New York City Wants to Amp Up Risk in Workers’ Pensions

Link: https://www.wsj.com/articles/new-york-city-wants-to-amp-up-risk-in-workers-pensions-11650976985

Graphic:

Excerpt:

New York City’s comptroller is the latest public official trying to change laws aimed at limiting risk in pension investments, as U.S. state and local pension funds try to plug shortfalls in a low-return environment.

Comptroller Brad Lander, who oversees about $260 billion in retirement money for city police, firefighters, teachers and other public workers, is asking New York lawmakers for more flexibility to invest in private markets, high-yield debt and foreign stocks. The state comptroller’s office, which supervises another $280 billion in retirement assets, views the idea favorably, with a representative saying such flexibility “is key in times of market volatility.”

Pension funds, like household investors, are facing a relatively bleak environment for stocks and bonds, the bread and butter of a traditional retirement portfolio. In the face of historic inflation and Federal Reserve efforts to contain it, these funds are finding they can no longer rely on bonds to rise when equities fall and vice versa. In the first quarter, the S&P 500 returned minus 4.6% while the Bloomberg U.S. Aggregate bond index returned minus 5.93%.

“Those two things taken together is what’s scary: the prospect of both going down at the same time,” said Steve Foresti, chief investment officer at Wilshire Associates, which advises large public pension funds. Retirement portfolio managers, he said, are asking “in that environment, do I have anything that actually goes up?”

Author(s): Heather Gillers

Publication Date: 26 April 2022

Publication Site: WSJ

How Much Private Equity Is Too Much for a Public Pension?

Link: https://www.ai-cio.com/in-focus/shop-talk/how-much-private-equity-is-too-much-for-a-public-pension/

Excerpt:

Pension funds around the U.S. are upping their allocations to private equity after a year of record-breaking returns. According to data obtained from Preqin, the average public pension’s allotment to private equity increased to 8.9% in 2021. In contrast, the average allocation was just 6.5% in 2012.

New York City’s pensions are among those that may see an increased allocation to the asset class in their portfolios should a new law pass. Currently, New York State implements a “basket clause,” which prevents public pensions from investing above 25% of their total portfolios in investments considered higher risk, including real estate, infrastructure, hedge funds, international equities, and private equity. The proposed law would increase that allocation to 35% for all pension funds in the state. If the law passed, the boards of New York City’s five public pensions would vote on whether to increase the “basket” for their own pension funds.

New York City Interim CIO Michael Haddad, who is responsible for overseeing investments in the five pension plans across the city, says that while the change in the law isn’t targeted at private equity exclusively, it’s likely that the asset class would increase.

Author(s): Anna Gordon

Publication Date: 10 May 2022

Publication Site: ai-CIO

Putin, Russian Pals “Mystery” Partners In Public Pension Deals?

Link: https://www.forbes.com/sites/edwardsiedle/2022/03/10/putin-russian-pals-mystery-partners-in-public-pension-deals/?sh=3057aa8524af

Excerpt:

America’s state and local government pensions invest as much as 40 percent of their assets in secretive, offshore “alternative” hedge, private equity, real estate and venture funds which warn that certain unidentified “mystery investors” pay lower fees, are provided greater information about investment strategies and portfolio holdings, have been granted liquidity preferences and receive superior net performance—all at the expense of America’s public sector workers. How many wealthy Russians are “mystery investors” in these pension deals which, according to an internal FBI document leaked last year, criminals and foreign adversaries regularly use to launder money? Wall Street refuses to say and public pensions have promised not to ask. Ironically, the invasion of Ukraine and calls to dump Russian investments to punish the country are drawing attention to the ugly fact that America’s public pensions have long consented to being kept in the dark by Wall Street, abrogating their duty to monitor and safeguard workers’ retirement savings.

….

For example, my second investigation of the Rhode Island state pension revealed in 2015 that contrary to the pension’s financial reports, 40 percent of the pension’s investments—not the 25 percent disclosed—had been allocated to secretive alternative investments.

….

