Ash Williams

Ash Williams isn’t bashful, nor should be. As he put it in an interview with CIO, “45 years of experience is useful to finance.” The former CIO of the Florida State Board of Administration started Monday in his new job at J. P. Morgan Asset Management, where he’s the vice chair for asset management.

He retired in September from the SBA, which he had headed since 2008. Last week, the bank announced his hiring.

He brings a lot to the table, to say the very least. In the part-time position, Williams said he will “serve as a source of knowledge.” And of course, he will give JPM access to his many relationships as it builds its already considerable institutional business. “I’ll be a voice for the firm,” he indicated, with public appearances to discuss the bank’s policies.

And a lot is going on in the world right now that a major financial player like JPM needs counsel on. One instance he cited was “the gap between people’s retirement savings” and what they need. The fear is that “a lot will end up living in poverty.”

Regarding American public pension programs, some of which have faced struggles in recent years, Williams commended places like Kentucky for improving their funded status and plan operations. “A constant long-term view is needed” by pension plans, he said. “It’s understanding reality and data.”

One reason he was drawn to JPM, he said, was that “I was impressed by their capabilities, by their ability to draw smart inferences” and turn those into strategy. He said he was “a huge fan” of the bank’s chief, Jamie Dimon “who is very charismatic” and a far-reaching thinker. He complimented Dimon on the JPM chairman’s idea about a new Marshall Plan for Europe “that would wean them off Russian energy.”

Figuring out risk is part of his purview, made all the more urgent by “the first shooting war in Europe we’ve had since 1939,” when World War II started.

Williams pointed to historian Niall Ferguson’s views on how wars can lead to inflation and currency traumas. He noted that many on Wall Street today had never lived in a time of high inflation, as he had, in the 1970s. Despite talk of the end of globalization due to the rise of nationalistic sentiment across the map, he said he had doubts that trend would end. “I don’t think it’s over,” he said.

Principally, he can’t see how the U.S. could re-shore all the industrial tasks that have gone overseas. “We don’t have the labor, the plants, or the equipment” to repatriate the manufacturing output that has departed, he said.

A Florida native, he will be based in Tallahassee. His ancestors settled in Florida “before it was a state.”  Aside from the new job, other past-times beckon. He said that he is “going back to golf,” which he played long ago. His wife, Jan, is a tennis buff. He has three daughters—one relatively nearby in Alabama, and two in Washington, D.C.—and three grandchildren.  The Williamses also are building a second home in the North Carolina mountains.

Another of his favorite activities is to ride his motorcycle, an Indian Scout:  a 2017 model designed to resemble the original from the early 1900s. “It looks vintage, with a leather seat, lightweight, and a powerful engine,” he said.

Williams likes to ride the bike north through the piney hills of Georgia, or south to the St. Mark’s Wildlife Refuge. The refuge features an 1831 lighthouse, salt marshes, and a menagerie of alligators, eagles, and whooping cranes.

Wherever he goes and whatever he does, Ashbel “Ash” Williams is sure to bring his signature energy and grace.

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Milliman’s analysis of the 100 largest U.S. corporate defined benefit plans found that as of March 31, funding for these plans has hit a 15-year high.

According to the Milliman 100 Pension Funding Index, between the end of February and the end of March, the funded ratio climbed from 102.5% to 105.2%, and the funded status surplus grew from $43 billion to $86 billion. Milliman says this is thanks to discount rates that have climbed 82 basis points over the first quarter.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.07% by the end of 2022 and 4.67% by the end of 2023) and asset gains (10.2% annual returns), the funded ratio would climb to 117% by the end of 2022 and 135% by the end of 2023, according to Milliman. Under a pessimistic forecast (3.17% discount rate at the end of 2022 and 2.57% by the end of 2023 and 2.2% annual returns), the funded ratio would decline to 98% by the end of 2022 and 90% by the end of 2023.

More broadly, Wilshire says the aggregate funded ratio for U.S. corporate pension plans in the S&P 500 increased by an estimated 1.9 percentage points month-over-month in March to end the month at 97.3%.

The monthly change in funding resulted from a 3.4% decrease in liability values partially offset by a 1.5% decrease in asset values. The aggregate funded ratio is estimated to have increased by 3.8 and 1.9 percentage points over the trailing twelve months and the first quarter, respectively.

