And you thought that Illinois pensions were enough to keep the SEC busy.
From Bloomberg on Friday:
UBS AG may be sued by the U.S. Securities and Exchange Commission over the sale of mutual funds that bought $1.5 billion in bonds Switzerland’s largest bank had underwritten in Puerto Rico.
The SEC’s Miami office issued a Wells notice to UBS Financial Services Inc. of Puerto Rico and UBS Financial Services Inc. regarding “secondary market trading and associated disclosures” of closed-end funds sold in the Caribbean island in 2008 and 2009, the Zurich-based company said in a report to investors. The notification typically lets recipients respond to investigators’ claims before the agency approves legal action. The SEC may decide to not pursue a case.
UBS led the original 2008 $2.9bn Employees Retirement System (ERS) bond sale and then bought $1.5 billion of the securities and put them into 20 mutual funds, which were also sold by the bank.
As the Bloomberg report notes, no legal action has yet been approved, and funds set up in PR and sold only to PR residents aren’t subject to the SEC or certain laws restricting transactions between funds and managers.
The report quotes Conway MacKenzie Inc, the firm later hired to examine PR’s fiscal woes, describing the commonwealth’s $2.9bn bond issue as “inherently flawed, misconceived and speculative as a mechanism to improve the system’s funding ratio.” In other words, a desperate move made under severe pressure.
A quick glance at the PR public pension schemes’ finances shows how the Commonwealth is a fiscal — as well as a constitutional — outlier. From Moody’s rating report on PR public improvement refunding bonds released on Friday:
According to preliminary actuarial valuations as of June 30, 2010, the unfunded actuarial accrued liability of the Employees Retirement System, the Teachers Retirement System and the Judiciary Retirement System increased to $17.834 billion, $7.058 billion and $283 million, respectively, the funded ratios of the Employees Retirement System and Teachers Retirement System decreased to 8.5% and 23.9%, respectively, and the funded ratio of the Judiciary Retirement System increased to 16.4%. When combined with the funded status of the Teachers Retirement System (TRS) and the Judicial Retirement System (JRS), which are much smaller plans, the commonwealth’s total funded status is 13.5%.
To put this in context, a recent CBPP report picked up by FT Alphaville was worried about average funding ratio projections of 70 to 80 per cent of future liabilities across the 50 States. ERS pension and benefit payments in 2009 totaled $1.1 billion — over $300m greater than total contributions. The difference was made up by proceeds from the 2008 bond.
The ERS black hole is a legacy of previous defined benefit plans that were closed in 2000 — Moody’s says the new defined contribution plans mean that “the current difficulties finite in nature.”
But how finite remains to be seen.
Related links:
How do you say ‘bank bailout’ in Spanish? – FT Alphaville
Space, time and public pension black holes – FT Alphaville