Paltry Returns For Pensions in 2011?

Janet McFarland of the Globe and Mail reports, Pension plans eke out positive return in 2011:

Canadian pension plans eked out a positive return in 2011, averaging a 0.5 per cent return for the year.

A survey of major Canadian pension plans by RBC Dexia Investor Services found plans reported they earned 4.2 per cent on their investments in the fourth quarter last year, pushing their full-year returns into barely positive territory.

“It’s been a tumultuous year for global markets,” said Don McDougall, director of advisory services at RBC Dexia.

“We had a natural disaster in Japan, geopolitical tensions in the Middle East, a stubborn U.S. recovery with its ensuring political backlash, sputtering Chinese growth and the ever-lingering European debt crisis. Most pensions will be pleased it’s over.”

The survey compiles results from pension plans across Canada with assets under management totalling $340-billion.

The results are similar to estimates published early this month by pension consulting firms that track investment returns using hypothetical model portfolios with typical asset allocations.

The break-even returns mean pension funds still saw their funded status decline in 2011. Pension liabilities are calculated based on long-term bond yields, which fell in 2011, driving up the amount of money pension plans are required to set aside to provide pensions to plan members.

RBC Dexia said pension funds reported Canadian equities were their hardest-hit asset class, with mining, energy and financial services accounting for the bulk of the market’s decline in Canada in 2011.

Canadian equity portfolios underperformed the S&P/TSX Composite index by 0.9 per cent for the year, RBC Dexia said, although beat the composite index in the fourth quarter by 0.6 per cent.

Foreign equities also dragged down returns last year, losing 4.2 per cent and underperforming global benchmarks by 1 per cent. Mr. McDougall said there was broad weakness in foreign markets, although the U.S. market was up 2 per cent for the year, making it one of a select few to remain positive.

“Canadian plans also benefitted from a weaker Canadian dollar against most major currencies with the exception of the euro,” Mr. McDougall said.

Strong returns from bonds offset stock losses, RBC Dexia reported. Bonds climbed by 9.8 per cent in 2011, with the global DEX Long Term bond index recording its best calendar year since 1997.

Things aren't any better in the United States where Marc Lifsher of the Los Angeles Times reports, CalPERS earns 1.1% on investments in 2011:

The nation's largest public pension fund, the California Public Employees' Retirement System, posted a 1.1% return on its investment portfolio in 2011, Chief Investment Officer Joseph Dear told his board.

The 2011 performance was well below the estimated average annual return of 7.75% that the fund's actuaries say is needed to meet current and future obligations to its members.

The $229.5-billion CalPERS provides retirement and other benefits for 1.6 million state and local government employees and their families.

CalPERS' annual investment results, whose volatility has echoed that of the overall markets, have become the focal point in an ongoing debate about looming pension fund liabilities and the ability of future generations of taxpayers to continue financing them. Gov. Jerry Brown has said he wants to overhaul state and local government pension programs, but whether he and the Legislature have the political wherewithal to do so in an election year remains unclear.

During the 2011 calendar year, CalPERS lost 7.95% on its public equity investments, lost 2.29% on its hedge fund investments, earned 12.38% on bonds and earned 9.92% on real estate.

In the first three quarters of the calendar year, it earned about 12.37% on its private equity investments. (The availability of these results lags a quarter.)

CalPERS' 2011 return was well off the 12.6% return for 2010 and 12.1% for 2009.

Calendar-year results, however, are used only as indicators, a CalPERS spokesman said. The fiscal year returns, posted as of June 30 each year, are the legal basis for annual decisions by the CalPERS board to raise or lower the contributions it gets from 3,100 participating government agencies, including the state of California.

As of June 30, CalPERS had a return on its investments of 20.9%, its best annual showing in 14 years. It had a return of 11.6% for fiscal 2010 and a massive recession-related loss of 23.4% for fiscal 2009.

Last fiscal year's strong showing, combined with the signing of a number of state labor contracts that increased the amount that employees contribute to their own retirements, allowed CalPERS to lower by $170 million the amount it sought from the state government this fiscal year.

This fiscal year, the state is contributing $3.51 billion. Next fiscal year's contribution is to be determined in the late spring.

I use CalPERS' calendar year results as a gauge of what to expect from other large public pension funds and it won't be much. The third quarter was a tough one and even though stocks snapped back, many pension fund managers underperformed in their public equities portfolio.

Hedge funds also underperformed in 2011, and even though CalPERS didn't get clobbered in hedge funds, they still doled out huge fees and lost money. When it comes to hedge funds, always ask where are the customers' yachts, and make sure you get the right alignment of interests. Think CalPERS should reevaluate their hedge fund portfolio (too much beta) and seed more hedge funds, including Canadian hedge funds. They should also manage more internally.

Their private equity team, led by Réal Desrochers, is performing well, delivering outstanding results in a tough environment. But private equity is no panacea, and as I recently discussed, this is a challenging environment for all asset classes, including private equity.

Nonetheless, gains private equity, real estate and infrastructure might save Canadian public pension funds from an otherwise bad year. We shall see, but don't expect much as most pension funds will report paltry returns for 2011.

Below, Janine Guillot, CalPERS Chief Operating Investment Officer, discusses improvements, goals and challenges in the operational aspects of the Investment Office (transcript available here).