“Despite this month’s volatility, highlighted by the over 11% trough-to-peak values intramonth for the FT Wilshire 5000, March’s estimated month-end funded ratio remains at its highest level since year-end 2007, which was estimated at 107.8%, before the Great Financial Crisis,” says Ned McGuire, managing director, Wilshire.

River and Mercantile notes that discount rates continued to push higher during March largely due to increases in Treasury yields. Even with the war in Eastern Europe, equity markets, while volatile, ended the month in positive territory. “The significant rise in discount rates so far in 2022, increases which are pushing close to 1% year-to-date, have fueled funded status increases for almost every pension plan sponsor,” it says in its “US pension briefing – March 2022.”

“The biggest story for pension plans so far in 2022 is the rise in discount rates,” says Michael Clark, managing director in River and Mercantile’s Denver office. “This has come primarily due to the increases in U.S. Treasury yields, and especially at the short end of the yield curve. The rise in short-term rates has largely been driven by Federal Reserve actions to combat the inflationary pressures that we’re currently experiencing. Because of the rise in short-term rates, we’re now entering a phase where on any given day the yield curve is inverted, where short-term rates are higher than long-term rates. This has historically been a warning sign of an impending economic downturn over the next year. While an inverted yield curve is not a sure-fire indicator of future problems, plan sponsors should still be aware of the potential implications.”

According to Insight Investment, U.S. corporate pension plan funded status improved by 0.8% from 95.4% to 96.3% during March. Assets declined by 2.4% and liabilities declined by 3.2%, and the average discount rate increased 26 bps from 3.65% in February to 3.91% in March.

“If we anticipate the Fed continuing to increase rates throughout the year, we may expect similar improvements in funded status for plans that are underhedged,” says Sweta Vaidya, North American head of solution design at Insight Investment. “At that point, it may be worthwhile to consider hedging or de-risking in order to secure those improvements.”

LGIM America’s Pension Solutions Monitor for March estimates that pension funding ratios increased approximately 2.8% throughout March to 96.3% from 93.5%. While asset performance for a typical plan with a traditional asset allocation was muted over the month, the increase in pension plan discount rates was the primary driver for the increase in funding ratios. Their calculations indicate the discount rate’s Treasury component increased 37 bps, while the credit spread component tightened 8 bps, resulting in a 29 basis point increase. Overall, liabilities for the average plan decreased 2.7%, while plan assets with a traditional “60/40” asset allocation rose by approximately 0.22%.

Results for Model Plans

Income Research + Management’s analysis of pensions’ funded status changes in March, developed by Theresa Roy, pension and liability-driven investment (LDI) specialist, found that higher discount rates and positive returns on growth assets in March contributed to funded status gains for all its sample plans.

According to IR+M’s LDI Monitor, its Average Plan funded status increased by 2.4% in March, ending the month at 102.9%. The Average Plan is soft-frozen with a target liability duration of 12 to 14 years, and a target asset allocation of 50% growth assets and 50% fixed-income assets.

Plans with smaller allocations to growth assets experienced muted increases in funded status. IR+M’s End Stage Plan funded status increased by 0.5% and ended March at 106.3%. The End Stage Plan is hard frozen with a target liability duration of 8 to 10 years, and a target asset allocation of 15% growth assets and 85% fixed-income assets.

Plans with larger allocations to growth assets saw greater increases in funded status. IR+M’s Young Plan funded status was 94.9%, up by 3.4% from the prior month. The Young Plan is open and accruing benefits with a target liability duration of 15 to 17 years, and a target asset allocation of 70% growth assets and 30% fixed-income assets.

Both model plans that October Three tracks gained ground last month. Plan A added almost 3%, ending the quarter up 4% to 5%, while the more conservative Plan B gained 1% last month and is now up almost 1% through the first three months of 2022. Plan A is a traditional plan (duration 12 at 5.5%) with a 60/40 asset allocation, while Plan B is a largely retired plan (duration 9 at 5.5%) with a 20/80 allocation with a greater emphasis on corporate and long-duration bonds.

Quarterly Data

Northern Trust Asset Management estimates that the average funded ratio for DB plans in the S&P 500 improved in the first quarter of 2022 ending at 99.3% from 95.9%.

