There are many good reasons not to invest in hedge funds. But there are also bad reasons, one of which was highlighted today in the Wall Street Journal:
Large corporate pension funds have quadrupled the share of their portfolios invested in hedge funds over the past five years, according to an analysis of about 300 firms in the S&P 500 by Wilshire Consulting. During that period, those pensions have lagged behind the performance of the broader stock market in every year but one, according to Wilshire. Their return of 9.7% in 2014 was below 13.7% for the S&P 500, including dividends.
“There’s certainly regret,” said Jim McKee, head of hedge-fund research at Callan Associates Inc., which advises pension funds. “The last five years have been disappointing for pensions invested in hedge funds.”
To see why this reasoning is silly, it helps to take a step back, and remember that defined-benefit pensions are just another kind of financial intermediary. Like insurers and banks, they make a bunch of promises to some people that they expect to fulfill by extracting a bunch of promises from other people. Read more
The Organisation for Economic Cooperation and Development has a new report out summarising data from its “social expenditure database,” which tracks government spending on public health, pensions, and other forms of welfare, as well as private forms of social spending such as group health insurance and non-government pensions. (Thanks to Sky’s Ed Conway for pointing it out to us.)
The first thing that struck us is that we can’t think of anything that explains why some OECD countries (excluding the poorer ones) spend a larger share of GDP on welfare than others. Contrary to stereotypes, the US consistently spends more than Canada, while Germany spends more than Greece and the Norwegian government is stingier than most of Europe. Iceland’s ranking also surprised us. On the other hand, it should surprise no one that France, Belgium, Finland, and Denmark are in the top spots: Read more
Remember how pension deficits were huge and insurmountable? Not so much, any more.
On its way to posing the question, will they be buyers of bonds?, JPMorgan‘s Flows & Liquidity team notes that the funding chasm is now more of a crack:
The funding gap of the 100 largest US corporate defined benefit pension plans peaked in July 2012 at -$546bn and had declined to -$140bn at the end of January. The deficit of UK defined benefit plans peaked at -£293bn in July 2012 and had declined to a low of -£28bn in December.
We could have sworn we were told that paying high-fee alternative asset managers was the only way pension funds stood a chance of meeting their liabilities, but it looks like stocks and moderately higher rates have put in the hard yards instead. Read more
We interrupt this blog to announce a zombie apocalypse has occurred. Please remain calm and do not adjust your allocations, many hedge funds remain open and fee structures are intact.
While United Auto Workers retiree healthcare trust fund and Fiat argue about the terms for an initial public offering for Chrysler, a piece from Citi this morning reminded us why the Italian carmaker is so well suited to running the company.
The question for both being, are they carmakers, or just highly specialised pension plans?
Consider this screen of European (but not UK) companies most exposed to pension risk. Read more
Creakier than sovereigns’ long-term pensions liabilities? Sub-sovereign ones, possibly.
A new piece by Moody’s lands, looking at the problem among the regions and cities of four countries otherwise rated Triple-A: Australia, Canada, Germany and the United States. Read more
Ready for pop quiz? Don’t worry, it’s only one question and it involves pictures. Ready?
In the below picture, a pension fund governed under the Employee Retirement Income Security Act (Erisa) has a trading relationship with a bank… Read more
Plenty of analysts and pundits have gone to the trouble of explaining the challenge confronting savers in the current low-yield environment…
But how many of them go to the trouble of putting on a barbecue to illustrate various credit strategies one may respond with? Read more
We take our headline from Sharon Bowles MEP.
The Member of the European Parliament was talking to Public Service Europe about this ominous move in transparent sovereign accounting: Read more
Are we ever going to be able to retire?
It’s a question many ponder… Read more
All remaining defined benefit pension schemes in the UK will be forced to close and many businesses pushed into insolvency if European proposals to strengthen company retirement plans are put in place, influential employers’ and labour groups have warned. The FT says in a letter to be sent on Monday to senior European commissioners, the heads of the National Association of Pension Funds, the CBI and the TUC labour union group warned that the plans will have disastrous consequences for companies and employees. “By demanding dramatic increases in funding from employers, the Commission’s plans would – at best – force all remaining defined benefit schemes to close and – at worst – push many businesses into insolvency, leading to significant job losses,” they wrote.
