Michigan Pension Bill Goes to Gov. Snyder

Michigan’s Governor Rick Snyder is expected to sign off on a bill that will change the teacher’s pension plan for the state later this week, when he returns from a trade mission in Europe.

The bill, Senate Bill 401 looks to increase contributions from employees to provide for a more cost-effective defined benefit plan for the state. If passed, the new plan will eliminate the current hybrid pension system (a combination of a 401 (k) and pension), replacing it with a new hybrid system that provides for a more attractive 401(k) option for school employees. Should employees elect the defined contribution plan, the school district will pay 4% of an employee’s salary into the 401 (k). The employee can also choose to contribute to the plan and the state will match up to 3% of their contribution.

According to the Detroit Free Press, 20% of new school employees enroll in the current 401 (k) plan, where they pay 6% and have a 3% employer match. New school hires from February 1, 2018 on will automatically be enrolled in the plan. Those currently enrolled will obtain the new benefits on October 1, boosting the employer match. Currently enrolled employees will also have a 75-day window to opt out of the new plan.

It should be noted that if the pension portion of the new hybrid system isn’t at least 85% funded for two years in a row, the state will close the plan. If the plan falls below the 85% mark, the Legislature would decide between boosting the funding or closing it. In regards to the worst-case scenario, Kurt Weiss of the Michigan state budget office told CIO “future Legislatures will have options to consider if it dips below 85%, which would include closure or paying down the debt. If they did decide to close it, that would leave a 401 (k) option for the teachers.”

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Weiss assured that in this particular situation, employees would keep what they had accrued up until the point of closure, but the Legislature’s reasoning behind this option is their “intent or desire to control any future debt that would be built. Their goal is to avoid an unfunded system that grows liabilities for the state. This new hybrid provides an enhanced 401(k) option for teachers while reducing the risk on the pension side.”

The bill passed last week on a narrow vote of 55-52, after identical House and Senate bills were pushed through the Legislature.

Tags: Governor Rick Snyder, Michigan, Pension, Teachers Pension

The $324 billion California Public Employees’ Retirement System (CalPERS) may reduce its private equity exposure after receiving public criticism for investing in the high-fee asset class.

At the CalPERS investment board meeting earlier this week, CalPERS CIO Ted Eliopoulos said that beginning in July, the pension fund will review the private equity business models available to it. He said this was necessary so that the fund can find an “effective governance system to oversee private equity investing,” or else it would have to reduce its allocation to private equity investments. Private equity assets represent a little more than 8% of the fund, or almost $26 billion, which was cut just last year from 10%.

CalPERS, the largest public pension fund in the US, has been the target of public pressure to disclose and account for the fees it pays for its private equity investments. According to an April report in Barron’s, nearly 85% of CalPERS’ private-equity portfolio is invested in holdings that have a so-called two and 20 fee structure, where the fund has to pay a fee of 2% of assets under management and 20% of the profits. And late last year, CalPERS revealed that approximately 14% of its profits from private equity investments were paid out in fees to managers.

The “fish bowl of CalPERS may have reached a tipping point for us in private equity,” Eliopoulos told the investment committee, according to Reuters. “Over the course of the past two years and frequently in these monthly investment committee meetings, CalPERS staff is attacked and denigrated for our decision to invest in these funds.”

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Although the fund’s private equity fees have been high, the returns have been high as well. Despite its relatively small portion of the fund, private equity investments are CalPERS’ highest-returning asset class. Since its private equity program was launched in 1990, it has contributed more than $25 billion in profits, according to CalPERS.

“Few investments are as essential to CalPERS’ success as private equity,” said Henry Jones, chairman of the CalPERS Investment Committee and vice president of the board, in a statement released June 21. Jones said critics of the fund’s private equity practices are doing more harm than good, and were often launching personal attacks on CalPERS investment professionals. He defended the fund’s transparency, saying that it was a leader in private equity fee disclosure.

“CalPERS has invested in private equity for over 25 years,” said Jones. “Without question, a large, strong private equity program will be a significant part of our portfolio for years to come.”

Tags: CalPERS, fees, Private Equity