Thursday, April 16, 2009

The End of Final-Salary Pensions?


Bloomberg reports that the New Jersey pension system deficit rose to $34 billion:
The funding deficit of New Jersey’s public pension system climbed to $34.4 billion as of June 30, from $28.4 billion in mid-2007.

The pensions were 72.6 percent funded as of June 30. That compares to a funded ratio in June 2007 of 76 percent, according to state Treasury Department officials.

New Jersey’s largest pension fund, the Public Employees’ Retirement System, had an unfunded liability of $10.82 billion as of June 30, up from $9.07 billion as of mid-2007. That combines state and local systems. The state PERS had a funded ratio of 65.6 percent, compared with 68.8 percent in June 2007.

The state has less money than it owes for anticipated pension obligations because of investment losses earlier this decade, a lowering of the retirement eligibility age and a failure by past governors to make annual contributions. The value of the pension system’s assets dropped to $56.3 billion as of February, from more than $82 billion as of June 2007, after losses on investments.

Governor Jon Corzine, a first-term Democrat seeking re- election in November, has tried to slow the deficit’s growth by making regular pension payments. His administration has contributed about $3 billion into the system since he took office, compared with $3.2 billion contributed in the previous 14 years, according to the treasurer’s office.

Pension Reform

Corzine’s administration also has enacted pension and benefit changes that are projected to reduce costs to the systems by more than $6 billion over the next 10 years. These include raising the retirement age and requiring newly appointed and elected officials to enroll in a less costly, defined- contribution plan, treasury spokesman Tom Vincz said.

Around the U.S., many state plans are experiencing increases in unfunded liability, Vincz said. A recent report from Wilshire Consulting showed that 59 other state retirement systems reporting actuarial data from fiscal 2007 to fiscal 2008 had sharply reduced funding ratios, with the average state ratio falling by 11 percentage points, from 88 percent to 77 percent, he said.

“All of this said, there are multiple factors that influence the liabilities of the system, not the least of which is investment returns, which have not kept pace with rising liabilities,” Vincz said in an e-mail.

Helping the Cash-Strapped

Corzine, the former chairman of Goldman, Sachs & Co., last month proposed reducing the state’s annual pension payment by $500 million, to $400 million, to help close a $7 billion state budget deficit for fiscal 2010, which begins July 1. The governor signed legislation allowing cash-strapped municipalities and school districts to defer half of their $1.1 billion in pension contributions due this month.

The funding gap for the teachers’ and the police and firefighters’ funds also increased between 2007 and 2008, reports released this month show. The overall state pension system operates on behalf of more than 700,000 current and retired employees.

Global Pensions reports that CalPERS assets are down 6% in Q1:

CalPERS assets under management dipped 6.4% to $171.6bn in the first quarter of 2009 on the back of weak equity returns and write downs in the pension fund’s real estate and private equity investments.

In a staff memo to the board, chief investment officer Joe Dear said the drop in value could also be attributed to the drops in the domestic and international equity markets.

As of March 31, the California Public Employees Retirement System invested 41.3% in global equity, 13.8% in private equity, 24.9% in global fixed income, 12.1% in real estate, 2.5% in inflation-linked asset class and 5.4% in cash.

CalPERS staff also announced the finalists up for a private equity consulting slot and plans to renew the contracts of its emerging managers if the move is approved at an April 20 investment committee meeting.

CalPERS named Aldus Equity; Brock Capital Group; Ennis, Knupp & Associates and Pension Consulting Alliance as the firms being considered for a private equity consulting slot, according to staff a memo to the committee.

The firm will serve as a consultant to the board and will advise on strategy and policy Analysis, general investment analysis and research, and performance monitoring. All four finalists are existing CalPERS consultants.

Separately, staff recommends renewing the contracts for emerging managers of managers FIS Group and LEIA one year.

Since inception on 1 February 2008 through 28 February 2009, the US$359.9m portfolio was down 41.45%, but outperformed its benchmark by 87 basis points.