Higher bills for pensions are beginning to eat into US corporate profits and are expected to increase still further in 2012, the FT reports. In the current earnings season, four companies in the Dow Jones Industrial Average have said that pension contributions will be at least triple those made in 2011. Credit Suisse estimates that S&P 500 companies will have to contribute $90bn to their pension plans in 2012, a rise of 74 per cent on planned contributions for 2011. Fears over tighter margins have already given investors second thoughts over the run of corporate earnings that has propped up the stock rally, the WSJ adds.
US blue-chip companies face a hit to earnings from greater pension contributions, with charges related to rising liabilities pushing groups such as Verizon and US Steel into losses during the fourth quarter, says the FT. The funding gap for pension plans of S&P 500 companies almost doubled in 2011, analysts say, to around $450bn, as bond yields dropped, causing the size of future liabilities to grow. Stock market performance has also failed to keep up with rising liabilities. “In addition to higher contributions this year, it looks like pension funding may become more of an ongoing drain on cash than it has been in the past,” said David Zion, head of accounting research for Credit Suisse. He estimates that S&P 500 companies will have to contribute $90bn to their pension plans in 2012, a rise of 74 per cent on planned contributions for 2011.
American Airlines parent AMR said on Wednesday it will seek to cut 13,000 jobs and terminate pensions in pursuit of $2bn in annual costs savings, reports the WSJ. The company said it wants to reduce labor costs by $1.25bn a year, or 20 per cent. That includes cutting its workforce by nearly 15 per cent, imposing new productivity measures and outsourcing some work. The company also aims to terminate its four underfunded pension plans, a move that would represent the largest pension default in US history. To enact the plan, the company must convince the US Bankruptcy Court that it cannot successfully restructure without these measures. AMR also needs to win approval for the desired pension terminations, over what is expected to be fervent opposition from the Pension Benefit Guaranty Corp.
So even Royal Dutch Shell has decided that the oil business is hard enough, without running a life assurance scheme for employees on the side. There is now not a single company in the FTSE100 index which offers a final salary pension scheme to new employees. This is the unintended consequence of well-meaning governments piling obligations onto the schemes, while moving them up the batting order of corporate creditors.
Thus, in little more than a generation, a system which allowed most businesses to look after long-serving employees in retirement has been destroyed. There will be wailing and gnashing of teeth, especially since Shell’s decision is a cold commercial one, rather than a necessary part of a survival plan. Yet we shouldn’t get too upset. The old system never worked as well as its advocates now claim. Long-serving employees become addicted to final-salary schemes, unable to leave because no new employer can afford to match their accrued benefits. In a world where companies’ life expectancy can be less than that of their employees, this makes no sense. Read more
A new report puts the cost of a Solvency II-type regime for UK defined benefit schemes at £600bn, more than half their current liabilities of about £1tn, the FT reports. Paul Sweeting, one of the authors of the JPMorgan Asset Management report, said: “This is a realistic scenario if the current proposals for the new Solvency II insurance regime are put through into pensions. Mr Sweeting said the £600bn bill was calculated mainly by using the much lower discount rates applied in Solvency II, which are based on European swap rates as a proxy for a “risk-free” rate of interest. Typically, UK schemes currently use the much more generous returns available on AA-rated corporate bonds to discount their future liabilities. However, the bill could be reduced dramatically if pension schemes were allowed to match the returns they generate from some of the assets they actually hold against liabilities with a similar duration.
Trustees of the Uniq pension scheme have sold its assets and liabilities to Rothesay Life in a deal that ensures that the 20,000 members will not have to rely on the state-founded Pension Protection Fund to make up any shortfall in their retirement benefits, reports the FT, in a deal which ends years of uncertainty that could have resulted in a significant hit to the PPF. The company also used a novel so-called deficit for equity swap that is likely to be a template for other employers whose pension liabilities are worth far more than the company. Under terms of the deal struck with Rothesay Life, which is owned by Goldman Sachs, scheme members will receive benefits that are far lower than they were promised during their working lives, but as good as those provided by the PPF, according to Lane Clark and Peacock, which advised the independent trustee to the scheme. Uniq was once the owner of the UK’s largest dairy companies and many of its pensioners are milkmen who earned modest salaries.