“Negative equity returns were offset by higher discount rates,” says Jessica Hart, head of outsourced chief investment officer retirement practice at NTAM. “As telegraphed, the Federal Reserve delivered its first 25 bp hike since 2018. The central bank communicated a cautious approach to future policy given the Russia-Ukraine uncertainty. For pension plans, maintaining their long bond allocation can reduce future funded ratio volatility, and they can still benefit from rising rates if they are not fully hedged.”

MetLife Investment Management analyzed the daily average pension funded status for companies in the Russell 3000 that sponsor DB pension plans and estimates that as of March 29, the average funded status rose to 104.1%, the highest level in the last 10 years. The average plan ended the quarter at 102.5%, which is the highest of any quarter-end in the last 10 years.

“Despite asset losses, pension funded status improved for most plans during the quarter due to liability decreases,” says Jeff Passmore, LDI solutions strategist at MIM. “Higher discount rates decreased pension liabilities by 10.4% and lifted the average funded ratio to 102.5%.”

NEPC’s Q1 2022 Pension Monitor says the funded status of the total-return plan increased 7.6% in the first quarter as higher yields and lower liabilities outpaced losses from equities. The LDI-focused plan saw funded status gain in the first quarter as interest rates increased and credit spreads widened, offsetting asset losses. The plan is 79% hedged as of March 31.

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Corporate pensions are better funded than ever, according to a new study released by JP Morgan. The data shows that the top 100 corporate pensions in the United States have finally surpassed the average funded levels achieved pre-2008. The average top-100 corporate plan today is 96.4% funded. Currently, over 70% of the plans studied were at their highest-funded levels ever since the Great Recession.

But the strategies that work for bridging a funding gap are not necessarily appropriate for better funded plans, says Jared Gross, co-author (with Michael Buchenholz) of the study and head of institutional portfolio strategy at JP Morgan.

“We’ve been in an era of gradual but persistent de-risking for the better part of the last 12 to 15 years,” says Gross. “But now that we’ve arrived at a level of funding that gives people more flexibility, it’s useful to step back and consider just how far they should go.”

Gross says that while the old models of asset allocation based on total return maximization did not work, newer models that focus heavily on liability-driven investing are also inefficient.

“The idea that a plan should be invested almost entirely in duration matched corporate bonds and should not seek any excess return is also outdated,” says Gross. “We are arriving at a point now where risk minimization is going to become increasingly inefficient.”

Gross says that given rising wage inflation, it’s particularly useful if plan sponsors look for assets that offer some degree of inflation compensation like real estate, timber, and alternatives.

“There are many plans that still have populations of active workers, so it may be that inflation is going to be a bigger part of the liability going forward,” says Gross. “If your portfolio is entirely invested in fixed income, you are not going to keep pace with that.”

Gross also notes that 2021 was the first year since 2013 in which both asset returns and actuarial returns operated to the benefit of plan sponsors.

“That sort of situation doesn’t come around very often,” says Gross. “While that usually is a good time to take off some risk, there are other far more interesting ways to reduce risks within the return-seeking portfolio rather than pushing capital further into long duration fixed income that also preserve some degree of outperformance.”

Gross also says that there is a misconception among some plan sponsors that pension surpluses are not useful.

“There is this kind of folklore in the pension community that pension surpluses are nothing more than a trapped asset on the balance sheet that will ultimately be captured by excise taxes,” says Gross. “There’s no truth to that at all.”

Gross says that surpluses can be an important cushion against pension volatility. They can also be important for plan sponsors that want to merge plans or do a 420 transfer, a process in which excess assets are transferred to retiree health accounts.

“Just reaching 100% funding is not really the endpoint that most plans should aspire to,” says Gross.

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Is investing in oil stocks a sin? If so, these energy shares are in good, and lucrative, company.  

A BCA Research report finds that investing in oil is acquiring, at least in some circles, a risqué allure. And it has helped keep up oil companies’ share prices.

Classic sin stocks are alcohol, tobacco, gambling, cannabis, and firearms. BCA calculates that they have outperformed the broad market in the U.S. by 28% over 50 years. At the same time, quoting a 2017 academic study, these indecent equities are 8% cheaper compared to the rest of the market, as measured by their price/earnings ratios.

