Los Angeles Pension System Cuts Rate of Return Assumption

The Los Angeles City Employees’ Retirement System (LACERS) board has unanimously voted to cut its assumed rate of return to 7.25% from 7.5%, the system announced at its most recent board meeting.

In addition to cutting the assumed rate of return, the LACERS board also adopted an inflation assumption of 3.00%, an inflation component of the salary increase assumption of 3.00%, and a payroll increase assumption of 3.50%. It also adopted a credit rate for employee contribution of 3.00%, and a real across-the-board pay increase component of the salary increase assumption of 0.50%.

The new investment rate assumption is expected to add $38 million in retirement costs to the city of Los Angeles’ general fund budget, and comes amid public concerns over the city’s growing pension burden, according to the Los Angeles Times.

LACERS’s consultant, Segal Consulting, recommended that the investment rate assumption be lowered to 7.00%, and suggested the 7.25% rate as an alternative assumption. The LACERS staff supported the 7.25% alternative, but under the stipulation that another review of the economic assumptions is completed in 2018, after the board adopts a new asset allocation.

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The investment return assumption is comprised of two primary components: inflation and real rate of investment return, with adjustments for investment expenses and risk.

The LACERS board had been debating how much to lower the investment returns over the past couple of months. While Segal’s preferred rate was the lower 7%, that reportedly would have added $51 million to $84 million to the city budget next year, depending on the inflation assumption chosen by the board.

Board member Michael Wilkinson, a representative for retired city workers, advocated the lower 7% recommendations, saying it would be “dangerous” for the agency to rely on a higher, less-realistic number, according to the Times.

The LACERS move follows a reduction in the assumed rate of return for the Los Angeles Fire and Police Pensions (LAFPP). In June, the Fire and Police Pension Commissioners approved the plan’s actuary recommendation to lower the investment return assumption to 7.25% from 7.50%. Segal, which is also the LAFPP’s actuary, said the investment return assumption reduction was needed, primarily due to a continued decline in inflation over the past two decades. The assumption was previously lowered to 7.50% from 7.75% in 2014.

The lower investment return assumptions for both LACERS and the LAFPP will add $170 million in retirement costs to Los Angeles’ budget next year, city analysts say, according to the Times.

Tags: Board Meeting, Los Angeles City Employees’ Retirement System, Pension

Swedish state pension fund Sjunde AP-Fonden (AP7) said it has successfully thwarted Facebook CEO Mark Zuckerberg’s attempt to create a new class of shares for the social media company.

Zuckerberg had hoped to create a new C class of Facebook shares to allow him to sell off a significant chunk of his shares to fund his philanthropy efforts, without losing control of the company.

AP7, along with Amalgamated Bank and other minority shareholders, sued Facebook over the move, claiming it would degrade the value of their holdings in the company. They estimated that their total loss would have been $10 billion if the plans were carried out. But Zuckerberg abandoned the plan just days before he would have been required to appear in court for the lawsuit.

“It is a total victory,” Richard Gröttheim, CEO of AP7, told Swedish financial newspaper Dagens Industri. “It is a total retreat. It is very gratifying, actually.”

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Facebook is the third-largest holding in AP7’s Equity Fund with a market value of SEK3 billion ($370 million).

“For us, the decision to overwrite the new share class is a success for several reasons. To begin with, it had directly damaged AP7’s savers financially when the holding had lost value,” said AP7 in a statement. “In the long run, it had also seriously damaged the opportunity to safeguard the savers’ interests because Mark Zuckerberg had been able to retain a majority of the votes by a few percent of the shares. In other words, it is an important success for minority owners to protect their rights.”

However, Zuckerberg didn’t say his decision to abandon the C shares plan was related to the lawsuit. Instead, he said in a Facebook post that reclassifying the stock was not necessary because the shares had risen so high.

“Over the past year and a half, Facebook’s business has performed well and the value of our stock has grown to the point that I can fully fund our philanthropy and retain voting control of Facebook for 20 years or more,” Zuckerberg wrote. “As a result, I’ve asked our board to withdraw the proposal to reclassify our stock—and the board has agreed.”

The social media company’s founder had said that over the next 18 months, he wanted to sell 35 million to 75 million shares, and then donate the proceeds to charity. Based on Facebook’s Sept. 28 closing price, those shares would be worth $5.9 billion to $12.7 billion. Zuckerberg, who owns more than 400 million shares of Facebook, and his wife Priscilla have pledged to eventually sell off 99% of their Facebook shares for charity.

Tags: AP7, Facebook, Mark Zuckerberg, Pension, Sweden

Swedish Pension Fund Thwarts Zuckerberg