On Thursday, California government Jerry Brown proposed an overhaul to the state’s pension plans for public sector workers that would see the retirement age rise from 55 to 67 and the addition of a 401(k)-style component. While unions reacted negatively to the proposals, the changes in California, if enacted, would follow in the path of 27 state legislatures that have enacted significant pension reforms in 2011, according to the WSJ. The changes would approval from voters as well as the state legislature. If enacted, the state expects to save $4bn to $11bn over the next 30 years. The biggest changes, however, would apply only to new employees.
The Fed’s attempt to stimulate the economy will add to the pain already being felt by company pension plans, reports Reuters. The dual whammy of falling stocks and declining yields means that pension assets currently only cover 79 per cent of their liabilities, according to consulting firm Milliman Inc. The consultancy also stated that this could fall as low as 60 per cent within two years if equities and rates continue on their current trajectory.
State leaders are learning from New York’s rancorous brush with bankruptcy in the 1970s as they seek consensus on reducing debt burdens, the FT reports. Felix Rohatyn, the veteran banker from Lazard Freres who was one of the architects of the city’s eventual financial rescue, has been advising Andrew Cuomo, governor of New York. The 1970s rescue plan has attracted renewed interest for its creation of consensus between labor unions and lawmakers against default, contrasting with recent gridlock in Wisconsin and Minnesota. Rhodes Island, owner of the biggest pension holes in the country, is pioneering the ‘persuasive’ approach, says the WSJ.
Government guarantees for financial institutions are a financial crisis thing, right?
Wrong. Read more
From the WSJ on Wednesday afternoon, provisional details of Illinois’ delayed $3.7bn pension bond sale:
Initial indications on the deal Tuesday showed $6.1 billion in orders, with around a fifth of those coming from international investors, such as sovereign-wealth funds and insurance companies, one market participant said.
Cash-strapped US states and cities face the prospect of downgrades after Fitch Ratings changed the way it analyses their burgeoning pension bills, according to the FT. In valuing pension liabilities in its credit analysis of states and local governments, the rating agency will now assume a return on assets of 7 per cent, lower than the average return of 8 per cent used by most pension plans. That translates to an increase in the average plan liability of 11 per cent. Plans in Montana, Hawaii, Vermont and New Jersey are among those whose funding ratios fall under 60 per cent using Fitch’s assumptions. The Illinois State Employees Retirement System is the weakest at 37 per cent, compared with 44 per cent using its reported 8.5 per cent assumed rate of return.
Worried about public pensions liabilities? Well, look away now.
In a report out Wednesday, The Center for Retirement Research at Boston College tried to isloate the factors that influence (1) the spreads on municipal bond yields, and (2) Moody’s rating of those bonds. Read more
The Treasury’s plans to increase public sector workers’ pension contributions by an average of 3 percentage points over the next three years could “destroy the local authority pension scheme”, the biggest of the council pension funds is warning, the FT reports. Lord Hutton, the Labour former cabinet minister, is due to produce his final report on public sector pensions in March and is widely expected to recommend a switch from final salary pensions to ones based on average earnings over a career.
And you thought that Illinois pensions were enough to keep the SEC busy.
From Bloomberg on Friday: Read more
Another day, another report of municipal bond outflows from mutual funds. From Reuters on Wednesday:
The mass exodus of cash from municipal bonds accelerated to a record outflow of an estimated $5.7 billion in the week ended Jan. 19, data from the Investment Company Institute showed on Wednesday. The redemptions are the most in any week since the ICI, a U.S. mutual fund industry trade group, started tracking weekly investment flows at the start of 2007.
Moody’s is now ranking US states’ liabilities according to both debt and unfunded pension liabilities, the FT reports. In a bid to give a broader picture of state finances, Moody’s combined their net tax supported debt and unfunded pension liabilities to assess how leveraged states are. Even then however, Moody’s has used data from 2009 which put all unfunded liabilities at $500bn, some way below other estimates. The move by the ratings agency has nevertheless ruffled feathers, the NYT says, because states do not show any of their pension obligations on audited financial statements.