It’s no secret that the FBI suspects that many alternative investment vehicles are widely utilized for money laundering. In 2019, the FBI compiled a report titled “Financial Crime Threat Actors Very Likely Laundering Illicit Proceeds Through Fraudulent Hedge Funds and Private Equity Firms to Obfuscate Illicit Proceeds.” Then, a leaked May 1, 2020 internal FBI report similarly titled “Threat Actors Likely Use Private Investment Funds to Launder Money, Circumventing Regulatory Tripwires” purported to supplement the January 2019 report “by providing recent reporting of hedge funds and private equity firms used to launder illicit proceeds, and expands the threat context beyond financial threat actors to include foreign adversaries.”

Author(s): Edward Siedle

Publication Date: 10 Mar 2022

Publication Site: Forbes

Suggested reforms for Pennsylvania’s Public School Employees’ Retirement System

Link:https://reason.org/commentary/suggested-reforms-for-the-pennsylvania-teacher-pension-system/?utm_medium=email

Graphic:

Excerpt:

Despite realizing excellent investment returns in 2021, industry capital market forecasts continue to suggest persistently volatile near-term investment returns that stand to only add to over $1 trillion in current pension funding shortfalls. Most near-term investment outlooks we’ve seen from pension boards across the country predict anywhere from a 6.0 percent-6.3 percent return over the next 10 years. PSERS’ assumed rate of return was recently lowered and currently sits at 7 percent.*

PSERS’s investment outlook is similar to these broad projections. Figures 1 and 2 present the results of the Monte Carlo simulation analysis developed by the Pension Integrity Project. This iterative analysis uses 10,000 simulations of PSERS’s asset performance over 20 years, considering expected returns and volatilities of plan assets, to generate both probabilities of hitting certain returns and expected return distributions.

These findings suggest that PSERS is not likely to achieve even a 6 percent average return over the next 10-15 years—much less its current assumed return of 7 percent. This suggests there is a high probability that the public pension plan’s unfunded liabilities could get worse, not better, in the near-to-mid term. This underperformance—relative to the plan’s own return rate assumptions—will make the system’s long-term solvency challenges even larger.

Author(s): Jordan Campbell, Ryan Frost

Publication Date: 11 Oct 2021

Publication Site: Reason

SEC Set to Lower Massive Boom on Private Equity Industry

Link:https://www.nakedcapitalism.com/2022/02/sec-set-to-lower-massive-boom-on-private-equity-industry.html

Excerpt:

In a matter of fact, understated manner, the SEC document makes clear that its enforcement regime has not succeeded in getting private equity fund managers to stop or at least considerably reduce their abuses. Recall that in 2014, then enforcement chief Andrew Bowden gave a peculiarly titled speech, Spreading Sunshine in Private Equity. The SEC has just started its initial examinations of private equity firms. Bowden said that the SEC had found serious abuses in more than half of the firms examines, including what in other circles would be called embezzlement. Bowden also said if anything the misconduct was more prevalent at the biggest firms, which was the reverse of what it found in other areas it regulated, where the crooked operators were normally boiler-room level.

This promising start quickly fizzled out. Yes, the SEC did engage in a series of enforcements actions, targeting common abuses like charging “termination of monitoring fees” which had never been contemplated in the fund agreements, and hauling up big name firms like Apollo, KKR, and Blackstone. However, this amounted to enforcement theater. The SEC acted as if “one and done,” citing particular firms for an isolated abuse, when all the big players were certain to have engaged in many others, and then acting as if everyone would shape up, was either craven or willfully blind. Bowden immediately turned to giving speeches on how private equity firms were obviously upstanding and wanted to do right. He then gave a speech at Stanford at a private equity conference where went on far too long about how he wanted his son to work in private equity and an audience member immediately said he wanted to hire him. Bowden left the agency in three weeks.

This SEC letter, by contrast, makes clear that the agency has ample evidence in its files of continued abuses by private equity fund managers. It does not mention a particularly egregious general strategy: of admitting in the annual disclosure documents, the Form ADV, that the private equity fund managers are violating their contracts with investors. Admitting a contractual violation does not cure it, but the private equity barons appear to believe they can create their own alternative reality. And until Gensler showed up, that belief looked to be correct.

