In its fiscal year 2021 budget proposal released Monday, the Trump administration proposed a host of changes to the current state of operations in the Federal Employees Retirement System (FERS).

The changes include an increase in employee contributions to FERS, so that the employee and employer would each pay half the normal cost, as well as an elimination of the FERS cost-of-living adjustment (COLA) and a reduction to the Civil Service Retirement System COLA.

Trump’s proposal also includes a castaway of the Special Retirement Supplement, a tool made eligible to federal beneficiaries to help buoy their financial independence between the age they retire and age 62, when they first become eligible for a Social Security benefit. The tool was designed primarily for individuals working in law enforcement jobs that require them to retire at age 59.

In citing the administration’s rationale for the changes, the budget report said the Congressional Budget Office (CBO) concluded in a series of recent reports that federal employees are compensated with combined pay and benefits well above the private sector.

“CBO found a 17% disparity on average, in total compensation, between Federal employees and their private sector peers,” the report said. “The disparity–which varies significantly by education level–is overwhelmingly attributable to benefits.”

The propositions were brought on board “to align federal compensation with leading private sector practices.”

The changes are expected to bring increasingly higher mitigations to the country’s projected deficits, saving $1 billion in 2021, and increasing to $15 billion in 2030. Between 2021 and 2025, the propositions are expected to reduce the deficit by $24 billion, and for the entire decade spanning 2021 to 2030, reduce the deficit by an aggregate $89 billion.

Retirement and disability benefits under FERS are fully funded by employee and employer contributions and interest earned by the bonds in which the contributions are invested.

“FERS and CSRS [cost of living adjustments] for annuitants are currently determined based on statutory formulas tied to the Consumer Price Index,” the budget stated. “However, FERS annuitants are somewhat protected from economic effects, because their retirement packages include Social Security benefits and the Thrift Savings Plan … in addition to the FERS annuity. Eliminating the FERS COLA and reducing the CSRS COLA payments would reduce both FERS and CSRS annuity benefits, bringing compensation more in line with the private sector.”

The budget also proposed reducing the mandated interest rate on the Thrift Savings Plan’s G fund, a pool of government securities intended to match the yield on either the three-month or four-week Treasury bill.

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The news out of China about the coronavirus is still worrisome, with more than 1,000 deaths reported so far, but hedge fund potentate Ray Dalio thinks the disease’s impact on the markets has been “exaggerated.”

And in the not-too-distant future, the epidemic won’t seem that important, according to the founder of Bridgewater Associates, the world’s biggest hedge fund operation (assets: $160 billion). “It most likely will be something that in another year or two will be well beyond what everyone will be talking about,” Dalio told a conference in Abu Dhabi.

In the meantime, he observed, the virus “probably had a bit of an exaggerated effect on the pricing of assets because of the temporary nature of that, so I would expect more of a rebound.” 

To date, with the exception of Asia, stock markets around the globe have taken a cautiously optimistic view of the outbreak’s economic and public-health impact. Initially, many exchanges dipped at the prospect that the contagion would develop into a worldwide scourge like the 1918 Spanish flu, which killed an estimated 50 million people. But the non-Asia bourses are back on a winning streak, with the S&P 500 hitting a new high Tuesday, up 4% for the year.

And indeed, Asia’s markets on Tuesday were up (other than in Japan). In 2020 to date, the Shanghai Composite is down 4.9%, while Hong Kong is off 2.6%, and Indonesia lost 5.5%.

Although Moody’s has warned that a coronavirus pandemic could turn out to be a “black swan” as bad or worse than the devilish surprise that shook the world in 2008, other researchers have suggested it will shave only a bit off worldwide economic growth—and that the dip will be reversed shortly thereafter.

Much, of course, depends on how fast the Chinese government can contain and stop the disease, and when China’s restrictions on travel and commerce are lifted. As the second largest economy, China is a major supplier of goods internationally, as well as an ever-growing consumer of imports. Should the country remain shut down for a long period, the baleful economic ripples could end up damaging world trade.

The result would be renewed losses on bourses across the earth’s face.

“What concerns me most if you did have a downturn,” Dalio said, “we are now 11 years in expansion—whether that’s one, two, three years forward, with the larger polarity that exists, the wealth gap and the political gap, I would be more concerned about that.”

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The New York State Common Retirement Fund on Monday posted a 5.3% return for its third quarter, rebounding from weak gains in the first half of the year thanks to a boost from the broader markets. 

