Former NYC School Chancellor Blasts Pension Accounting

The prominent former public official, who was in charge of the New York City public school system for eight years, rails against pension accounting assumptions in a Monday opinion piece.

(January 10, 2011) – Former New York City public school chancellor and current New Corporation executive Joel Klein is blasting public pension accounting.

In a Monday Wall Street Journal opinion piece, Klein, who left the New York school system in November to lead News Corporation’s education division, writes that while “…Bernie Madoff pretended he was getting 8% returns on his clients' investments—and he's in jail for running a Ponzi scheme,” public sector pensions see this “make-believe” as “common.”

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Klein is referring to the well-known practice of assuming anywhere between 7% and 8.25% returns for public pension funds, “regardless of what the investments actually earned in the market,” he writes. Critics often target this pension accounting as illegitimately allowing states and municipalities to avoid contributing to their pension systems, which are notoriously underfunded. The recent case of the Pittsburgh pension system, which narrowly avoided having to hand their pension management over to the state, highlights the plight of such capital pools.

Klein, like other pension commentators such as financial author Roger Lowenstein, chocks this practice up to political expediency. “While irresponsible, this kind of behavior makes good political sense,” he writes. “After all, people run for office in the short run, and money spent now—rather than put aside in a pension reserve—is more likely to garner votes.”

Like for Madoff, Klein writes, the “[inevitable]… day of reckoning” for state and municipal entities from across the country has arrived. “Defined-benefit pensions helped bring the once-vibrant U.S. auto industry to its knees,” he writes, adding that “the same kind of pensions are now hollowing out public education.” While controversial, Klein’s view can be seen to be supported by recent studies, one of which predicted that New York taxpayers will have to add billions in dollars annually to their public pension systems over the next five years.

While Klein’s view is not novel, his closeness to the issue will likely give rise to further pressure on America’s public pensions, which have become a hot topic as of late with state capital limited and the economy stubbornly refusing to grow at a pace many hope for.



To contact the <em>aiCIO</em> editor of this story: Kristopher McDaniel at <a href='mailto:kmcdaniel@assetinternational.com'>kmcdaniel@assetinternational.com</a>

UK's Multi-Employer Pension Fund Revises Investment Strategy for Improved Returns

The group said the new approach aims to allow for better risk-adjusted returns relative to liabilities to ensure that better results are delivered for members.

(January 10, 2011) — In response to low funding and solvency levels, and tapering future return expectations due to falling interest rates, the UK-based occupational Pension Trust, with nearly $7 billion in assets under management, is offering an updated investment service in an effort to provide better risk-adjusted returns relative to liabilities.

“With funding and solvency levels significantly below 100%, and with future return expectations having dwindled as interest rates and market sentiment have fallen, the new strategy aims to allow for the generation of better risk adjusted returns relative to liabilities for pension schemes,” said Chief Investment Officer David Adkins in a statement. “In addition, our new investment governance structure, which has been in place in its entirety for less than a year, I feel is better equipped to produce better risk adjusted returns compared to the past.”

Adkins added that going forward, the UK firm will be taking a more responsive approach to fluctuations in market conditions by providing daily estimates of funding and solvency levels, improving performance reports.

The UK fund, under the new strategy, plans to invest more in alternative growth assets to hedge against risk, shifting away from quoted equities. Meanwhile, the fund will ensure that its new investment approach outperforms their benchmarks while relying more heavily on passive index-tracking investments.

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The Pension Trust has also tweaked its governance structure by forming three sub-committees to support the main investment committee: the Funding and Investment Strategy Review Group (FISRG), the Investment Strategic Opportunities Group (ISOG) and the Investment Manager Review Group (MRG). According to the fund, the FISRG will approve funding conclusions with scheme sponsors within guidelines set by the board, recommending investment strategies to the investment committee. The ISOG will review, recommend, or reject new investment ideas before they appear in front of the investment committee, and the IMRG will monitor the performance of managers and other providers.

The Pension Trust, established in 1946 and now the 44th largest pension fund in the UK, is an occupational pension scheme and one of the leading multi-employer occupational pension scheme for the charitable, social, educational, voluntary and not-for-profit sectors. The Pension Trust’s products include: 29 stand-alone final salary schemes, five multi-employer defined benefit schemes, a money purchase plan and a multi-employer career average revalued earnings (CARE) scheme.



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

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