United Nations Secretary-General Antonio Guterres wants to overhaul management of the global body’s $61 billion pension fund after three years of underperforming returns and contentious delays in paying retirees.The UN Joint Staff Pension Fund is seeking candidates with “more than 20 years of proven progressively responsible experience” to replace Carolyn Boykin, the former chief investment officer of the Maryland State Retirement and Pension System, who took the UN post three years ago, according to an internal job posting seen by Bloomberg News.
Dina Medland writes:
The under-funding of pensions is a global issue, and one that keeps returning to the news with ‘corporate governance’ stamped all over it in bright red letters, as previously covered on Forbes. In Britain research out today shines a light on corporate priorities. With total pensions liabilities at £625 billion ($827 billion), FTSE100 companies were still able to pay four times as much in dividends in 2016 as they did in pension contributions.
So you still think Environmental, Social and Governance (ESG) issues are not terribly ‘gritty’? Think again. Under the auspices of an ESG issue brief, MSCI – whose indices and analytical information help investors build and manage portfolios – recently published a report on concerns around the under-funding of global pensions.
Its results are startling. The ratio of under-funding is worst in North America, followed by Europe.Britain’s BT has a whopping 36% gap between its pension obligations and the resources set aside to fund them, second behind America’s DuPont, which has an even larger 42% funding gap. BT has around £50 billion ($62.4bn) of underlying pension liabilities, the largest of any U.K. company.
Christopher O’Dea writes in Investments & Pension Europe:
The dominant theme in the governance of US public pension funds these days is ‘investors, govern thine selves’. Many pension funds have invested in activist hedge funds or established their own corporate governance functions. These are designed to press corporate leaders and their boards to develop better strategies, improve execution and upgrade talent and technology to more effectively address an increasingly complex and volatile business environment. However, many US pension plans are in dire need of a governance overhaul themselves.
The challenges US pension trustees are grappling with today reflect the evolution of pension systems in the country, [pension consultant Rick] Funston says. “A good many of the pension systems, if not all of them, in fact, evolved from a sole fiduciary form of governance under treasurers and comptrollers, to independent fiduciary boards,” he says. But the question really is how independent are they? “In a number of cases,” he says, “legislatures still retain budgetary control, so a question remains how autonomous are the trustees, and how much freedom do they have to act, to do what they need to do in order to carry out their fiduciary duties.”
Systemic underfunding is the primary result of the governance gap. Since 2000, the study says, US public plans, in the aggregate, have gone from fully funded to 74% funded. In 2014, 63% of plans were less than 80% funded – the level deemed ‘at risk’ for private-employer pension plans under the Pension Protection Act – and 20% were less than 40% funded. To compensate, the study found, public pension plans have increased the risk profile of their investments. In 1952, public employee defined-benefit plans invested 96% of assets in cash and fixed-income investments; that percentage fell to 47% in 1992, to 27% percent in 2012, and to less than 19% in 2015.
The core issue is that “public pension plans make unreasonably high rate-of-return assumptions”, the study says. “The implied risk premium in state and local pension plans’ rate-of-return assumptions has grown from 30 basis points over 30-year Treasuries to 480 basis points today.” If public pension plans assumed a riskless rate of return, the study says, “state and municipal pension plans would be only 50% funded”.
We have no objection to the shift in pension fund accounting. But that should have little impact on the company’s overall financials and certainly no impact whatsoever on employee and executive bonuses, which should be exclusively based on contributions to operational productivity.
Ford Motor Co. is changing how it accounts for pension plans, a move that should boost company earnings, makes profitability in Europe more likely and better represents the health of the automotive group’s underlying performance….
The change sweeps away billions of dollars in pension-plan losses from previous years that Ford had yet to factor in to future results, and allows the auto maker to approach coming years with a cleaner slate. Investors tend to largely ignore a company’s historical financial performance once it is too far in the past, instead focusing on future earnings potential.
The move also strips the pension losses out of Ford’s core automotive operating units, giving those units’ earnings a lift. The effect may be most significant in Europe, where the revisions will move the company from a loss to a profit for the first nine months of 2015, putting it in a stronger position to book its first full-year European operating profit since 2010.
Ford said the move won’t immediately affect the bonuses for company officers tied to the auto maker hitting certain financial benchmarks because it will use pre-revised 2015 results for those calculations. Hourly employeesrepresented by the United Auto Workers, however, will get bigger profit-sharing bonuses for 2015, because their payouts will be tied to the revised North American results.
Those involved in managing 401(k) plans are expected
to make decisions for the exclusive benefit of plan
participants and beneficiaries. This study provides evidence
that mutual fund companies involved in plan
management often act in ways that appear to advance
their interests at the expense of plan participants.
Where mutual fund companies serve as plan trustees
– indicating their involvement in the management of
the plan – additions and deletions from the menu of
investment options often favor the company’s family
of funds. More significantly, this bias is especially
pronounced in favor of affiliated funds that delivered
sub-par returns over the preceding three years. And
participants do not shift their savings to undo this
favoritism, especially the favoritism shown to subpar
affiliated funds. The study also found that the
lackluster performance of these sub-par funds usually
persists. These findings thus suggest that, with
respect to setting 401(k) menus, mutual fund companies
tend to influence decisions in ways that appear to
adversely affect employee retirement income security.
Many thanks to Elizabeth Warren for pushing for a fiduciary standard that would limit self-dealing by money managers like this guy.
“We all agree that we must act in a client’s best interests,” Schneider said, before arguing that the Obama rule requiring managers to do just that would ultimately force Primerica to abandon its single-mother clientele.
Warren presented Schneider with a Huffington Post article detailing lawsuits against the company filed by Florida workers. According to the complaints, Primerica encouraged workers nearing retirement to trade in their government-guaranteed pensions for much riskier assets — a move that would jeopardize their savings while giving Primerica the opportunity to profit from managing their funds in the future. Had they stayed in their pensions, retirees would have simply received regular payments, leaving no fees for Primerica reps.
The lawsuits describe exactly the kind of activity that the Obama rule is designed to prevent, and suggest that Primerica hasn’t always acted in its clients’ best interests. Primerica set aside $15.4 million in 2014 to settle lawsuits from 238 such workers.
“Mr. Schneider, I just want to understand your company’s advice in these cases,” Warren began. “Do you believe that people like these firefighters from Florida who are near retirement and have secure pensions with guaranteed monthly payments should move their money into riskier assets with no guarantees, just before they retire?”
Almost no one who understands personal finance would give such advice in good faith. And Schneider never really answered the question, after being pressed by Warren three separate times. He said that regulators had signed off on the activity, that “each situation is very different,” and that it could make sense for someone on the verge of death.
“I’m sorry, are you suggesting that these 238 people were weeks away from dying, and that’s why they all got this advice?” Warren asked.