Home > News > Asset Management Culture > New York State Pension Fund Aims to Be Carbon Net Zero by 2040
Asset Management Culture

New York State Pension Fund Aims to Be Carbon Net Zero by 2040

The $226 billion Common Retirement Fund joins other institutional investors in following the Paris Agreement’s targets.
By Michael Katz


The $226 billion New York State Common Retirement Fund (NYSCRF) has pledged to transition its investment portfolio to reach net zero greenhouse gas emissions by 2040.

New York State Comptroller Thomas DiNapoli said the process to transition to carbon net zero will include completing a review of investments in the energy sector within four years in order to assess transition readiness, as well as a divestment of companies that don’t meet climate-related investment risk standards.

“New York state’s pension fund is at the leading edge of investors addressing climate risk, because investing for the low-carbon future is essential to protect the fund’s long-term value,” DiNapoli said in a statement. “Achieving net-zero carbon emissions by 2040 will put the fund in a strong position for the future mapped out in the Paris Agreement.”

DiNapoli also said the fund is assessing energy sector companies in its portfolio to determine their ability to provide investment returns in the future. He said the companies that fail to meet the fund’s minimum standards may be removed from the portfolio.

For more stories like this, sign up for the CIO Alert newsletter.

“Divestment is a last resort, but it is an investment tool we can apply to companies that consistently put our investment’s long-term value at risk,” DiNapoli said.

Having instituted a climate action plan last year, the fund has already set minimum standards for the thermal coal mining industry and divested from 22 coal companies. It is also currently finishing evaluating nine oil sands companies, and it will develop minimum standards for investments in shale oil and gas, which will be followed by integrated oil and gas, other oil and gas exploration and production, oil and gas equipment and services, and oil and gas storage and transportation.

The fund said minimum standards for all of the sectors, and a determination of which companies are suitable to remain in its portfolio, will be completed by 2025. After it finishes its initial review, the fund will reassess whether the remaining companies are meeting minimum standards and are on a viable low-carbon transition trajectory. The fund also said it will hire additional staff and engage consulting partners to support this work.

“We hope this commitment from the third largest pension fund in the nation will help to inspire and ratchet up ambition across the broader investment community,” Mindy Lubber, president and CEO of sustainability nonprofit organization Ceres, said in a statement. “The fund is showing that it understands the difference a decade can make in helping to limit global temperature rise to no more than 1.5-degrees Celsius and prevent the most catastrophic impacts of the climate crisis.”

The New York pension fund is the latest in a slew of institutional investors worldwide that have recently pledged to become carbon net zero over the next few decades. Earlier this year, Australia’s biggest superannuation fund, AustralianSuper, as well as fund manager IFM Investors and superannuation fund HESTA announced that they would target carbon net zero by 2050, as have UK pension fund the National Employment Savings Trust (NEST) and Harvard’s $41 billion endowment.

Related Stories:

New York City Takes ‘Major Next Step’ on Fossil Fuel Divestments

Net Zero Becoming More Affordable Says Goldman Sachs

New York Appoints Its First-Ever ESG Director

Tags: , , , , , , , , ,

Home > News > Asset Management Culture > 4 Public Pension Funding Strategies Besides Employer Contributions
Asset Management Culture

4 Public Pension Funding Strategies Besides Employer Contributions

Issuing bonds or tapping gambling revenues are among the methods some states adopt, the National Institute on Retirement Security finds.
By Sarah Min


Maybe it’s time for pension plans to explore other funding strategies aside from public employer contributions. Plan sponsors typically use the annual required contribution (ARC) or the actuarially determined employer contribution (ADEC) to meet public pension liabilities. But a number of states have found success experimenting with lesser-known methods. 

It could be useful for other public retirement programs to consider these strategies, according to a report released this week from the National Institute on Retirement Security. While resilient markets have buoyed public pension funding levels, many state governments will continue to face budgetary challenges next year, which is likely to impact contributions and hurt funding levels, researchers said. 

Here are four funding strategies to help keep pension costs stable over time, according to the study: 

Employer Side Accounts. A funding idea borrowed from the private sector, an employer side account allows plan sponsors to pre-pay into separate accounts that allow them to reduce future contributions. Theoretically, this means employers can pay more during better economic periods so they can get away with paying less during fiscally tougher times. 

For more stories like this, sign up for the CIO Alert newsletter.

An early adopter of the approach is the Oregon Public Employees Retirement System (PERS), which in 2002 was permitted to use these separate funds to reduce minimum pension contributions for a 20-year amortization period, and has since expanded the program to six, 10, or 16-year amortization periods. About $5.2 billion in a $65.7 billion total system portfolio was in employer side accounts in 2018.

Pension Obligation Bonds. Researchers admitted this funding strategy is less “innovative” than others, but they argued pension bonds can help fund state plans, so long as issuers pay attention to timing risk. After all, a 30-year equity horizon has significantly less volatility than a 10-year horizon. 

Issuers who want to make sure their returns outpace their borrowing costs will want to do two things: One, issue smaller amounts of pension bonds over time, instead of one large issuance, to help diversify entry to equity markets and interest amounts, the report said. (Caveat: This can come with higher administrative fees). Two, invest the proceeds into equities markets through several years.

Withdrawal Liabilities. This is a fee, for when employers stop contributing to a plan.

In 2015, a withdrawal liability in Indiana was signed into law after winning unanimous approval in the state legislature. Lawmakers were alarmed after a few large employers in the Indiana Public Retirement System (INPRS) started excluding future workers, meaning remaining employers would have to pay more to the system to cover legacy costs. It would also mean future retirees would lose out on benefits.  

After it was passed, four plan sponsors affected by the retroactive bill had to pay a total of $73 million in fees to the INPRS. 

Dedicated Revenue Streams. Some state leaders have implemented, or at least proposed, dedicated revenue streams from such sources as gambling or tobacco settlements to bolster funding levels at public retirement systems. 

Several states, including Illinois and Oregon, have proposed or passed bills allowing legal sports betting revenue to help fund contributions into retirement systems. In Kentucky, a bill introduced in the state legislature this year would set aside 95% of legal sports betting revenue to pay down the state pension fund’s unfunded liabilities. While the bill did not pass, it’s expected to come back in future sessions, and has support from a number of legislators, including the state governor. 

Other states have come up with other revenue solutions. In 2017, New Jersey transferred the entirety of the state lottery revenues to the state pension system. In 2013, Montana set aside a portion of its coal severance tax to fund the state pension fund. And in West Virginia, a lump-sum contribution into the state pension fund from a tobacco settlement helped increase the plan’s funded status to 50%, from 25%, over a two- year period.

Related Stories: 

10 Ways to Close Public Pension Funding Gaps

Tax Cuts Could Come Back to Haunt State Retirement Systems

Say What? Long-Time Bear Becomes Bullish on the Economy

Tags: , , , , , , ,

«