chief investment officer should keep his job. Reported by the San Diego Union-Tribune:

The county pension board voted Thursday to formally consider firing their Texas investment consultant.

The decision on the future employment of Salient Partners of Houston was set for Oct. 2, one day after the last of the county’s in-house investment staff was scheduled to go to work for the investment firm as part of a years-long outsourcing push.

In the meantime, Chief Investment Officer Lee Partridge of Salient will no longer be permitted to risk up to five times the amount of San Diego County’s pension money invested under his “risk-parity” strategy.

The board considered yesterday the idea of allowing higher amounts of leverage in pension fund investments. But that idea was voted down by a measure of 5-2.

Now, the board has suspended its CIO’s ability to use any leverage at all until the board votes on the CIO’s future. That vote will be held in early October.


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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 5th 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.


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North Carolina Fund Draws Fire For Fees, Conflicts of Interest

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North Carolina Treasurer Janet Cowell is the sole trustee of the state Retirement System. That gives her power and control over the state’s pension investments that very few Treasurers share—but it also puts her in a position to take the brunt of the blame when things don’t go as planned.

Cowell is drawing an especially large amount of flak the past few months from critics condemning for her habit of accepting donations from investment firms—and then outsourcing investments to some of those same firms. Tom Bullock of WFAE reports:

During Cowell’s two successful campaigns to be North Carolina’s state Treasurer, 41 percent of her campaign donations came from out-of-state. Much of that money came from investment firms, insurance companies and lawyers…

The national average for state treasurers over the last two election cycles? Just shy of 11.5 percent.

In fact, over that same period 89 candidates vied to be a state’s treasurer. Only four had a higher percentage of out-of-state contributions. But in terms of total dollars, Janet Cowell is squarely at the top of that list.

Cowell declined to be interviewed for this story. Instead, her spokesman, Schorr Johnson, was made available.

“I’ll say that throughout Treasurer Cowell’s term in office she has been a consistent and vocal advocate for public financing for the office of state treasurer,” Johnson says.

Critics say there’s a reason for the influx of out-of-state cash (particularly from New York)—investment firms want the pension fund’s money, and Cowell is the one who makes those investment decisions.

Accordingly, Cowell is drawing fire for the fees paid to investment managers. Critics say the fund’s performance doesn’t justify the fees being shelled out—and some even claim that North Carolina is paying more fees that it’s letting on. David Sirota writes:

According to documents from the North Carolina Treasurer’s office, taxpayers paid $1.6 million in fees (or 0.7 percent of the $230 million Innovation Fund) to Credit Suisse for managing the fund last year. That, however, may not be the entire outlay on fees. As [Ted] Siedle’s report notes, the Innovation Fund directs capital through “fund of funds.” Those investments can also extract fees, which can be hidden in the lower returns passed on to investors.

Assuming these underlying funds charge the standard 2 percent management fee and 20 percent fee for investment performance, and taking into account private equity’s typical transaction, monitoring and operating fees, Siedle estimates that the fund is paying as much as $15.2 million in management fees each year (and that’s without factoring in any additional fees for investment performance). In all, Siedle estimates that since North Carolina’s Innovation Fund launched in 2010, as much as $65 million that was billed as going to local entrepreneurs may have gone to financial middlemen in the form of fees.


While there is no publicly available independently audited evidence of the Innovation Fund’s returns, fund officials said in 2013 that it had generated a 15 percent return so far. By comparison, the Russell 3000 has generated a 16.5 percent return since 2011, and the S&P 500 has shown a 58 percent return since 2011.

Ted Siedle, whom Sirota mentions above, has claimed for months that North Carolina was under-reporting the fees they paid to managers. He submitted his report to the SEC.

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