Los Angeles Fire and Police Pension Evaluates Potential Real Estate Direct Investment Platform

The Los Angeles Fire and Police Pension Plan (LAFPP) has employed its staff and consultant Townsend Group to initiate feasibility studies for the possible implementation of an in-house real estate direct investment arm in its $22.2 billion portfolio.

The strategy is rare. After studying the topic using publicly available data, the pension staff found only one retirement system that employs a direct investment strategy for its real estate portfolios, the State Teachers’ Retirement System of Ohio (STRS).

STRS has a real estate portfolio with $7.9 billion in assets, 85% of which are primarily managed internally after the board and executive director delegated investment management and implementation decisions to its staff. A report noted that their responsibilities include “buying, selling, managing, and monitoring individual securities, real assets, and other investment transactions; retaining, managing, and terminating external investment managers, and preparing, negotiating, and executing external investment manager mandates.” Approximately one-fourth of its 100+ investment team has direct involvement in the real estate portfolio.

Direct investment arms are normally regarded for their higher returns relative to commingled-fund strategies. Given that the pension’s staff is experienced and makes profitable investments, the absence of management fees could benefit a given portfolio significantly.

A report from LAFPP also noted the feasibility studies were intrigued by the Canadian model of internally managed investment portfolios to generate strong performance numbers. But although those pensions regularly use an in-house arm for their equities, fixed income, and private equity portfolios, a direct real estate arm was absent from two of the country’s largest public pension plans: the Canada Pension Plan Investment Board (CPPIB) and the Ontario Teachers’ Pension Plan.Caisse de dépôt et placement du Québec (CDPQ) formed an external subsidiary called Ivanhoe Cambridge to manage their real estate portfolio, through the acquisitions of Ivanhoe Corporation and Cambridge Shopping Centres about twenty years ago and merging it with Societe Immobiliere TransQuebec.

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

The $22.2 billion LAFPP’s real estate portfolio is valued at approximately $1.87 billion as of last December and is inclusive of four REITs ($609 million), commingled funds ($774 million), and two separate accounts ($490 million).

Tags: Los Angeles Fire and Police Pension Plan, Pension, Real Estate, Townsend Group

The unfunded liability of the Hawaii Employees’ Retirement System rose to a record high of $13.4 billion in 2018, and is expected to continue to increase over the next four years before it starts to improve, according to the system’s most recent actuarial valuation.

This is despite the fact that for the fiscal year ended June 30, 2018, the retirement system reported a 7.9% return, raising its market value to just under $16.6 billion from $15.7 billion at the same period last year, while its funded level edged higher to 55.2% from 54.9%.

The most recent actuarial report for the system forecasts that the unfunded liability will continue to rise until 2023 and peak at just under $14.2 billion before slowly improving to a surplus of $281 million and a market value of $60.6 billion by 2043.

“We have determined that the funding period for paying off the UAAL of the System (in aggregate) is 25 years,” GRS Retirement Consulting, the system’s actuary, wrote in its report to the system’s board of trustees. “Because this period is less than 30 years, the objectives set in state statute are currently being realized.”

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

According to Hawaii state law, the employer contribution rates are subject to adjustment when the funding period is greater than 30 years. The employer contribution rate for Police and Fire employees is scheduled to increase to 31% in FY2019, 36% in FY2020, and 41% in FY2021. Meanwhile, the employer contribution rate for all other employees is set to increase to 19% in FY2019, 22% in FY2020, and 24% in FY2021.

However, the actuary said that its forecasts are contingent on returns meeting the current assumptions, and employers meeting the contribution requirements established by the 2017 Legislature.

“The 25-year funding period assumes all of the currently scheduled contribution increases occur and remain in effect throughout the period,” said GRS. “It is imperative that the increases occur as scheduled to meet the current projected obligations of the system.”

GRS also warned that “future changes to the actuarial assumptions or future changes to reduce the contribution requirements could significantly change the outlook of the system, and the expectation on when the system will reach a 100% funded level.”

The system has a new CIO, Elizabeth Burton, who joined in October from the Maryland State Retirement and Pension System, where she had been managing director of the quantitative strategies group. She replaced Vijoy Chattergy, who resigned as CIO in February.

Tags: Hawaii Employees' Retirement System, Pension, Unfunded Liability