Another advantage for sin stocks is that heavy government regulation has erected high barriers to entry, limiting competition and propelling consolidation.

Many of those attributes are true to oil companies. While frackers have become a presence in the oilfield, the majors still command the most capital, allowing them a lot of leeway. Even before the energy disruptions wrought by Russia’s invasion of Ukraine, the majors had been dialing back their capital spending, even while demand surged.

Sure enough, they have scored good earnings of late, and their stocks are soaring. Exxon Mobile is up 43% this year and Chevon 45%. It doesn’t hurt that their price/earnings ratios are affordable, with Exxon at 16 and Chevron at 21. The S&P 500’s P/E is 25.

A 2021 report by Gold­man Sachs showed that market concentration for oil producers tripled from 2018 to 2020, versus the 2010 to 2014 period. The oil firms “now stand at levels consistent with an oligopoly,” the BCA report says.

BCA also quotes Cliff Asness, founder of AQR, on sin stocks’ bad-boy allure: “How does the market get anyone, perhaps particularly a sinner, to own more of something? Well, it pays them! In this case through a higher expected return on the segment in question.”

BCA notes that climate-minded divesting has prompted numerous institutional investors to ditch oil stocks. The report observes that “what is undeniable is that the combination of divestment and the challenging environment of oil have given an attractive discount to energy stocks.”

The study adds that “oil is not tobacco,” in that the economy needs the energy that petroleum generates, and that’s hardly true of cigarettes.

For investors, the extra enticement of naughtiness may be a nice propellant for oil shares, now and in the future.

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The Securities and Exchange Commission said it will focus in 2022 on private funds, environmental, social, and governance investing, and crypto assets, among other priorities.

The regulator’s Division of Examinations released its annual Examination Priorities Report for 2022, in which it identifies the areas it believes present the highest risks to investors and the markets. The SEC said it completed more than 3,000 examinations in fiscal year 2021, a 3% increase from the previous year, and conducted hundreds of registrant outreach meetings to monitor significant market events, such as the volatility in the equity and options markets in early 2021.

“In this time of heightened market volatility, our priorities are tailored to focus on emerging issues, such as crypto-assets and expanding information security threats, as well as core issues that have been part of the SEC’s mission for decades,” Richard Best, the SEC’s acting director of the Division of Examinations, said in a statement. “Our priorities cover a broad landscape of potential risks to investors that firms should consider as they review and strengthen their compliance programs.”

Private Funds

One of the SEC’s focuses for the year will be on registered investment advisers who manage private funds. It said it will review advisers’ fiduciary duty, compliance programs, fees and expenses, as well as conflicts of interest, disclosures of investment risks, and controls regarding material nonpublic information.

The regulator also plans to review the portfolio strategies, risk management, investment recommendations, and allocations of private fund advisers, with an emphasis on conflicts and disclosures regarding those areas.   

ESG

ESG-related advisory services and investment products, including mutual funds, exchange-traded funds, and private fund offerings, will also be a major focus of the SEC this year. In particular, the regulator wants to know whether investment advisers and registered funds are accurately disclosing ESG investing approaches, and whether they have controls in place to prevent securities laws violations regarding ESG-related disclosures.

The SEC also said it will review companies’ proxy voting policies and procedures to see if their votes align with their ESG-related disclosures and mandates, and if there are any misrepresentations of the ESG factors considered or incorporated into their portfolios.

Crypto Assets, Emerging Technologies

The SEC will conduct examinations of broker/dealers and advisers using crypto assets and emerging financial technologies to review whether they considered the potential risks involved when designing their compliance programs.  The Division of Examinations will review whether market participants involved in digital assets have met their standards of conduct when recommending to or advising investors, and whether they regularly update their compliance practices.

“The division will conduct examinations of mutual funds and ETFs offering exposure to crypto-assets to assess, among other things, compliance, liquidity, and operational controls around portfolio management and market risk,” said the SEC in its report.

It said the examinations will focus on firms that claim to have new products, services, and practices to determine whether they are consistent with disclosures made and the standard of conduct owed to investors and other regulatory obligations.

The SEC said the scope of any examination is determined through a risk-based approach that includes analysis of a firm’s history, operations, services, products offered, and other risk factors.

