Illinois Pension Signals Lower Return Target

The executive director of the $37 billion Teachers’ Retirement System of the State of Illinois has hinted that the plan may lower its assumed rate of return.

(June 28, 2012) — The $37 billion Teachers’ Retirement System of the State of Illinois (TRSI) may employ a lower expected rate of return when it calculates its liabilities, the chief of the plan suggested in an interview with the Wall Street Journal.

“My guess is that [the rate of return] comes down,” Richard Ingram, executive director of TRSI, told the WSJ. “We are not immune from financial reality. We are looking at the same numbers as everyone else.”

TRSI uses a discount rate of 8.5%, permitted under current Governmental Accounting Standards Board (GASB) rules but one of the highest relied on by US public pensions. Lowering that figure even slightly would cause a large spike in liabilities for a plan that is already deeply underfunded. As of June 30, 2011, the plan was 46% funded.

While over the past 30 years TRSI earned an annualized rate of return of 9.3%, over the past decade it has on average fallen short of that benchmark. “The question is whether that is a good number for the next 30 years,” said Ingram. “That is what we are wrestling with right now.”

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As a national debate surges over whether public pensions are accurately computing their future liabilities, early this week the GASB voted to approve new accounting standards that could cause a jump in public pension underfunding. Although funds that the GASB deems sufficiently funded can continue to base their liability assumptions on an estimated rate of return of their choosing, insufficiently funded plans would have to use a discount rate of between 3% and 4%. The new standards, should the GASB not decide in the meantime to relax them, would come into effect over a period of two years.

Meanwhile, this month a study by the Pew Center on the States found that the pension and benefit obligations of state pension plans faced a staggering $1.38 trillion unfunded liability. The Pew survey relies on data from the 2010 fiscal year—the latest available but still outdated—so the true figure may be higher or lower than that.

Although public pension funds struggle with underfunding issues and do the best with what they resources they have, there are pockets of excellence throughout. The latest issue of aiCIO magazine profiled the two men in charge of the San Bernardino County Employees’ Retirement Association, who are managing the task of paying $8 billion in benefits with only $6 billion in assets. To read “Bright Lights, Big Country,” click here.

To read Ingram’s interview with the WSJ, click here.

(June 28, 2012) — On a humid, drizzly Tuesday in London town, 70 of the biggest and brightest in institutional investment joined aiCIO to discuss portfolio construction, investment strategy, and the economy in general at our annual European conference.

The first panel, held at 8 Northumberland Avenue, a former gentlemen’s club found a stride from the Thames, addressed ‘risk’. Panellists Bernard Walschots, CIO of Rabobank Pension Fund, Evalinde Eelens, senior investment strategist at A&O Services, and Erik D Gosule, head of client solutions at PanAgora Asset Management (a conference sponsor) talked through how risk-based approaches could be woven into portfolio constructions – and to what end.

The panel was divided on the benefits of risk parity, but agreed that approaching investment from a ‘risk-based perspective’ was key to investing both in the current volatile economic environment and in more balanced climates.

The next panel addressed fiduciary management in its many guises: implemented or delegated consulting, investment outsourcing and many others.

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Chetan Ghosh, CIO of Centrica Pension Fund, Jerry Moriarty, chief executive of Irish Association of Pension Funds, and Markus Barth, global head of CROCI Investment Products at Deutsche Bank agreed there were different levels of delegating responsibility and that there should be no ‘one-size-fits-all approach’.

The main concern for panellists was that some investors were being ‘rail-roaded’ by their consultants into taking their product in this arena as they were ‘easy targets’. “Just because they are your best option as a consultant, they may not be your best option as a fiduciary manager,” said one. The others called for mandatory tendering processes for this approach.

After coffee, Francesco Curto, global head of CROCI Research at Deutsche Bank – the conference’s platinum sponsor – explained the unit’s approach to investing in equities. Curto said: “The CROCI Global Dividend process selects stocks that screen well on both dividend yield and ‘real’ economic price to earnings ratio by avoiding the stocks most at risk to future dividend cuts and subsequent poor price performance.”

For more details on this approach – click here.

The alternatives panel featured investors who have both given over around 25% of their portfolios to investments outside of the mainstream. Larissa Benbow, head of investments at HBOS Pension Fund, and Richard Moon, investment manager of alternatives at Railpen Investments talked about which sectors they were looking at and what standards they demanded from their providers in terms of performance and governance.

Guest moderator Chris Jones, head of alternatives at consultants bfinance, asked what investors should have learned over the crisis – the panellists responded that investors should realise the best managers will never drop their fees and lock-ins and gates should no longer be tolerated.

Lunch was served in the former billiard room and attendees took time to ‘network’.

After the break, Rob Gardner, co-founder and co-CEO of consultants Redington guest moderated the liability-driven investment (LDI) panel, featuring Ian McKinlay, CIO of the Pension Protection Fund, Marcus Hurd, principal & actuary at Aon Hewitt, and Stefan Lundbergh, head of the innovation centre at APG and Board Member, AP4.

The panel agreed that in theory, investing with liabilities as the only pure target was sensible, but deciding how to do it relied very much on the starting and ending point. One panellist said it was important funds did not fall in to the trap of ‘assumption-based investing’.

Securities lending took centre stage for the next panel. Industry expert Roy Zimmerhansl led the panel in debate over changes to the industry’s practices in the aftermath of the financial crisis and what investors could expect when launching such a programme.

Kevin McNulty, chief executive at International Securities Lending Association, Leandros Kalisperas, head of credit at the Universities Superannuation Scheme, and Simon Lee, senior vice president at sponsor eSecLending, debated the issues, using case studies to better illustrate the pros and cons of lending out portfolios.

After tea and scones in the billiard room, attendees returned for the final ‘fireside chats’.

In the first of these less formal panels, Erik Knutzen, CIO at NEPC, and Crispin Lace, director of consulting & advisory services at Russell Investments offered thoughts on how investors in Europe could track down returns without ramping up their risk in the uncertain climate.

The pair suggested investors returned to examine active management and dynamic strategies, certain illiquid credit opportunities and some emerging markets. Other areas to consider included distressed European corporate debt and insurance-linked securities.

The final panel saw the architects of the CERN pension fund giving an update on their progress, some two years after explaining changes they intended to make at the previous aiCIO Summit in London. Theodore Economou, CEO, and Gregoire Haenni, CIO, illustrated to the conference how they select and gauge the performance of fund managers using a technique akin to DNA sequencing.

They also demand the managers donate a certain amount of their fees earned on their account to charity.

Networking cocktails (and some of the most creative canapés in London) were served as attendees continued to discuss the themes of the day and at 7pm it was all over for another year.

Thanks to our sponsors: Deutsche Bank, eSeclending, Panagora, Aviva Investors, Bridgewater Associates, and Standard & Poor’s Rating Services.

See you all next year – or in Sydney, Australia in November.