Congressional Republicans on Friday took another step in their quest to dismantle the Biden administration’s environmental, social and governance rule-making initiatives.
The House Financial Services Committee has formed a working group to “combat the threat to our capital markets posed by those on the far-left pushing environmental, social and governance proposals,” the committee’s Chairman Patrick McHenry, R-N.C., announced.
The group will be led by Rep. Bill Huizenga, R-Mich., and include eight other Republican committee members.
Among its priorities, the group will examine ways to “rein in the SEC’s regulatory overreach;” reinforce the materiality “standard as a pillar of the nation’s disclosure regime;” and hold to account market participants who “misuse the proxy process or their outsized influence to impose ideological preferences in ways that circumvent democratic lawmaking,” according to a news release.
“This group will develop a comprehensive approach to ESG that protects the financial interests of everyday investors and ensures our capital markets remain the envy of the world,” Mr. McHenry said in the news release. “Financial Services Committee Republicans as a whole will continue our work to expand capital formation, hold Biden’s rogue regulators accountable, and support American job creators.”
President Joe Biden on Thursday announced that the Pension Benefit Guaranty Corp. has approved $36 billion in federal assistance to shore up a massive union multiemployer pension plan facing steep cuts.
Teamsters Central States, Southeast & Southwest Areas Pension Fund, Chicago, will receive the funds under the Special Financial Assistance Program. The program, created by the American Rescue Plan Act that Democrats passed in March 2021, was designed to shore up struggling multiemployer pension plans through 2051. The PBGC estimates the total cost of the program will range from $74 billion to $91 billion.
The Central States Pension Fund covers more than 350,000 union workers and retirees who were facing estimated benefit reductions of roughly 60% in the next few years, according to a White House news release.
The pension plan had a funding ratio of 18% with $57.2 billion in projected benefit obligations as of Jan. 1, 2021, according to the plan’s most recent Form 5500 filing. As of Dec. 31, the plan had $10.1 billion in assets, the filing showed.
The PBGC approved the first SFA application in December 2021 and since then has awarded funds to 36 other struggling multiemployer plans. But Thursday’s announcement is by far the largest. As of Dec. 1, the PBGC had approved just over $8.9 billion in SFA funds to cover roughly 193,000 workers, retirees and beneficiaries.
The Bank of England’s emergency bond-buying last week helped shore up U.K. pension funds and threw a spotlight on a popular strategy among corporate plans known as LDI – or liability-driven investing.
Total assets in LDI strategies in the U.K. rose to almost £1.6 trillion ($1.8 trillion) at the end of 2021, quadrupling from £400 billion in 2011, according to the Investment Association, a trade group that represents U.K. managers. Many LDI mandates allow for the use of derivatives to hedge inflation and interest rate risk.
Here’s how LDI works: Liability-driven investing is employed by many pension funds to mitigate the risk of unfunded liabilities by matching their asset allocation and investment policy with current and expected future liabilities. The LDI portion of a pension fund’s portfolio utilizes liability-hedging strategies to reduce interest-rate risk, which could include long government and credit bonds and derivatives exposure.
Jeff Passmore, LDI solutions strategist at MetLife Investment Management, said the situation with U.K. pension plans “has been challenging, and the heavy use of derivatives in the U.K. LDI model has made the current situation worse than it would otherwise be.”
While most U.S. LDI portfolios rely on bonds rather than derivatives, ‘”those U.S. plan sponsors who have leaned heavily on derivatives and leverage should take a cautionary lesson from what we’re seeing currently across the Atlantic.”
The U.K. pension debacle “is a plain-and-simple problem of leverage,” Charles Van Vleet, assistant treasurer and chief investment officer at Textron, said in an email.
Many U.K. pension plans were interest rate-hedged at 70%, while also holding 60% in growth assets, suggesting 30% leverage, he said. The portfolio’s growth assets have lost around 20% of value if held in public equities and fixed income or about 5% down if held in private equity, he noted.
“Therefore, to make margin calls on their derivative rate exposure they had to sell growth assets – in some cases, selling physical-gilts to meet derivative-gilt margin calls,” Mr. Van Vleet said.
“The problem is worse for plans who gain rate exposure with leveraged ETFs. The leverage in those funds is commonly via cleared interest rate swaps. Margin calls for cleared swaps can only be met with cash – not posted collateral. Therefore, again selling physical-gilts to meet derivative-gilt margin calls.”
BRIAN CROCE COURTNEY DEGEN PALASH GHOSH ROB KOZLOWSKI
China plans to raise retirement ages gradually over a number of years instead of in a drastic one-time change, a government researcher said last week, without providing any detail on when the changes might start.
When the retirement age starts being lifted, it will be by a few months every year, or by a month every few months, according to Jin Weigang, head of the Chinese Academy of Labor and Social Security under the Ministry of Human Resources and Social Security. Mr. Jin didn’t say when the changes would begin, but the current five-year plan calls for “raising the retirement age in a phased manner.”
“People in different age groups will be retiring at different ages,” Mr. Jin said in an interview with the state-run Xinhua News Agency published March 13. “For example, in the first year of the policy’s implementation, female workers who were originally scheduled to retire at 50 will retire one month or a few months after 50.”
The world’s largest pension fund had charted a course for sustainable investing, but the Government Pension Investment Fund, Tokyo, is now treading water.
After taking the helm of the world’s biggest pension fund as CIO in 2015, Hiromichi Mizuno sought to turn GPIF into a fund that — as one Harvard Business Review article put it — tried to “change the world” through its approach to environmental, social and governance investing.
However, the $1.63 trillion fund — constrained by stricter legal restraints than its peers — has largely been quiet on impact investing since Mr. Mizuno was succeeded in April 2020 by Eiji Ueda. At the same time, the COVID-19 pandemic has accelerated the global push toward ESG themes and GPIF’s peers around the world have cut fossil-fuel investments and threatened to pull funds from firms that fail to meet ethical standards.
Vermont lawmakers are pushing a plan to reduce a widening shortfall in the state’s retirement systems by asking teachers and state employees to pay more into their pension plans and work more years.
During a March 24 meeting, the Vermont House Government Operations Committee proposed teachers base contribution rates be raised by 1.25% to 2.25% and that most state employees be increased by 1.1%, according to a proposal posted on the Vermont General Assembly website.
The proposal also bumps up the age at which most workers can qualify for retirement benefits, requiring them to reach full Social Security retirement age, which is currently 66 or 67. Some groups of teachers and state employees can now retire as early as 62 or with 30 years of service.
In addition, employees will receive a lower overall benefit as it would be based on the average of their seven highest consecutive years of salary rather than the three highest as is now the case, according to the proposal.