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Yogi Berra, the baseball great and off-beat social commentator, said it well: “I never make predictions, especially about the future.” Wall Street, however, can’t help itself from issuing economic auguries—and its consensus is reassuring, with one jarring exception.

Forecasts about the economy, while problematic, give people a glimpse of what to expect in their lives and investments—amid a world today beset by war, a persistent pandemic, waning government aid, high inflation, and climbing interest rates.

The outlooks distill all the bad news with the good news, such as low unemployment, strong corporate earnings, large household savings, and small debt loads. Weighing the good and the bad has resulted in an overwhelming consensus of investment firms and other economic observers that the U.S. won’t slip into a recession anytime soon (meaning this year or next), and will instead only experience a growth slowdown.

Which makes Deutsche Bank’s recent raspberry of a prediction all the more discordant. The prognostication makes it the first major bank thus far to spy a recession on the horizon. David Folkerts-Landau and Peter Hooper say in a report that the U.S. will fall into a recession next year, with all the usual lousy woes. They foresee the jobless rate, for instance, rising to 4.9% in 2023, from 3.6% most recently. Their culprit: the Federal Reserve and its tightening regimen.

Despite Fed Chair Jerome Powell’s plan to bring the economy in for a “soft landing,” in his parlance, Deutsche Bank believes that higher interest rates will choke the economy. They think the Fed will end up shrinking its balance sheet by almost $2 trillion by next year, which is in line with most projections.

But by mid-2023, Deutsche Bank expects the federal fund rate to be 3.5%, which is almost a full percentage point above what the Fed estimates. The Fed will proceed with several half-point rate hikes in its next three meetings, which means the rate escalation will be front-loaded, Deutsche Bank states.

“Our call for a recession in the U.S. next year is currently way out of consensus,” Folkerts-Landau and Hooper contend. “We expect it will not be so for long.”

Indeed, a versus only 15% who anticipate one in 2022.

Officially, however, major investment firms are calling for a deceleration of growth, but not a recession, traditionally defined as two negative quarters in a row. Goldman Sachs Group’s take on this question is that an economic slump is “far from inevitable,” because, among other things, consumers are “flush” with cash.

Morgan Stanley has a kindred view. Inflation will slap the public with an average $1,600 hit to household consumption this year—yet the fat savings will offset that, it maintains. What’s more, although commodity price boosts (mainly food and gasoline) are vexing, they are sitting at far lower relative levels than in the 1980s, 2006, and 2012, the firm argues.

And Bank of America says that “slower-than-expected real GDP growth—not a recession—is our operating base case for the U.S. over the next 12 to 18 months.” Tailwinds such as companies’ massive inventory rebuilding and a fading pandemic will prevail, BofA declares.

The Conference Board crystallizes the slower-but-not-bad viewpoint. Economic growth will be 3.0% this year and 2.3% in 2023, the organization avers. That compares with last year’s heady 5.7% expansion.

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Pension reform has always been a hot-button topic in France. In 2019, President Emmanuel Macron’s proposal to raise the retirement age and create a universal state-run pension system led to the longest worker strike in the history of modern France.

And now, just ahead of the French presidential election taking place this month, Macron has made pension reform one of the top issues of his campaign.

“He put it on the top of his platform,” says Michael Zemmour, a research fellow at Sciences Po in France who specializes in political and welfare economics. “This is more about confrontation about social rights and entitlements than [a] pure economic problem.”

Macron’s proposal is to raise the retirement age to 65 from 62. Marine Le Pen, Macron’s right-wing rival, wants to lower the retirement age to 60. France currently has the third highest level of pension spending in the entire OECD as a percentage of GDP.

Hervé Boulhol, a senior economist at the OECD, says ballooning pension costs are a problem. Nevertheless, he thinks that continuing an arbitrary retirement age, which both politicians are proposing, isn’t the smartest way to go about things.

“One thing we keep saying is that it makes sense to at least link retirement age to life expectancy,” says Boulhol.

France has a pay-as-you-go system, which means that the pension funds are not invested before being paid out to beneficiaries. However, the pensions can still struggle with funding if there are too few young people paying in to support a growing older population.