And now CalPERS is seeking to buy TARP holdings and Citigroup assets:

The California Public Employees’ Retirement System said it’s seeking opportunities to buy assets of Citigroup Inc. and other financial companies tied to the U.S. government’s $700 billion Troubled Asset Relief Program.

Calpers, as the largest U.S. public pension manager is known, said today it’s setting aside “billions of dollars” amid the credit crunch and is ready to deploy capital. It added that there’s a “glimmer of hope” in the stock market.

The pension fund is seeking to buy “some of the assets of these financial companies such as Citi and the others, assets that they’re trying to get off their balance sheets,” Henry Jones, a Calpers board of administration member, said in an interview after a speech in Seoul.

Calpers’s cost of managing its investments declined to the lowest level since 2004 after the value of fund holdings fell 27 percent this fiscal year, and it projects its investment costs will fall to $817 million in the 12 months that begin July 1, down from $1.04 billion last year, according to a report that will be presented to the fund’s governing board. That is the lowest since the fund spent $523 million in the fiscal year that ended June 30, 2004.

Calpers has broadened its asset allocation ranges to ensure more flexibility and plans to hold its investment review in May, about 18 months ahead of schedule, Jones said in the speech.

‘Toxic Debt’

“The assumptions that we used 18 months ago no longer fit the present market,” he said. “There’s still a tremendous ocean of toxic debt out there. Even if we didn’t buy it, it’s done enough damage to our banks to affect all of us on Wall Street.”

The pension fund lost more than a quarter of its value in the first seven months of its current fiscal year, led down by stocks, real estate and commodities, according to its most recent investment activity report.

The MSCI World Index jumped 12 percent in the past one month as governments around the world stepped up efforts to stimulate their economies. The gauge has pared losses this year to 6.6 percent after last year’s 42 percent slump when the global economy sank into recession.

Calpers, with $175 billion in assets as of April 13, reached a recordhigh of $260 billion in October 2007. The fund provides pension and health benefits to 1.6 million government workers, retirees and their families.

Tight Credit

“Credit is still tight in the markets, but we’re able to raise enough cash to still make good deals and position ourselves for an eventual market turnaround,” Jones added.

The Sacramento, California-based fund invests 7.6 percent of its funds in cash, a category that calls for no allocation under targets established in December 2007, according to its Web site. The fund’s bond investments represent 24.8 percent of the total, more than the 19 percent target.

It’s underinvested in equities, with 53.5 percent allocated there compared with a target of 66 percent.

Calpers has $500 million invested in South Korea, including a $100 million investment with Lazard Asset Management Plc last year, Jones said.


CalPERS is making a risky bet here and I hope it pays off for them. But I fear it will likely backfire as that "glimmer of hope" evaporates very quickly.

Finally, the BBC asks whether it's the end of final-salary pensions?:

If you are one of the lucky few still in a final-salary, defined benefit (DB), plan, you need to know what this will mean for you and your plans for retirement.

Closing a scheme to current members is a big step for employers.

Many smaller companies have already done this.

So far, larger ones have typically made modifications to their DB scheme, and probably stopped people joining it some years ago.

But cancelling the ability of existing members to accrue more pension, by stopping them paying in any more money, is new for most large organisations.

Someone wrote me that defined-contributions are the future and that "people must assume responsibility for their financial health as well as their physical health. We cannot expect the government to take on such responsibilities because that is not the way evolution (real world) works."

But as I have written before, the shift to define-contribution (DC) plans is not the solution. Most people cannot deal with the stress of investing their own money or selecting between funds that are offered to them.

It is important that people start doing their own due diligence and build up some knowledge on investments, but the reality is that most individuals cannot handle these responsibilities.

This is why I recommend we scrap private pensions altogether and create several large public defined-benefit plans that are capped at a certain size. These funds would follow the highest standards of governance and they would be managed by professional money managers whose interests are aligned with their stakeholders and pension beneficiaries.

One thing is for sure, the end of final-salary pensions won't solve anything and we should stop pretending otherwise.