Friday, May 23, 2014

TEXPERS Objects to Americans for Prosperity Interference in Detroit

New press release out today. Read it here, or below:
HOUSTON (May 23, 2014) – The Texas Association of Public Employee Retirement Systems registered its contempt for the decision by Americans for Prosperity earlier this week to interfere in pension politics in Detroit and pledged vigilance of future similar activities in Texas.
Among other actions, the AFP is encouraging state lawmakers to pressure Detroit into dumping its art collection and switching to defined contribution plans for public employees without fully evaluating the effects of either.

“While we certainly respect the right of special interest groups to assert their views on public policy issues, it seems to us that the AFP’s 11th hour threats of statewide officials is more an effort to grandstand than to really play a part in developing reasonable solutions,” said Max Patterson, the executive director for TEXPERS, an organization with more than 75 pension plans and representing nearly 2 million individuals in Texas.

“Unfortunately, we have been witness to similar gratuitous interventions by other groups in other states and the odds are that they may try such political stunts here in Texas despite the strength of our state and local pensions,” Patterson said.

“Instead of engaging local police, fire and municipal employee pensions in discussions about issues, they prefer the radical’s course with threats and the pursuit of one-size-fits-all hierarchical legislation from the state house. These tactics are foreign to the hard-working men and women who formed and operated their pensions precisely so they would require minimal contributions from local taxpayers for their retirements.
“We would hope that political discussion about pensions in Texas will not revert to ‘might makes right’ by those pursuing singular objectives without consideration of tradition or the financially healthy status of most state and local pensions.”

Tuesday, April 22, 2014

"Alternative Investments" Need Another Name

A couple of weeks ago we released the TEXPERS annual Asset Allocation report, a survey of our members’ investments for the prior year. We noted in our press release that so-called ‘alternative investments’ increased among our members’ investments when compared to last year’s ratios. It got us to thinking: when did ‘Main Street’ investments become ‘alternative’ investments?

For example, years ago it used to be that a city Treasurer, among all their other duties, might run the city’s pension fund by investing in rock solid U.S. government bills, notes and bonds. The Treasurer’s rationale was that they would never be accused of wild speculation with the retirement money of their city’s police, firefighters and municipal employees. They could rightly be viewed as tending conservatively to their fiduciary responsibility. It was an easy choice for them. But the Treasurer often had to go through Wall Street to secure those bonds.

Then, when some began to realize that keeping just slightly ahead of inflation wouldn’t properly maintain their pension obligations, the investment duties were outsourced to a pension organization responsible for making better investments and administering benefits. The investment portfolios tended to a 60% stock to 40% bond ratio, as that was the best thinking on what qualified as a diversified portfolio. Again, that money flowed through Wall Street investment houses.

Over time, another modest change occurred. Pension managers began adding foreign investments to their mix, with companies listed on foreign stock exchanges taking priority. That was considered appropriate diversification. And because the companies were on foreign exchanges, or represented in American Depository Receipts (ADRs) on U.S. exchanges, they had a sense of legitimacy in their own right. And this was yet more money flowing through Wall Street investment firms.

While those dynamics are still at work, today’s pension managers are seeking even broader diversification of their assets. Wall Street stocks and bonds aren’t the only assets that generate returns. Today’s pension boards recognize there is a much wider world of investment opportunities available out there. Oil and gas leases. Commercial buildings. Home rentals. Commodity investments. The list could go on and on.

Many of those investments used to be called “Main Street” because they lived outside Wall Street’s reach.

But it seems that, in many ways, the term Main Street seems to have been replaced by the ‘alternative.’ We talked about this phenomenon last year, when a Wall Street Journal article made it seem like the Texas Teachers Retirement System was really off the rails in its off-Wall Street, private equity investment strategy. Remember their headline, “Pensions Bet Big with Private Equity”? Wasn’t that a bit pejorative? It was in our view. The Wall Street Journal article seemed alarmed that the TRS had been so successful with its private equity investments!

Now, please realize there are a lot of people who would like all investments routed through Wall Street stocks and bonds. They tend to live in New York, or other major investing centers, like Chicago, London, etc. That’s how they make money.