French citizens will be going to the polls for the first round of elections this Sunday, April 10. If no single candidate wins the majority of the vote, which is likely to happen, then there will be a runoff election between the top two candidates. This second election will take place on April 24.

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The Pension Benefit Guaranty Corporation has agreed to provide more than $680 million to bail out three insolvent multiemployer pension plans that cover over 5,500 participants.

The Teamsters Local 641 Pension Plan of Union, New Jersey, which covers 3,610 participants in the transportation industry, will receive $503.9 million including interest under the Special Financial Assistance Program established by the American Rescue Plan.

The plan became insolvent in March of 2021, at which time the fund began receiving financial assistance from the PBGC. It was required by law to reduce its participants’ benefits to the PBGC guarantee levels, which was approximately 55% below the benefits payable under the terms of the pension. 

The federal funds will restore all benefit reductions caused by the plan’s insolvency, and will allow the plan to make payments to retirees to cover prior benefit reductions. The approval also means the PBGC’s Multiemployer Insurance Program will be repaid $13 million, which is the amount of financial assistance the agency has provided since March of 2021 to cover the plan’s outstanding loans, plus interest.

The PBGC also approved an SFA application from the San Francisco Lithographers Pension Plan, which covers 1,572 participants in the printing industry, and agreed to provide the plan with $133 million.

The plan, which became insolvent in June 2021, had to cut benefits for its participants to approximately 20% below the benefits payable under the terms of the plan. However, the plan will now be able to make payments to retirees to cover prior benefit reductions. As a result, the Multiemployer Insurance Program will be repaid the $5.4 million in financial assistance it has provided the plan since it ran out of money last year.

And the Laborers’ Local 186 Pension Plan of Massena, New York, which covers 379 participants in the construction industry, is set to receive $46.6 million from the PBGC under the SFA.

The plan has been insolvent since July 2021, at which time it had to cut its participants’ benefits to approximately 35% below what they would have received from their plan had it not run out of money. The plan has received nearly $1 million in financial assistance from the PBGC since it became insolvent, which will be repaid to the agency’s Multiemployer Insurance Program.  

According to the PBGC, the SFA program is expected to provide funding to more than 250 severely underfunded multiemployer pension plans covering over 3 million workers, retirees, and their beneficiaries. Under the program, plans are required to demonstrate eligibility and calculate the amount of assistance needed pursuant to ARP and PBGC’s regulations.

Plans may use SFA funds only to pay plan benefits and administrative expenses, and they are not obligated to repay the PBGC. Plans receiving funds are also subject to certain terms, conditions and reporting requirements, including an annual statement documenting compliance with the terms and conditions. PBGC is also authorized to conduct periodic audits of multiemployer plans that receive financial aid under the program.

The most recent phase of the program began April 1, at which time multiemployer plans that fall under Priority Group 3 became eligible to apply for SFA funding. The group includes plans with more than 350,000 participants that are in critical and declining status.

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The Federal Reserve is about to embark on an epic shrinkage of its balance sheet, according to the minutes of its policymaking panel, released Wednesday. This is making the stock market uneasy. The S&P 500 dipped 0.97% yesterday and is off 0.45% this morning, in line with decreases on the other major indexes.

At the center of the market’s queasiness, along with ongoing worries about high inflation and the Ukraine war, is exactly how the balance sheet reduction will occur. The minutes only told us that the Fed will be reducing its holdings at a monthly pace of $60 billion in Treasury bonds and $45 billion in agency mortgage-backed securities. The point of the bond-shedding is to increase long-term interest rates.

Even the Fed’s chair, Jerome Powell, has indicated that a lot of question marks surround this campaign, known as quantitative tightening. “We have a much better sense, frankly, of how rate increases affect financial conditions,” he said in recent remarks.

“Even if it’s done in a predictable way, this is a big adjustment for markets,” says Brian Sack, director of global economics at the investment firm D.E. Shaw.

The general assumption is that the Fed’s bonds, bought to push down long-term rates amid the pandemic economic slide, will simply be allowed to mature. This would have an indirect impact on the bond market because fewer other investors would seek to purchase bonds, one theory holds. If the Fed actually sold bonds before maturity, that could suck liquidity out of the system.

