Auditor Report Labels CalSTRS a 'High-Risk' State Liability, Depleted in 30 Years

The California State Teachers' Retirement System (CalSTRS), facing massive funding shortfalls, has been labeled a "high risk" problem for California by the state auditor.

(August 19, 2011) — An auditor has labeled the California State Teachers’ Retirement System (CalSTRS) a ‘high-risk’ problem for the state, with the scheme expected to run out of money in the next 30 years.

The assessment by State Auditor Elaine Howle into high-risk issues faced by California found that unless the legislature takes immediate action, the state could be forced to be responsible for providing the necessary funding using taxpayer money. Reaffirming CalSTRS’ long-term funding problem, the report concluded: “CalSTRS reports that the programme’s assets will be depleted in 30 years. Considering that pension obligations can extend beyond 50 years, unless the State takes steps, such as raising the contribution rates for members and their employers, it may be responsible for providing the necessary funding to ensure that CalSTRS’ defined benefit programme meets its obligations.”

Despite CalSTRS’ strong performance during the latest fiscal year with a $29 billion investment gain, the fund is still far below its October 2007 peak. Currently, it only has about 71% of the assets needed to pay is long-term obligations, short of the 80% level most experts recommend. The report added: “The laws governing the contribution rates for CalSTRS members and their employers have not changed in decades. As a result, the defined benefit programme is currently funded at 71%, well below the 80% considered necessary to fund a sound pension program.”

In response to the report, CalSTRS spokesperson Ricardo Duran told aiCIO: “What the State Auditor’s list does is underscore what’s been called for in the data that we’ve been providing the Legislature and the Administration. They have the authority and the responsibility to develop a long-term funding plan because the state is the plan sponsor and ultimate guarantor of the system, which has served the state’s educators well for nearly a century. Neither the Legislature nor the Administration have asked CalSTRS to provide specific recommendations, but we’ve said that a gradual, predictable approach to reaching funding health will provide the greatest degree of fairness to CalSTRS members, the school districts and the taxpayers of California.”

Duran added: “The issues are long-range ones because CalSTRS has the assets to continue paying benefits for three more decades, but the longer it takes to develop a plan, the more costly will be the solution.”

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The report by the California auditor highlights the grim reality of the world’s pension funding situation. A recent report by the Organisation for Economic Co-Operation and Development (OECD) revealed that while pension assets are slowly returning to pre-crisis levels, full recovery remains uncertain. Andre Laboul, head of the OECD’s financial affairs division, stated: “Having weathered the financial crisis, pension fund asset levels in most countries continue to show strong growth and are on the way to returning to pre-crisis levels. During 2010, both economic and financial indicators showed signs of further recovery. However, the outlook for future economic growth in developed economies remains uncertain and sluggish.”

Click here to see a video with CalSTRS CIO Christopher Ailman speaking with aiCIO about the government-run model of public pensions, hedge fund-of-funds vs direct investing, and the future of outsourcing CIO talent.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

While the economic outlook is seen as dismal among US money management executives, 61% of respondents surveyed by KPMG are looking to add to their firms' headcount over the next year.

(August 18, 2011) — Despite a slow market recovery, 61% of US money management executives surveyed by KPMG are looking to hire over the next year.

In a survey conducted in May and June, just less than half of the 100 respondents predicted an incremental 1% to 3% increase in staff, even though they’re not expecting a “complete” economic recovery for more than two years.

The survey showed that regulatory and legislative factors are largely to blame for the slightly negative economic outlook among fund managers. “The executives told us that the combined impact of the uncertain regulatory and constricted economic environment is significantly inhibiting growth as they try to determine what moves they will need to make to maintain their competitive edge,” said Dave Seymour, head of KPMG’s Investment Management practice, in a statement. “The good news is that they are putting cash into play to improve their infrastructure and to prepare for future business needs,” he said.

Meanwhile, 75% of money management executives surveyed said their firms had significant cash on their balance sheets. About 25% of respondents said they already were investing that cash and another quarter said they expect to begin investing by the first quarter of 2012, with technology, strategic acquisitions and expansion into new markets ranking as leading targets for those investments. “Information technology is among the most important areas for these executives right now because system platform upgrades will be required for many firms to maintain their competitive advantages in addition to meeting new regulatory requirements, such as cost basis reporting, FATCA (Foreign Account Tax Compliance Act), and certain components of Dodd Frank,” Seymour added.

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Additionally, the survey noted that transparency and relationships between asset managers and investors are perceived to be improving. More than half (54 %) of the executives surveyed said that transparency has improved between investment managers and investors since the financial crisis, while 38% have seen no real change. Nine percent said it is too early to tell.

When asked to identify what actions they would need to take to comply with regulatory changes, 68% identified improving existing internal policies and procedures, 63% pointed to strengthening information technology platforms and enabling applications, 59% said strengthening risk management processes, 46% identified developing a strong internal training program for staff, and 40% chose enhancing financial reporting procedures.

A recent Bank of America Merrill Lynch Survey of Fund Managers echos findings by KPMG over the future of the US economy. The BofA survey showed that manager optimism about the global economy has declined significantly in August. The firm’s latest monthly study — conducted August 5-11 in a survey of 244 fund managers overseeing $718 billion — revealed that a net 13% of managers believe the global economy will experience weaker growth compared with a net 19% in July who were confident the economy would improve.

“Flows out of equities into cash have reached capitulation levels, especially in the US but it’s significant that a revival in optimism towards China has survived the global correction,” said Michael Hartnett, chief Global Equity strategist at BofA Merrill Lynch Global Research, in a statement. “Investors are waiting for convincing, coordinated action from governments before recommitting their cash to equities,” said the firm’s Gary Baker.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742