By using the word ‘alternative’ they can imply ‘risky’ or ‘out of the ordinary.’ For those invested in the inner workings of the stock exchanges, those sorts of investments may seem risky and out of the ordinary, but to those beyond the Hudson River they are ordinary, and often less risky than volatile stock markets.

Our point is simply this: our Wall Street friends tend to define terms to their advantage, but the perceptive reader should always remember that Main Street, “alternative” investments are just as lucrative, or sometimes even more so, than what is available through Wall Street financiers. – Max Patterson

Monday, April 14, 2014

More Hyperbole Unsupported by Facts about the Future Health of Pensions

Ray Dalio, founder and co-chief investment officer of the Bridgewater Associates hedge fund, has produced the latest attack on public employee pensions. Falio is reportedly worth $14 billion, according to Forbes. Why are so many billionaires targeting public pension systems these days?

But we digress.

Dalio’s group is reported as estimating that public pensions will require $10 trillion for public pensions to meet their financial obligations 30 years from now, but their $3 trillion in investible assets today won’t allow them to reach that goal. Bridgewater Associates projects that pensions would need to earn 9 percent annually to cover their expenses. We’re not going to dig into their numbers, because we have better things to do with our time, but here a couple of observations:

First, pensions themselves don’t even project out 30 years. Twenty years is the more common standard by people in the business of running pensions. Thirty years is a reach from the get-go. Anything dire can be projected out 30 years. In our eyes, their projections were dubious from the beginning.

Second, 8 percent average annual returns are indeed possible over 20-year periods, despite the Bridgewater Associates forecast that pensions might more realistically achieve four percent or less.

We beg to differ with their forecast.

We have only to look at several TEXPERS member systems who proved in TEXPERS annual Asset Allocation Report that they can achieve outstanding results over 20-year periods. Here are the standout performers for the 20-year period in Texas:

Big Spring Firemen's Relief & Retirement Fund 9.87%
Dallas Police and Fire Pension System 9.04%
El Paso Firemen and Policemen's Pension Fund 8.91%
Amarillo Firemen's Relief and Retirement Fund 8.73%
Lubbock Fire Pension Fund 8.66%
Houston Municipal Employees Pension System 8.64%
Austin Police Retirement System 8.39%

The reason that Texas pensions have been successful is that they are flexible. The pensions of yesterday might have had an investment ratio of 60 percent U.S. stocks and 40% U.S. bonds. Today’s pensions are much more diversified, as our latest report also uncovered. 

Sixty survey respondents representing approximately $170.3 billion in total assets allocated their investments in much different fashion in 2013. The report showed that 32% were using alternative strategies (real estate, private equity, energy, etc.), while 25% were invested in international equities, 22% were in domestic equities, 20% were invested in fixed income, and 1% held short-term securities/cash.

We agree that billionaires must have special insights to achieve their wealth, but they should stick to what they know and leave pensions alone. They should recognize that public employee pension plans have different liabilities when compared to private, corporate and foundation pensions. These differences greatly affect how each one invests. We would suggest to Mr. Dalio that unless he sits on a public fund board or is a consultant to public funds, he should focus on his business and not speculate or draw conclusions from mathematical equations. – Max Patterson

Tuesday, March 18, 2014

Talent Poaching: The Price of Successful Investing at Teachers Retirement System of Texas

Last year, the Teacher Retirement System (TRS) of Texas –oddly – came under fire from the Wall Street Journal for the success of its private equity returns. This year, Harvard University has hired away one of TRS’ private equity team members to head its PE portfolio.

As the Boston Globe article says, Richard Hall will join Harvard University's endowment fund after managing $14 billion in private equity for TRS for six years. 

We mention this only to discuss a point.

Successful money managers with great track records are in high demand. The skills and techniques that Hall and others develop in the course of their work at a successful public employee pension system are desired by other organizations, like university endowment funds, large hedge funds, or mutual funds.