This time, investors are well-notified of what the Fed is doing with its bond holdings. In 2013, then-Fed Chair Ben Bernanke shocked the market by announcing a big shift in policy.

Two times burned, this time really shy. The Securities and Exchange Commission has had to bolster money market mutual funds during the 2008 global financial crisis and the 2020 onset of the pandemic. Both times, investors pulled cash out of the funds. So the agency is moving to tighten the withdrawal rules.

The comment period on the SEC’s proposal ends on Monday, and there’s a lot of opposition. Big money market investors are threatening to yank their cash out of the funds.

The funds mostly invest in commercial paper and bank certificates of deposits. And these, said SEC Chair Gary Gensler in a statement, “tend to be illiquid in times of stress.” The problem, he stated, is that there “isn’t a lot of trading in commercial paper and CDs in good times. In stressful times, it almost entirely disappears.”

What particularly sticks in the craw of many fund investors is the SEC proposal for “swing pricing,” which essentially shifts the cost of redemption onto redeeming shareholders. Now, the investors who didn’t redeem shoulder the cost. The other controversial feature of the SEC plan is to increase the daily and weekly liquid asset minimums to 25% and 50%, respectively, from 10% and 30%. Also, the plan would expand available information about the funds and thus the SEC’s ability to monitor them.

To critics, the SEC is going too far. Example: Northern Trust Asset Management, one of the nation’s largest sponsors of money funds, says the plan would drive it to exit prime and tax-exempt funds, a process it started two years ago. NTAM has  $1.6 trillion in assets under management,  and $218 billion of it is in U.S. registered money market funds and another $118 billion in other money markets funds (such as CIT and UCITs). While it supports the transparency provision and other elements, the firm objects to swing pricing and liquidity changes.

In a letter to the SEC, Colin Robertson, NTAM’s head of fixed income, labeled swing pricing “overly complex, punitive, or burdensome.” The exodus from funds that the plan will trigger, he admonished, “may result in fewer investment options available to investors.”

Among asset allocators, the SEC’s plan is seen as more of an annoyance than a threat, as they have ample cash reserves in many places. And they are willing to accept slightly less than par value if they really need to tap money funds.

As Matt Clark, CIO of the South Dakota Investment Council, puts it, “Investors like pension funds can easily afford to redeem money markets at a small discount to par to obtain liquidity if needed, as this is minimal compared to selling anything else in a crisis at large losses.”

U.S. money funds have $5.7 trillion under management. On average, 90-day commercial paper yields 1.14%, much higher than a bank account pays, and offers quick liquidity to investors who need to cash out.

These funds had long been viewed as a good and safe place to park cash until the two massive redemptions, in 2008 and 2020. But they don’t carry federal deposit insurance, as bank products do, and have much lighter regulation. And that is what the SEC’s Gensler points to in creating the agency’s new plan.

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This story was corrected on NTAM’s AUM and money market fund totals of April 11, 2022.

Tags: Colin Robertson, commercial paper, Gary Gensler, money market funds, Northern Trust Asset Management, SEC, South Dakota Investment Council

The European Insurance and Occupational Pensions Authority is launching a stress test tomorrow to determine the resilience of European pension funds during a climate emergency.

The climate test primarily examines what would happen to pension funds if investors faced a dramatic rise in carbon prices due to the extreme effects of climate change. The hypothetical scenario assumes that no new climate policies are introduced before 2030 and that carbon technology is largely unavailable. Because of this, in the hypothetical, governments enact extremely strong policies in 2030 that dramatically increase the price of carbon.

The potential financial effects of such a situation will be applied to a balance sheet to figure out just how pension funds and their investments would be affected. Due to the cut-off date for developing the scenario, the test will not reflect the recent shock to the energy sector caused by the war in Ukraine.

The scenario focuses on sector-specific shocks, and EIOPA hopes that it will shed insight as to which investment strategies bear the most risk. All pension funds with more than €500 million ($550 million) are required to participate in the exercise.

The test was developed by the Network for Greening the Financial Sector. EIOPA is also conducting two questionnaires: one to follow up on analysis from the 2019 stress test, and one to assess the potential consequences of inflation for benefit recipients.

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Tags: Climate Risk, crisis, EIOPA, ESG, Europe, Network for Greening the Financial Sector, Pensions