Author(s): Yves Smith

Publication Date: 10 Feb 2022

Publication Site: naked capitalism

Maryland is wasting its pensioners’ money

Link:https://www.washingtonpost.com/opinions/2022/02/04/maryland-is-wasting-its-pensioners-money/

Excerpt:

Seven hundred and forty-four million dollars. That is the amount of Wall Street fees paid by the Maryland state pension plan for investment advice in fiscal 2021.

Over the past 10 years, the fees totaled roughly $4.5 billion, or about 15 percent of the plan’s earnings. For that kind of money, you would think the state gets only the prime stock and bond picks from its advisers, but, during that time, Maryland, as with most other states, failed to beat the returns of a simple 60 percent stocks/40 percent bonds index. Many large institutional investors, including public pension plans, use this 60/40 index as a barometer to gauge their portfolios’ results. They structure their portfolios to avoid a 100 percent exposure to the sometimes volatile stock market. If their results are better than the index for a given year, they claim success. Many mutual funds attract smaller individual retail and 401(k) retirement accounts by copying the index and charging low fees for passive management.

….

This drainage damages the financial security of public workers in Maryland and other states, and it forces greater taxpayer contributions to the plans. The ongoing situation has a secondary effect as well: The massive wealth transfer — from public workers and average taxpayers — to a small coterie of Wall Street money managers fosters a new plutocracy, successful at obscuring the problem and blocking reform.

The obvious fix for public plans is to shift from expensive fee investments to low-fee indexing, a tactic endorsed by none other than Warren Buffett, the noted value investor and philanthropist. For large public plans, including Maryland’s, this shift, if implemented, would be gradual. Extricating the fund from its long-term contractual commitments and replacing them with passive investments is going to take time.

Author(s): Jeff Hooke

Publication Date: 4 Feb 2022

Publication Site: Washington Post

Why private equity sees life and annuities as an enticing form of permanent capital

Link: https://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/why-private-equity-sees-life-and-annuities-as-an-enticing-form-of-permanent-capital

Graphic:

Excerpt:

Permanent capital—investment funds that do not have to be returned to investors on a timetable, or at all—is, according to some, the “holy grail” of private investing.1 Permanent capital owes its exalted status to the time and effort that managers can save on fundraising, and the flexibility it provides to invest at times, like a crisis, when other forms of capital can become scarce.

….

The trend is not new: private investing in insurance dates back more than 50 years to Berkshire Hathaway’s acquisition of National Indemnity in 1967. As that example shows, many forms of insurance beyond life and annuities can serve as permanent capital, including specialty and property and casualty (P&C). In this article, however, we’ll focus on the reasons why many PE firms have concluded that life insurance and annuities represent a once-in-a-generation opportunity. We’ll also look at the requirements for PE firms on the sidelines that want to enter the market, discuss some overlooked ways that PE owners can create value, and highlight some implications for life insurers as they consider either selling a portion of their book of business or emulating and competing with this potent new industry force.

Author(s): Ramnath Balasubramanian, Alex D’Amico, Rajiv Dattani, and Diego Mattone

Publication Date: 2 Feb 2022

Publication Site: McKinsey

Federal prosecutors have been investigating D.C.’s pension board, responsible for $10 billion retirement fund

Link: https://www.washingtonpost.com/dc-md-va/2022/01/23/dc-pension-fund-investigation/

Excerpt:

Federal prosecutors have been investigating the financial transactions of the D.C. Retirement Board, which manages the city’s $10 billion pension fund for retired teachers, police officers and firefighters.

The fully funded municipal employee pension plan has long been the jewel in D.C.’s financial crown, the envy of other cities and a signal of the trustworthiness of the District’s finances to the credit rating agencies that issue municipal bond ratings.

….

The existence of the investigation was disclosed in a whistleblower lawsuit filed in December against the D.C. Retirement Board by Erie Sampson, the agency’s general counsel since 2008.

Sampson alleges that she was placed on administrative leave in October in retaliation for alerting officials at the retirement board and in D.C. government, including the city’s chief financial officer and members of the D.C. Council, about problems in the retirement board’s accounting and governance — as well as for cooperating with the federal investigation.

A spokesperson for the retirement board declined to comment, citing the ongoing litigation.