But New York State Comptroller Thomas P. DiNapoli said the fund will maintain a “conservative approach,” as state pension plan leaders, concerned by historically low interest rates and slowing economic growth, worry about excessive risk. The Common Retirement Fund, with a funded ratio of 96.1%, boasts one of the strongest pensions in the nation.

“Volatility remains the defining characteristic of the investment landscape,” DiNapoli said in a statement. “As we approach the fund’s fiscal year end, we will maintain our conservative approach and keep a close eye on investment returns.”

As part of its risk-averse strategy, the third-largest state pension in the nation lowered its target rate of return to 6.8%, from 7%, for the current fiscal year starting in April. That puts the Common Retirement Fund, up 7.3% to an estimated $225.9 billion in December from an audited $210.5 billion in April, on track to meet the new target. 

More state pensions are adjusting their forecasts and retreating into conservative strategies. The California Public Employees Retirement System (CalPERS), which is the largest pension fund in the nation, said in 2016 that it would reduce its assumed rate of return to 7%, from 7.5%, by next year. In October, trustees of the Ohio Public Employees Retirement System decided to lower that fund’s assumed rate of return for two of its five pension plans. 

Meanwhile, experts forecast that returns at public pensions will be more than a full percentage point lower over the next 20 years, according to a report from the Pew Charitable Trusts. Even small percentage drops can have a “significant impact” and increase liabilities across US plans, the research group said. 

Reducing return estimates is not the only change the Common Retirement Fund is making. Since the start of its fiscal year, the pension fund has incrementally increased its exposure to fixed income—cash, bonds, and mortgages—to roughly 24%, up from 18% of its total portfolio in March. 

The fund currently has roughly 39% in US stocks and 16% in non-US equities. It also has about 9% in private equity, roughly 9% in real estate and real assets, and nearly 4% in absolute return strategies and opportunistic alternatives. 

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Harvard’s faculty voted overwhelmingly at its monthly meeting to demand that the management company overseeing the university endowment divest its $41 billion portfolio of fossil fuel investments.

By a vote of 179 to 20, the university’s faculty voted to support a motion in favor of calling on the Harvard Management Company (HMC) to “withdraw from, and henceforth not pursue, investments in companies that explore for or develop further reserves of fossil fuels.”  

The motion also calls on HMC to replace any adviser who is not willing to comply with divestment with someone who is. The final motion also included an amendment that added that all future endowment investments should be subjected to a “system of decarbonization.”

After the vote, Harvard University President Lawrence Bacow said he would bring the motion to the Harvard Corporation for consideration. “I am confident that the corporation will give it the thought and consideration it deserves,” Bacow said, according to the Harvard Crimson.

But supporters of the divestment movement shouldn’t hold their breath as the faculty motion will most likely result in no change to HMC’s investment policies. The faculty vote isn’t the first time HMC has been pressured to divest, and it likely won’t be the last.

Environmental activist group Divest Harvard launched Heat Week five years ago, which has become an annual weeklong protest to push Harvard to divest from fossil fuels. In 2018, Kathryn “Kat” Taylor resigned as a member of Harvard’s Board of Overseers to protest the university’s failure to address what she said are unethical investments, particularly in fossil fuel companies. And last June, former US Vice President Al Gore called on his alma mater to divest of fossil fuel investments in a speech given at the university’s 2019 Class Day.

But HMC hasn’t budged from its long-standing policy position against divestment, which states that that “the university maintains a strong presumption against divesting investment assets for reasons unrelated to the endowment’s financial strength and its capacity to further Harvard’s academic goals.”

Last May, in a rare on-campus appearance by an HMC executive, the endowment’s chief compliance officer defended Harvard’s investment policies at a panel that included students and faculty supporting the divestment movement. Kathryn Murtagh explained Harvard’s decision to maintain its status as a shareholder and active owner so it can engage in formal dialogue with companies about sustainability issues.

“Active ownership, engagement, advocacy, stewardship—these are all tools that institutional investors can leverage to drive corporate change,” Murtagh said, according to the Crimson.

While protests, motions, and rebukes have yet to change HMC’s stance, the one thing that could convince it to divest is if fossil fuel investments start costing the endowment money instead of making it money.