Whenever we see news stories about the bonuses paid to top money managers and staff at public pension systems, and then we see comparisons to average salaries of teachers or other public employees, we wince a bit like everyone else. But, we know that those bonuses are unbelievably small compared to what other money managers and staff receive at private sector money management firms. We read recently of $20 million salaries for top executives at PIMCO, for instance. (Inside the Showdown Atop Pimco, the World's Biggest Bond Firm, WSJ, Feb. 24, 2014).

But truly the market for those with skills and experience in managing money is highly competitive and there’s always an organization which needs a boost from those with fresh approaches and a winning track record. Harvard’s endowment fund is an incredibly prestigious group and it is our bet they pay handsomely, probably offering Mr. Hall (a Harvard graduate) a very sweet deal indeed.

In the world of money management, talent poaching is the name of the game. Texas is fortunate to have so many dedicated professionals at all its pensions, sometimes working with below-market compensation packages. We salute them all. – Max Patterson

Monday, March 10, 2014

Wilshire Report shows pensions continue trending in right direction

Since 2008 there have been numerous reports decrying the funded ratios of public employee pension funds around the United States.

Of course, 2008-09 were tough times for stock and bond market investors and the historic downward spirals offered the opponents of public employees’ defined benefit plans plenty of opportunity to knock them. Unfunded liabilities would break the backs of cities and states, they said (and continue to say in many cases).

The truth of the matter is that public employee pensions are long term investors and focusing on returns – and the subsequent consequences to a pensions unfunded liabilities – for a year or two or five or ten -- doesn’t make much sense to those in the industry. The time frames for most pension investments are 15-20 years and as long as the longer-term, multi-year trends for both returns and unfunded liabilities are positive, public officials should not be too concerned except in a relatively small number of cases.

Such is the situation we’re seeing with a national report by Wilshire Associates on the state of U.S. retirement systems. A few points from the survey of 111 pension plans that reported their returns to Wilshire, as reported in Asset International’s Chief Investment Officer:

  1. The aggregate funding rose three percent to 75% in 2013, from 72% in 2012.
  2. For 111 pension plans, assets grew 8% from $1.96 trillion to $2.12 trillion in 2013.
  3. The 111 plans’ aggregate funding shortfall decreased from $863.3 billion to $779.8 billion.
  4. The average assets-to-liabilities ratio was 70%.
  5. Only 8 had assets worth less than 50% of their liabilities.
All said, only 7 percent of the reporting pensions were in a truly concerning situation, with their assets less than 50% of liabilities. These might warrant some review and action by the people involved to ensure their future solvency, but they are certainly salvageable. All the other findings were very positive.
The best news from our perspective was the aggregate funding trend, up 3% in one year. In investing terms, the trend is your friend, and as long as the large majority of pension funds continue in this positive direction the din and cry for ‘pension reform at all costs’ will slowly fade – until the next historic market downturn. – Max Patterson

Monday, February 3, 2014

Opponents to Defined Benefit Plans Never Stop Their Non-factual Assaults

Would new public employees accept wages lower than what they could get in the private sector if they were offered “portable” defined contribution plans like private sector employees are?

It’s a valid question which is being touted by the Honorable Talmedge Heflin, director of the Center for Fiscal Policy at the Texas Public Policy Foundation, in his opposition to the use of defined benefit plans today. It seems as though Heflin is suggesting that people seeking employment would be more inclined toward 401(k)s and lower compensation:
It would be folly for the state to try to chase private sector pay during an economic boom, said Talmadge Heflin, director of the Center for Fiscal Policy at the conservative Texas Public Policy Foundation.

Instead, Heflin suggested the state try to lure younger workers by creating a portable retirement plan akin to a 401(k) and dispensing with the pension that serves as a "golden handcuff" that has kept older employees on the job. (Why state workers are leaving their jobs,” by Kate Alexander, in the Austin American Statesman, Jan. 23, 2014)
One way to probe Heflin’s assertion would be to look at the popularity of defined contribution plans to private sector employees. We know that public sector employees accept their golden handcuffs as a primary reason to stay on the job. But how do private sector employees view them?