Author(s): Julie Zauzmer Weil

Publication Date: 23 Jan 2022

Publication Site: Washington Post

NAIC launches review of private equity-owned insurer issues

Link:https://www.dlapiper.com/en/us/insights/publications/2021/12/naic-launches-review-of-private-equity-owned-insurer-issues/

Excerpt:

On December 7, the National Association of Insurance Commissioners (NAIC) Financial Stability Task Force voted in a virtual meeting to expose, for a 30-day comment period, a list of “Regulatory Considerations Applicable (But Not Exclusive) to Private Equity (PE) Owned Insurers.” The Task Force assigned to its Macroprudential Working Group the role of coordinator of the ongoing evaluation of these considerations.

The decision is the latest public expression of increasing concern among regulators about the recent growth in number and complexity of private equity-owned insurers.

The current exposure has some antecedents in NAIC-directed efforts that began two years ago.  In November 2019, the Statutory Accounting Working Group began an effort to change the Statement of Statutory Accounting Principles (SSAP) No. 25, which provides accounting rules on insurer transactions with related parties and affiliates.

Author(s): Scott Fischer

Publication Date: 9 Dec 2021

Publication Site: DLA Piper

Oregon public pension fund gave blessing to NSO Group deal, sources suggest

Link: https://www.theguardian.com/world/2022/jan/17/oregon-public-pension-fund-gave-blessing-to-nso-group-deal-sources-suggest

Excerpt:

Oregon’s public pension fund, which manages tens of billions of dollars in retirement savings, appears to have privately given its blessing to a 2019 deal by an investment fund to acquire NSO Group, the controversial spyware company.

A source with close knowledge of the matter and emails seen by the Guardian suggest that a senior official at the pension fund signalled his strong support for the takeover of NSO as early as 2018, months before the deal was announced.

Last month, Oregon officials said they were “deeply disturbed” by reports that NSO Group “enabled widespread human rights violations”.

Author(s): Stephanie Kirchgaessner

Publication Date: 17 Jan 2022

Publication Site: The Guardian

Wrong Way CalPERS: Dumping $6 Billion of Private Equity After Struggling to Put Money to Work and Then Increasing Target

Link: https://www.nakedcapitalism.com/2022/01/wrong-way-calpers-dumping-6-billion-of-private-equity-after-struggling-to-put-money-to-work-and-then-increasing-target.html

Excerpt:

When CalPERS does something as obviously nonsensical as planning to dump $6 billion of its private equity holdings, nearly 13% of its $47.7 billon portfolio, when it just committed to increasing its private equity book from 8% to 13%, it’s a hard call: Incompetent? Corrupt? Addled by the latest fads (a subset of incompetent)?

And rest assured, the harder you look, the more it becomes apparent that this scheme is as hare-brained as it appears at the 30,000 foot level. But unlike another recent hare-brained private equity scheme, its “private equity new business model,” beneficiaries won’t have the good luck of having it collapse under its own contradictions. CalPERS has loudly announced that Jeffries & Co. will be handling these dispositions, so they will get done….at least in part. But the fact that CalPERS’ staff has gone ahead and merely informed the board, as opposed to getting its approval, is yet another proof of how the board has abdicated its oversight and control by granting unconscionably permissive “delegated authority” to staff.

The one bit of possible upside would not just be unintended, but the result of CalPERS acting in contradiction to its expressed objectives: that its allocation to private equity would undershoot its targets by an even bigger margin than otherwise.

Author(s): Yves Smith

Publication Date: 14 Jan 2022

Publication Site: naked capitalism

CalPERS Considering Selling Up to $6 Billion in Private Equity Stakes

Link: https://www.ai-cio.com/news/calpers-considering-selling-up-to-6-billion-in-private-equity-stakes/

Excerpt:

The California Public Employees’ Retirement System (CalPERS) has engaged financial services company Jefferies about the potential of selling up to $6 billion of its private equity stakes, according Buyouts magazine. This comes just after CalPERS announced it would be increasing the percentage of its portfolio allotted to private equity to 13% from 8% in November.  

CalPERS board member Margaret Brown told Secondaries Investor in November that the fund is considering investing in secondaries and divesting from some of its legacy private equity investments.

“We have some really old private equity that’s just sitting there and doing nothing,” she said.

Author(s): Anna Gordon

Publication Date: 13 Jan 2022

Publication Site: ai-CIO