An August report from the Institute for Energy Economics and Financial Analysis (IEEFA) said that BlackRock, the world’s largest asset manager, has lost $90 billion over the past decade from its investments in four oil and gas giants—ExxonMobil, Chevron, Royal Dutch Shell, and BP—alone. Last month, BlackRock surprised the investing world by announcing that it was making sustainability the focus of its investment strategy for the $6.3 trillion it has under management.

“Sustainability- and climate-integrated portfolios can provide better risk-adjusted returns to investors,” CEO Larry Fink said in a letter to CEOs. “And with the impact of sustainability on investment returns increasing, we believe that sustainable investing is the strongest foundation for client portfolios going forward.”

Perhaps HMC will follow suit if it finds that its fossil fuel investments are underperforming and cutting into the endowment’s returns. But it seems unlikely that it will be the divestment leader many of its students, faculty, and alumni are calling for it to be.

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The UK’s largest private pension fund, the Universities Superannuation Scheme, plans to cut its external hedge fund holdings by 50%, said investment chief Simon Pilcher, according to a report from Bloomberg.

The pension’s rationale is credited to disappointing performance executed by its hedge fund managers, following a huge pattern where investors around the world redeemed nearly $100 billion from hedge funds in 2019, an increase in outflows of 163% from nearly $37.2 billion in 2018. Hedge fund managers struggled to identify pockets of alpha in a rising bull market, causing the industry to witness more fund closings than launches.

Instead of mostly utilizing external fund managers, Pilcher said the pension will now in some cases opt for an in-house team to execute its specific hedge fund strategies.

The fund’s pooled hedge fund investment vehicles comprised £1,760 million ($2,283 million) in assets by the end of last March (the latest data available) a small decrease from £1,862 million the year prior, according to its 2019 annual report.

Don Steinbrugge, CEO of hedge fund consulting firm Agecroft Partners, advised earlier this year that the firm is predicting an uptick in hedge fund allocations from pension fund managers in 2020.

More than 4,000 hedge funds have been liquidated in the past five years, according to Hedge Fund Research Inc. Many investors have been opting for cheaper, high-beta indices that ride the bull market.

The fund began allowing members of its defined contribution plans to invest funds in private market assets beginning earlier this month. The pension’s private markets investments include 320 assets in infrastructure, property, private debt, and private equity

Pilcher was named CEO of the investment management unit of the scheme last May. He’s responsible for overseeing the fund’s £64 billion pension fund, providing benefits for academic staff throughout the United Kingdom. He was previously CEO of institutional fixed income and chairman of real estate at M&G Prudential.

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Seeking fresh donors, Columbia University is mulling a proposal over the next several months to build a school dedicated to climate change. 

Columbia already runs the Earth Institute, the research firm it founded in 1995 that also investigates issues regarding environmentalism. But the research firm “has encountered structural challenges that limit its success and growth,” stated a December report from an advisory task force to the university president. 

Last month, the university decided to go forward with the climate change school plan, as part of a wide-ranging list of commitments to sustainability, according to a letter from Columbia President Lee C. Bollinger. 

“The Climate School has enormous fundraising potential,” the report read. “It will allow the university to make the greatest impact possible across all parts of Columbia, more so than if we were to simply enhance existing structures or fund large projects.” 

Unlike the research firm, the Climate School can appoint faculty and subsidize its research with a tuition base, the task force wrote. A school can also develop a pipeline of alumni for future funding. 

The plan to build a separate school follows a dismal year for Columbia’s nearly $11 billion endowment, which returned just 3.8% in 2019. The poor showing not only trailed every other Ivy League endowment, it also lagged behind the national total institution average, which gained 5.3% in the same time period. It’s also just half the performance of the S&P 500, which increased roughly 7.6%.

Socially Responsible Investing

Following similar pledges from other schools, including its sister school Barnard, Columbia also pledged to be carbon neutral by 2050 and is seeking divestment options for its portfolio. The school will also appoint a chief climate officer for the first time, the president said.  

Columbia is not the first school to consider incorporating socially responsible investing principles into its portfolio. Last week, Georgetown said it will divest from fossil fuels over the next decade. And at Harvard, the question of fossil fuel divestment is a point of contention among students, faculty, and shareholders. 

The university has seen a series of exits from its endowment recently. Last month, Columbia Investment Management Company CEO Peter Holland said he would retire later this year. Meanwhile, former chief investment officer Tim Donahue left the endowment nearly six months ago to head Hawaii’s Kamehameha Schools’ $8.2 billion endowment.

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