 The Deloitte Annual 401(k) Benchmarking Survey for 2012 holds some clues:
 1) The last several Deloitte surveys have found private sector employers (PSEs) worried that their employees aren’t saving enough for retirement. “In 2012, plan sponsors reported a continued sense of obligation in preparing employees for retirement. The number of plan sponsors rating retirement readiness of participants as quite important or very important increased to 78% in 2012 from 73% in 2011. This uptick in concern from plan sponsors may signal that they feel participants are trending in the wrong direction with respect to understanding their retirement income needs and saving appropriately.” 

Our question is “Why?”

If 401(k)s are so popular with employees, why are they not using them appropriately? If as Heflin asserts that 401(k)s should be viewed as a replacement for “golden handcuff” defined benefit plans, why must PSEs go to such lengths to promote 401(k)s within their organization?

2) Participants’ activity with their 401(k)s is decreasing each year, according to the following chart from the Deloitte study.
Again, we have some questions.

If 401(k)s are so popular (and a draw to private sector employment), wouldn’t employee involvement increase?
Another statement in the report reflects this skepticism: “Without taking an active role in managing their 401(k) accounts, employees can remain stuck at a low deferral rate and disengaged from investment decisions that impact their retirement savings. With this in mind, plan sponsors are looking to their recordkeepers to help improve plan effectiveness via an overall enhanced participant experience aimed at active engagement.” (As an aside, it seems this sentence is saying that plan sponsors see the need to improve positive results for employees in order to make them less complacent and despairing of their investment results.)
We are going to look for other surveys and research that go more to the heart of Heflin’s assertions.

While the Deloitte study has fairly consistently found that PSEs feel 401(k)s fit their recruitment and retention requirements, the study never asks them any questions comparing their feelings about the use of DB plans for recruitment and retention. And Heflin’s assertion seems to imply the opposite view, that only if DC plans are implemented would more employees gravitate toward lower paying government work.

Of course, as we go looking for more facts, we’d encourage the Honorable Mr. Heflin to offer any proof that “creating a portable retirement plan akin to a 401(k) and dispensing with” golden handcuff pensions would serve the public interest in attracting more employees to replace the outflow of state workers. Somehow we doubt he’d have even an iota of evidence in that regard. – Max Patterson


Friday, January 17, 2014

Just Because You’re Rich Doesn’t Mean You’re Immune to Scrutiny

We’ve previously offered our opinion about billionaire John Arnold’s efforts to insert his foundation’s opinions about public employee pensions into the public debate.

Our point has been simple – Arnold secured his retirement by the age of 39 with single-minded focus on investment trading while hard working men and women taught children, fought fires and busted bad guys for the general benefit of society. Their retirement may be later in their life than his, but they deserve the opportunity to have good investment management for their retirement nest egg, just as Arnold created for himself. Defined benefit plans offer that opportunity for people more concerned about the public good than their own trading account.

Over time we’ve also noticed that David and Charles Koch have become active participants in policy debates about public employees’ pensions. The Koch brothers’ financial support of the Cato Foundation, Americans for Prosperity, the Texas Public Policy Foundation, and the American Legislative Exchange Council are all documented fact by other sources, here and here as examples. (Other billionaires, like George Soros and Michael Bloomberg, are known to swing their money around as well for their pet causes, so we don’t want to seem lopsided in our concern about billionaire influence on U.S. politics.)

But we wanted to spend just a minute congratulating MSNBC TV host Rachel Maddow for her recent stand in support of general journalistic prerogative in investigating and recounting the activities of the Koch brothers and their billionaire power plays. You can see here her brave stand against the Koch brothers’ attempt to dissuade her investigation of their activities.

Just as TEXPERS has had to spend time and effort defending public employees’ pension benefits from billionaires’ schemes, we support all journalists in their attempts to expose the influence of wealthy people on public policy through various front groups. The structure for local public employee pension systems in Texas has contributed to their success, just as the structure for a free media has been effective for informing the general public of the activities of the billionaire club. We salute Maddow and all those journalists who endeavor to report on these influencers, just as we salute those who cover events on Wall Street, Main Street and everywhere else in America and the world. – Max Patterson