Pension Pulse

Jeremy Warner of the Telegraph reports, The uncertainty over oil is a slippery slope : The last time the oil price lost touch with gravity, which it threatens to again with the price of Brent crude now well north of $100 a barrel, it helped tip the world economy into the deepest recession since the 1930s. Is history about to repeat itself? Much depends on developments in the Middle East, but things are once more looking perilous. By adding to energy costs, the effect of high oil prices is to reduce the amount of money for spending on other things, thereby undermining aggregate demand in the wider economy. Eventually a tipping point is reached where confidence collapses. Given what happened as recently as 2008, you would expect OPEC to be acting quickly to prevent any further explosive increase in prices. The wave of popular protest across North Africa and beyond has put that assumption in doubt. What happens to the world economy is not exactly a priority right now for the autocrats wh...

Ben Levisohn of the WSJ reports, Rising Yields Could End the Party : With corporate profits rising and economic data coming in better than expected lately, stocks are surging. But so are bond yields—and that could spoil the party. Bond yields and stock prices have been rising together. On Feb. 8, the Dow Jones Industrial Average touched 12233, its highest level since June 2008. The same day, the yield on the 10-year Treasury reached 3.72%, the highest since April 2010. Rates have risen for six consecutive months, the longest such streak since 2006. Signs of a healthier economy are growing more numerous by the day. The Chicago Purchasing Managers Index, for instance, rose in January to its highest level since 1988. Corporate profits also have been better than expected; more than 70% of the companies in the Standard & Poor's 500-stock index that have reported fourth-quarter results so far have beaten earnings projections. Yet rising bond yields can cause problems of ...

Ruth Sutherland and James Salmon of the London Mail report, £80bn wiped off value of pensions after inflation rate was underestimated for 12 years : A staggering £80billion has been wiped off the value of pensions because the rate of inflation has been underestimated for 12 years, it emerged last night. Millions of pensioners relying on occupational schemes have been left hundreds of pounds short each year because their retirement benefits have not been increased to reflect the full rise in inflation. A 0.3 per cent a year underestimate of the effects of inflation over 12 years comes to 4 per cent. John Ralfe, one of the UK’s leading independent pensions consultants, said: ‘In simple terms, for every £100 of pension you are receiving, you should be getting £104.’ Details of the blunder come just days after the Bank of England admitted that inflation this year is likely to rise from 4 to 5 per cent. High inflation can be devastating to pensioners because their incomes fail to keep pace ...

Theresa Tedesco and Barbara Shecter of the National Post report, Fraud bailout fund hits wall (HT: Pierre): A recent proposal by a group of Quebec-based advocates to create a shareholder insurance fund for victims of financial fraud could put the province on a collision course with Canada's big banks. The Coalition for the Protection of Investors (CPI), an organization comprised of academics and financial industry representatives, says a compulsory indemnity fund to protect against fraud for Quebec, which has suffered numerous high-profile investor scandals in recent years, is running into resistance from the major chartered banks. Robert Pouliot, a co-founder of the coalition that tabled the proposal last month, says the country's large financial institutions have indicated they are not interested in financing a universal insurance fund for investors, arguing the industry already provides investor protection through IIROC. "There is resistance to...

Michael Bow of Professional Pensions reports, Ignoring climate change risk will cost schemes trillons : Schemes must factor in climate change risk to their asset allocation strategies over the next two decades or face losing trillions of pounds, Mercer warns. Research from the consultant - commissioned by a group leading schemes including BT Pension Scheme - anticipated climate change policy will account for 10% of a pension fund's portfolio risk by 2030, with costs hitting about £5trn by 2030. Mercer said funds could combat the growing policy risk headache by diversifying their portfolios away from equities and bonds into "climate sensitive" assets. These include infrastructure, real estate, private equity, agriculture land, timberland and sustainable assets. Mercer forecasts a portfolio trying for a 7% return could cancel out the climate change risk by allocating 40% of its funds to these assets. The Environment Agency, participants in the research, welcomed...

Cristina Alesci and Henry Goldman of Bloomberg report, NYC Pension Managers May Face Firing for Badmouthing : Newly hired managers for part of New York City’s $108 billion pension might be fired if they criticize workers’ benefits, according to a trustee of the police retirement fund. Joseph Alejandro said he proposed that the fund’s board be able to dismiss future managers who disparage a public pension, “its beneficiaries or any trustees or employees.” The Employees’ Retirement System is also considering the provision, he said. Blackstone Group LP ’s chief strategist, Byron Wien, strained relations with New York unions last year when he said benefits are “too generous.” “The intent isn’t to chill analysts who provide legitimate information,” Alejandro said in an interview yesterday. “We are trying to prevent money managers from taking positions that are essentially opinions based on political viewpoints.” Unions across the U.S., including the American Federation of State, County and ...

David Wessel of the WSJ reports, Budget Would Raise Pension-Insurance Cost : President Barack Obama's budget proposes to raise premiums the Pension Benefit Guaranty Corp. charges employers by $16 billion over ten years and, in a significant policy shift, would levy higher premiums on the riskiest companies. The PBGC insures defined-benefit pension plans, those that promise a monthly sum based on years of service and wages. Its $80 billion portfolio, mainly assets of pension plans it has taken over, is $23 billion short of the current value of pensions it has promised to pay. Premiums are supposed to make up the difference. Total premium revenues last year were $2.2 billion. Both the fiscal commission appointed by Mr. Obama and another, private one recommended increasing PBGC premiums to close the long-run deficit. "Premiums are much lower than what a private financial institution would charge for insuring the same risk, but unlike private insurers (or even other s...

Ruth Sullivan of the FT reports, Pensions plan to de-risk funds : UK pension funds plan to reduce risk-taking on assets and liabilities in the next decade. Nearly three-quarters of defined benefit pension schemes aim to de-risk their funds, according to a survey of 200 schemes, carried out by Aon Hewitt. Bigger schemes plan to do this by becoming self-sufficient without relying on sponsors for payment of benefits, while smaller ones want to buy out the benefits from an insurance company. “Nobody wants pension risk any more. Trustees and sponsors do not want pension funds to turn around and bite them, they want out,” said Kevin Wesbroom, at Aon Hewitt’s global risk services. On the asset side, funds plan to move away from equities, especially UK companies, favouring property, hedge funds, commodities, currency and infrastructure. They will increase their exposure to bonds and use other liability-driven investment strategies. However, in spite of intentions to de-risk, trust...

James Nash and Stacie Servetah of Bloomberg report, California, New Jersey Pensions Squeeze Fee Savings : Pension system investment directors overseeing more than $217 billion in California and New Jersey cut millions of dollars in projected costs by reducing the fees they pay to asset managers. The $146.4 billion California State Teachers’ Retirement System, the nation’s second-largest public-pension fund, has reduced the fees it pays to money managers by an average of 15 percent since June 2009, Chief Investment Officer Christopher Ailman said yesterday in a board meeting. In New Jersey, the pension-investment manager said it negotiated at least $40 million of fee and expense cuts during the next five years. Pensions around the nation are grappling with unfunded liabilities estimated at more than $3 trillion in a 2010 study by Professors Joshua Rauh and Robert Novy-Marx. Recession losses still haven’t been fully recouped. In December, the California fund was valued at 9.7 percent l...